Q2 2021 Kilroy Realty Corp Earnings Call

[music].

Good day and welcome to the second quarter 2021, Kilroy Realty Corp Earnings Conference call. All participants will be in a listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions to ask a question you may.

May Press Star then 1 on your Touchtone phone and to withdraw your question. Please press Star then 2 please note. This event is being recorded I would now like to turn the conference over to MS. Michelle Noh Chief Financial Officer. Please go ahead.

Good morning, everyone. Thank you for.

Joining us on the call with me today are John.

Sorry, Tyler Rhodes, Rob pot, 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 supplement 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.

Site and will be available for replay for the next 8 days, both by phone and over the Internet our earnings release and supplemental package have been filed on form 8-K with the SEC and both are also available on our website John will start the call with business conditions in our markets and then review our operational and strategic activities.

I will discuss second quarter financial results and provide you with the earnings guidance for 2021, then we'll be happy to take your questions John.

Thank you Michelle Hello, everybody. Thank you for joining us today.

We've had an extremely active and productive period.

For the last call.

Paul it's on several large long term leases at small rental rates, we've continued to expand on our life science portfolio.

Completed 4 acquisitions that continue to position us for future growth.

Before I review the acquisitions, let me share our view on current market conditions.

<unk>.

I'm happy to report the jaws workforce is fully back in the office.

We're excited that more and more of our tenants are joining us.

It is clear on the U S economy has rebounded more quickly than expected.

<unk> brings more tenant leasing discussions and more requests for property tours.

We are.

Strong job creation high levels of capital investment continued expansion and healthy financial performance from our major tenants and increasingly so from our mid to smaller tenants and we continue to see high quality well located assets in our markets are the other.

Demand is strong.

On valuations with record pricing.

These factors are translating into increased leasing activity on office and residential as well as continued strength in our growing life science portfolio, starting with office.

Data on broader Mark that Oh God for rent levels remains limited, but the information we need.

Do see suggested office rents in our markets for Premier quality properties and for locations did not decline materially from pre COVID-19 levels on some of our projects rents are increasing once again.

At San Diego, we have recently executed a definitive agreement with a major technology company to develop.

Develop and lease for 71000 square foot office project in a market where rents have reached all time highs construction should commence later this year.

We are also happy to report that the office component of our 1 for sale project is now fully leased the recent lease rates reported all time highs for the market and our residents.

Only 25% from our original underwriting.

On a per sale and there's only 1000 square foot project demonstrates our ability to continue creating significant value by developing well located world class office projects and finally in Seattle also on the second quarter, we signed a 57000 square.

Block, but 7 and a half year lease with a gaming company at our key Center project at an all time high rental rate for the Bellevue market. The ramp was 25% higher on a cash basis, and 55% higher on a GAAP basis compared to the prior lease Bellevue remains 1 of the strongest markets on a country.

Country anchored by Amazon, but with plenty of GAAP from other technology and gaming companies.

Moving to life science fundamentals continue to outperform starting with San Diego vacancy rates in Torrey Pines in University town center are incredibly low at less than 2% and rents.

Square, plus 15%, 20% year over year and were at all time highs.

A lack of availability of these 2 submarkets and sports life science companies to expand into the adjacent areas of Sorrento Mesa del Mar Heights, and along the 56 free way.

As an example earlier this month on Delmarva.

Rents are rights, we signed a 10 year 96000 square for a full building lease with German Chad a publicly traded life Science company at our 12340 El Camino real property adult day will serve as the company's new headquarters as it expands its footprint in the market.

Market.

And we are on detailed negotiations on another 200000 square feet of life Science transactions also in del Mar Heights.

And you can see we're on the final stages of beliefs negotiations with another publicly traded life Science got made for a 10 year 51000 square foot full building lease.

On Hydro our 46.90 executive drive project slated for redevelopment in early 2022.

These transactions are on properties to be converted for life science.

Mark to market rent increases of more than 50% highlighting the low risk high return conversion opportunities.

Embedded in Kilroy is existing San Diego office properties.

It is important to note that our success on these conversions is in part due to our intense focus on quality on buildings that have the right layout and physicality to accommodate different uses.

As mentioned on lifestyle demand.

North of del Mar Heights, and East along with 50 States corridor, where a major life Science company is committed to lease a 500000 square foot spec project nearing completion and close proximity to our Santa Fe Summit development project.

As a reminder, we have full entitlements.

To build between 600000, and 700000 square feet of life Science Clark on for.

Santa Fe summit phases, 2 and 3.

We are evaluating the commencement of construction on at least 1 phase for later this year.

Moving to South San Francisco Life Science fundamentals continue to tightened with.

Moving on rates less than 1.5% and rents at all time highs.

In June we commenced construction on the second phase of our roughly 50 acre 3 million square foot Kilroy Oyster point life Science campus Phase 2 follows the successful leasing of phase 1.

Okay.

$570 million 656000 square foot project that was fully leased 2 quarters. After commencement of phase..2 will include just under 900000 square feet of space across 3 buildings and will represent a project total investment.

<unk> of $940 million approximately.

Certainly $160 million of that has already been invested.

We believe we are ideally positioned with phase 2 and we're already in negotiations with several prospective tenants.

In summary, we will be delivering 2.5 million square feet of state of art life Science projects.

And the other across San Diego and San Francisco, The next 5 to 30 months.

Yes. It goes for a project in San Diego Kilroy, Oyster point phase, 1 and phase 2 in South San Francisco and beyond those pages, 3.4 and 5 of Kilroy Oyster point.

We will.

Ex for life science portfolio by an additional 1.5 for 2 million square feet.

I think that's all up in combining with our existing life science projects. We will have assembled the best in class life Science portfolio of just under 6 million square feet with an average age of 3 years in the best locations.

Expanding upon full build out life science could be 25% to 30% of our total NOI.

I'd like to provide an update on our residential portfolio in San Diego are want to sale project of 608 units is now more than 93% leased which is up from approximately 75%.

At least last quarter and exceeds our prior leasing guidance rent levels have increased 15%, 20% since the beginning of the year.

Hollywood.

Our latest fluctuate tower Cos, John Dean is now 30% leased just 2 months since its completion.

To sum.

For residential portfolio, we now have more than 1000 luxury residential units between our 2 Hollywood projects and our San Diego 1 for sale residential living.

On the retail from a rent their permit program and this is in the second quarter and we're seeing substantial pick up in people traffic yes.

Well it's in leasing.

To summarize on reaching performance in the first quarter, we signed 200000 square feet of leases of which 2 thirds were renewals.

Second quarter, we signed 220000 square for you of leases of which 2 thirds were new leases. This is a good indication of a positive shift in market conditions.

Leasing and so far this quarter, we signed an amendment to on 170000 square feet of new leases.

At this pace, we expect to return to.

To our pre Covid quarterly run rate later this year.

With that update let me review our capital allocation activities today too.

To recap.

<unk> quarter, we completed the sale of the exchange.

For 1 point O 8 billion or 1400 and $40 for square foot, which was nearly twice our total investment it was a record price for commercial real estate in San Francisco and provide us with substantial capital for new investment.

On the freight we've reinvested $680 million across for value, creating projects that provide a combination of accretion leasing upside and development opportunity.

As we previously reported in late June we closed on a $580 million acquisition of indeed power line.

We constructed.

You did have 134000 square foot class a office property located in the heart of Boston and Central business District.

He is currently 57% leased with 42% of the space leased for 2030 for 2 indeed.

That's what grade weighted global recruiting platform.

Physician immediately establish Kilroy C.

Our largest class a office owner in the C V D with arguably the best building on the greater Austin area and provides the opportunity to create additional value through the lease up on the remaining straight space and a strong and geographically constrained market.

We are excited about our expansion into Austin city with all the characteristics and growth potential that we look for when entering a new market.

It has a young well educated population and contemporary urban culture is very popular with its large numbers of millennial residents Austin's broad technology.

Oh Gee presence is an attraction and strong advantage for us. We know these types of companies we understand their space requirements.

And we've already worked with many of them in developing or adapting properties to meet their needs with the tech boom in Austin in its early stages, we see these trends continuing apple.

Tesla, Google and many others are nearing completion of expanded office spaces, which will bring more jobs for the region.

Further enhanced with technology ecosystem.

The acquisition of the deep tower was the perfect way for Kilroy to enter the market for.

36 store properties.

That's a unique asset.

I leave visible for Florida ceiling glass towers, situated on a full city block.

And in the several months since we began underwriting the opportunity the market has only strengthened positioning us to seed.

Our yield expectations to sum up the acquisition places us on a state of.

The other property in a premier sub market of 1 of the fastest growing cities in the country. It provides an excellent foundation expanding degree routes to market and build a store operating platform for Protiviti gross advances are opportunities to partner with many of the leading technology companies in the world.

Our second investment during the quarter underscores our confidence in the vibrant little Italy neighborhood of San Diego, just north of the city's downtown in June we completed the acquisition of a land side at $20.45 specific highway for $42 million.

City block directly of June.

We sent to our 'twenty 100, Ketner project and within walking distance of the bag is currently entitled for up to 275000 square feet of office space.

Will feature a panoramic water views from every floor.

Combined with our 'twenty, 1 or kind of project it creates opportunities for us to offer greater.

For scale and flexibility to the increasing number of companies are attracted to this exciting area.

Moving to the scale and flexibility to be printed in little Italy enhance our land assemblage in the east village with the acquisition of an $8.5 million on land site earlier this year with this site.

We now control 2 full city blocks entitled for up to 1.2 million square feet of office or up to 1000 residential units or some combination of the 2.

Our fourth.

Last night was the purchase on a ground lease central line or 491000 square foot.

He's center office property in Bellevue, Washington for $47 million.

Purchase price equated to $96 on a per building.

Basis in a market where vacant land is trigger for double this amount on the ground lease had a remaining term on 72 years and the ground lease payments were tied to the project.

Projects income, which would dramatically increase since the last adjustment we have now eliminated that exposure as we saw with our recent gaming company leased and that's building rents continue to climb and Bellevue, especially for high quality projects like Heath Center, we completed the acquisition earlier this.

Month these.

These for investments for all off market and in each case reflects our disciplined approach to capital allocation decisions and our continued commitment to position our company and our portfolio for the future.

To wrap up we had a very busy first half of the year, we sold $1 billion of asset.

And redeployed a portion of the proceeds into projects with meaningful upside and value creation potential we are expanding on our life science portfolio with state of the art development and redevelopment projects.

We have the proper physicality on Android in the best locations, we're seeing strengthening fundamentals and while we expect market conditions.

Conditions drove in flow, there's far more enthusiasm today than any time since the pandemic began and finally after years of evaluations. We've entered an exciting market by acquiring the best project.

City of Austin that completes my remarks, now I'll turn the call on Michelle.

Thank you John.

With 88 cents per share in the second quarter interest.

5 cents higher than the midpoint of our guidance 3.5 cents for better than expected operating results, including earlier than projected lease commencement and stronger leasing at 1 paseo residential and 1 and a half.

Thanks for getting to 1 time items, including repayment, that's owed rent and lease termination fees.

We are also happy to report we did not have COVID-19 related charges in the second quarter.

And our same store results second quarter cash NOI was up 4.9%, reflecting strong rack granite and the 1 time items.

You noted the bonds, which contributed 130 basis points to cash NOI.

GAAP same store NOI was up 5.5%, which was driven by $4.5 million of revenue reversals in 2020 or 2.3% excluding the prior year for personal.

At the end of the second quarter.

Our stabilized portfolio was 91, 8% occupied and 93, 6% leased which were both up 30 basis points from the prior quarter, reflecting additional lease commencement.

Overall rent collection in the second quarter was 97% with office and life Science right.

Net collection of 98%.

Turning to the balance sheet.

After funding the acquisitions that totaled approximately 680 million on liquidity today stands at approximately $2 billion, including $860 million in cash and full availability of $1.1 billion under the new revolver.

With respect to indeed tower you will note that we included the project in our development pipeline with a total estimated investment of $680 million. This total reflects our purchase price of $580 million, which includes $35 million of tenant improvement credit related to in place leases.

And an incremental $100 million of leasing and carry cost to stabilization.

We have no material debt maturities until 2023, our net debt to Q2 annualized EBITDA was 5.8 times.

Now, let's discuss our 2021 guidance provided in.

In Yesterdays earnings release.

To begin let me remind you that we approach on near term performance forecasting with a high degree of caution given all the uncertainties in today's economy. Our current guidance reflects information and market intelligence as we know it today any COVID-19 related restrictions or a significant shifts in the economy our.

Our markets tenant demand construction costs and new supply going forward could have a meaningful impact on our results in ways not currently reflected in our analysis.

Projected revenue recognition dates are subject to several factors that we can't control, including the timing of tenant occupancies with.

With those caveats our assumptions.

21 are as follows.

GAAP interest is expected to be in the range of <unk> $77 million to $82 million driven by the acquisition of Endy tower in 2045 Pacific Highway we.

We expect to end the year with net debt to EBITDA of approximately 6 times.

Same store cash NOI growth is expected to.

Approximately 2% to 2.5% for the year.

At this time, we expect revenue recognition on the remaining 51% of our $3.3 Dexter development in 2022, given tenant improvement work timing.

We expect year end occupancy of approximately 91, 5% for the office.

Office portfolio, and 75% to 80% for residential.

Our guidance does not assume a material increase in transient parking, but as we've noted on prior calls we expect to pick up roughly a million dollars a month to get back to pre COVID-19 levels.

We did not have any additional acquisitions in our budget.

Taking into account all these assumptions, we project 2021 <unk> per share to range between $3.71 to 382 with a midpoint of $3.77.

To help you get to the midpoint, we deduct first first half actuals of $1.86 from the $3.77, which implies.

<unk> second half results of $1.91, or a <unk> <unk> increase over the first half.

The <unk> are driven by the following major items.

<unk> <unk> of NOI loss from the sale of the exchange.

Offset by the following positive items 10 from higher cap interest and NOI from the acquisitions.

So indeed tower 2045 Pacific Highway and the key center ground lease.

<unk> from revenue recognition of <unk> phase 1 in the middle of the fourth quarter and another 3 from our stabilized portfolio, including contributions from 1 Paseo office and residential.

And lastly, as a reminder, these assumptions reflect the COVID-19 restrictions and circumstances as of today.

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 1 on your Touchtone phone and if you're using a.

From please pickup your handset before pressing on the keys and towards draw. Your question. Please press Star then 2 and at this time, we'll pause momentarily to assemble our roster.

And the first question will come from Nick <unk> with Scotiabank. Please go ahead.

Speaker. Thanks, Hi, everyone. Maybe first question for John or Rob If you could just talk a little bit more about the activity of leasing in your markets for traditional office versus lab space. Maybe you can just go through some of the <unk>.

Markets and talk about kind of stronger and weaker points. Please.

Sure.

Yes, sure Hi, Nick and good afternoon, everyone.

Let me just touch on on our markets go directly into San Francisco leasing activity in San Francisco and I'm speaking about office has nearly tripled quarter to quarter. So as John said in his remarks.

Grace are much different mood and attitude on the part of brokers as well as tenants in many tenants we're seeing that during the pandemic had put their plans on hold for expansion or relocation have now dusted off those plans on our back in the market in the quarter in San Francisco, There were 15 transact.

Ex the reductions over 100000 square feet.

Completed and I think interestingly.

For those 15 are relocations or expansions.

Now there are about 118, new tenant searches.

Have materialized in the past 5 weeks or so <unk> is tracking about 2 million square.

Fans of transactions that are in LOI and I would take a break right here to say that when you look at the sublease number for example of just under 9 million square feet in San Francisco, No doubt still a daunting number but the data is backward looking and there are transactions that have signed that have not yet.

Square tenants have not yet occupied that will bring that number down and I think most notable in San Francisco's Macy's Dot com space, which we've talked about.

Throughout.

All of our quarterly calls so that space came on the market.

Prior to the pandemic and they signed a 106000 square foot sublease with.

Net called <unk>, which is a relocation and expansion and again. This goes to 1 of the themes. John has talked about continually on our calls about flight to quality, the macys spaces and excellent location on the build out.

As exactly what tech companies want.

Another transaction pending.

We can't go into or name the company, but it's a tech expansion that I think everyone will find interesting that we expect to close in the third quarter.

So jumping to Seattle again, I think Seattle is actually starting to really wake up and actually busier than San Francisco is sublease space in San.

Pending the Seattle excuse me.

<unk> declined about 17% in Q2.

There are right now about 196 active requirements in the market.

Brokers are tracking about $4.4 million square feet of demand and that's about an 80% increase over Q4.

I think another very specific indicator of the health of the Seattle market as the Rainier Square project, which is fully leased by Amazon.

Everyone knows they've been sub leasing that over time.

Right now have about 200000 square feet of signed leases year to date and they've got only 150.

2000 square feet left and again this speaks to the quality of the asset quality of the build out and the location.

Jumping to before I leave the bay area or jumping to life Science, Let me just touch on the Bay area, 1 more time.

Life Science again continues to be extremely.

Ft bust in the Oyster point area were tracking over 4 million square feet of demand.

From tenants developers that have product up and visible on the skyline, meaning steel is up and starting to close in buildings.

Have over 1 million square feet of pending transactions that we expect will be signed between.

<unk> in Q4, <unk> as you know started construction and as we go vertical we expect the same sort of activity at our project.

Los Angeles is a little mixed again, you really have to look at the markets that we operate in Q.

Q2 leasing activity.

<unk> been closer to pre pandemic levels, I would say and nowhere is that more evident than in the west side, where Hulu Snapchat and others have expanded.

Insignificant.

Chunks piece.

Pieces of space.

The last market I'll, just touch on briefly because I think John covered it really.

As move his remarks, San Diego is.

Benefiting both from an influx of large tech as well as the continuing growth of life science market, Our 'twenty 100 Ketner project.

Will be shell on core complete next month.

Tour activity is up there from a variety of tenants and I think thats.

Well on real appealing parts about this location is that we not only are attractive to tech, but we're attractive to the.

More typical fire category tenants in the market. So we're very pleased with the activity there and couldnt be happier with 1 for sale at a 100% leased so that that Nick his overview.

1 other market by market.

Very helpful. Thanks, Rob I would just second question is a follow up on the new leasing activity I think John you did say earlier that 2 thirds of the new leasing in the second quarter was new leases. So new leasing activities picked up on I thought you said something about back half for the year getting closer to pre Covid I.

A review for that correctly, but.

Maybe you could just I just wanted to also be clear that these are comments that were applicable to traditional office and not just lumping in some of the lab space leasing that youre getting done.

Yes, My comments were in terms of square footage leased.

We're sort of doing a 2 million.

No fire plus run rate annually for <unk>.

2 or 3 years before.

Covid I don't have in my mind, there how much of that was office and lab in new space and so forth.

Are you all at <unk>.

I think what I was trying to say is that.

Leasing activity has really picked up down here in San Diego with the exception of cat or is just going to be delivered here in another month or so.

Every square foot we have.

That is that we've announced starting construction on or that we have in the portfolio is leased.

Okay, Great just a quick follow up I mean does any of the other recent news on Delta and now some more indoor mass potential in California. Some.

Some delays in return to office I mean does that maybe throw a bit of a slowdown until leasing in the market.

Yeah.

Do we know.

Thanks.

I can tell you that.

I'm going to be taking this call from our San Diego office. The other is up a 1 sided media.

You go up in the San Francisco, you'll see people on the strength you see people on the restaurants, you didn't see any of that 2 months ago.

Will this relative slowed.

Slow down again as a result of Delta.

I'd be guessing.

San Diego.

It was much more open throughout the entire pandemic than the parts north people for their math, Colorado was much more.

Vibrant.

And I think that's good.

<unk> to be the case.

Yeah, we just have to wait and see that's why I made in my comments that there is going to be some ebb and flow we can't say for sure, but what we can say is that the people are back to business, we're making deals we're having regular meetings tours expansion discussions.

People are sharing with us what they are doing in other cities. What are you doing in Austin. So for so it's a whole different dynamic, but certainly things could get.

Could get it.

<unk> slowdown.

This delta thing becomes a big.

On bigger.

Well as big now but.

I don't know how you answered a bunch for the normally a little bit because I'm, a I'm not seeing anything but positive signs.

But more to come.

Okay I appreciate it thanks John.

The next question will come from Manny Korchman with Citi. Please.

Aye.

Hi, everyone.

John others, especially on life science space talk about the difficulty in conversions and how that's.

It's going to help to control some of the oversupply for potential oversupply in this space you seem pretty confident in.

Converting your spaces on building a whole lot of.

Go ahead life science, So can you help us think about.

Either what we're missing or what they were missing in terms of supply and why supply from other it doesn't really worry you.

Well you know you can never say supply from others doesn't worry us what I've said in prior conference calls.

Is that.

New because you've call something life science, or so you're going to convert to cash.

I would quote life science doesn't mean they'll come I've seen a lot of people buy stuff down here in San Diego as an example, with the idea that they're going to convert for like flights and we wouldn't touch it we wouldn't touch it because the adjacencies are wrong or because.

It's just the tally of the buildings, even when you convert it doesn't lend itself to high quality.

If you think about life science leasing it.

Yeah, they're startups, who are true, which are always you know a different piece, but life science companies want the same things that other technology companies want they want a place.

Let's see where they can have more of a campus where they can have scalability, where they can have the amenities and the environment that attracts and retains the best people and that's where we're very focused but I mentioned the conversions.

UTC and the conversions and del Mar those were already strong life science markets.

So we just happen to have buildings that are relatively new that are have the right kind of floor plates and the right kind of ceiling heights, and structural and so forth that lend themselves and already established life science locations to be excellent candidates for conversion.

Think there's a lot of people that are going to get their clock.

I mean that are playing in this life science conversion gain a lot of them.

I think there's too much money raised in that space, while other companies that don't know what theyre doing every.

Every day I mean, almost everything we see at some old dog building that there's other clogging for the pass through.

For years and now all of a sudden it for life Science play I, just think they're going to be a lot of people that are gonna give birth.

Uh Huh, that's what's driving the question [laughter].

And then yeah, I mean, I mean put put interest.

You can go buy a Volkswagen bug I'd say that youre.

For <unk> freight.

But I don't think youre going to do a very good job making money.

Because you've got the wrong you got the wrong.

It all vehicle or the wrong.

In this case a lot of these buildings.

I've gone out and looked at some of these things on a go you got to be Kidding me. This is a waste of time.

We're gonna Harley here.

So I think its just some silly money out there.

And then just thinking about your own acquisitions.

Given that capital chasing a lifestyle space, maybe a little bit less capital chasing on office space or are you more focused on finding office opportunities to use the proceeds do you have left to use up.

Why do you think you might be actually end up buying from life science space.

I don't see us.

We've not found any life science space to my knowledge that we bought since we bought the Tech Center.

I think that's what it's called Oyster point Tech Center next to our Oyster point.

<unk>.

Or do you think which we bought had some life science on it.

And it was right next door property and we bought it for the idea we've converted to a higher and better use of the phase 5 and other than that correct me tighter Elliot I don't think we bought anything.

But we.

Life science or to convert.

Claude on life science in the past.

5.6 years.

Yeah, that's right I think the last acquisition as you said it was oyster point Tech, which was in early 2018.

Yeah. So I guess my point Manny is where.

We're extremely disciplined with regard.

Bert to what locations, we Wanna be on it with regard to the physicality that works for what's nice for Kilroy is we've made a comment on this from time to time again that the average age of our portfolio is I think it's on her 9 years all right.

On your 10 years old and so we've been building the buildings that have.

Regarding the structural it hasn't kind of floor heights and all the rest is office buildings. So if they happen to be on life science market, they convert easily because they're physically already.

A long way towards what you need to accomplish whereas the average office building.

All kinds of problems.

Has it gotten even gonna mechanicals for loading and all the rest and they just don't comport for that.

But I don't have that any sites on acquiring.

On the life science.

Property I'm eating an existing operating building at this time.

Thank you for everyone.

The next question will come from Blaine Heck with Wells Fargo. Please go ahead.

On.

Yeah.

Blaine.

Perhaps you're muted.

Sorry about that can you hear me.

I don't know a year ago.

Gotcha, Okay. Good morning out there.

So probably for John or Elliott's can you just talk about your appetite for additional investments in Austin at this point.

Whether youre looking for a core acquisitions value add acquisitions or development opportunities and and maybe even whether you're.

You're you're actively pursuing anything at this point.

Yeah.

You want to take that 1 on it.

Sure so.

We are as you can imagine pretty positive on the Austin market. We are looking to grow their I'd say the profile of deals across the spectrum.

Spectrum, we tend to.

Do most of our acquisitions on the value add side or development, but we have in the past occasionally but our core deal at this point theres nothing that is imminent to and worth discussing but are the expectation.

1 is that we will continue to grow there over the next several years.

Great. That's helpful. And then just just to follow up on that you know Austin clearly fits the type of market you guys are interested in and in a tenant profile that you guys know very well, but I think you could potentially argue.

Argue the same for some other sunbelt markets or Submarkets can you talk about whether or not you have any interest in additional markets in the south or southeast.

This is John.

I'm not going to go there.

We're gonna be opportunistic when we think it's in the best interest of.

Sure a horse on where we feel that we could have.

Right Glenn.

Demand and where we can have scale.

With indeed, if I may.

No what other in my comments, we were able to buy best in class, it's very much a kilroy kind of building if I looked at.

If it's a 10 I don't think there was a 7 and net in that city right now.

There's some coming with the new.

New buildings, but.

Really gave us a building that's representative of the type of thing that we do ourselves.

And I.

For the L. A is killing.

No I don't see us buying core unless for some reason is you know at least at a real low rent and the other opportunity to pop the rent.

Significantly in the future value adds Ben.

You know our game for many years and develop of course has been.

On a very strong component of our activities, whether that will take us beyond Austin at some point I don't know right now we're very focused on the 5 markets. We're in for Boston being the latest.

We will be assembling a team there was a process of that and we've made some real strides both with.

Exactly.

Existing kilroy people won't be chance for us.

Well, it's a new hires but you will see us be a player there.

Got it Okay. That's really helpful color and then maybe if I could sneak 1 more in just shifting gears a little bit here, we've clearly seen an.

On increasing the cost of materials and difficulty in procuring some.

The raw materials for just for construction.

Given that you guys are commencing on a pretty major project and K O. P. Phase 2 can you talk about how you guys are dealing with the cost side of things and in making sure you have all of the materials to avoid delays.

Yeah.

The.

The materials have gone up labor has gone up.

I think that with day, 1 of the things we're watching.

The line is the.

And it may have passed today I don't know a day.

Infrastructure Bill.

Congress is doing.

Yeah.

For all of these things from.

Pete for you on hammers and concrete and wire and on the rest. So what we do is we work as active as we are we work with all our contractors who work for the architects who work from their vendors with regard to what they're saying what they think we should be a.

Forecasting we put in a lot of contingency.

And we put it on a lot of projected cost increases.

Excuse me for a second I do not have COVID-19, but I forgot my first cold in 2 years.

As you can probably hear so forgive me for coffee.

We have been right.

In fact, we've tended to be overly.

Overly conservative.

Conservative in our forecasting I can't tell you specifically, what's going on happening at any given time, but we are we've converted I think I mentioned on the suite you know in the last year on conference calls, but basically domestic sourcing everything.

On the money that we can as opposed to buying from China or wherever we're trying to make sure that we have within the supply chain control and that we have more visibility with regard to costing we have people embedded on the on the on the factory floors, where things are being manufactured.

On whether it's window wall or elevators or whatever.

To.

Make sure that we understand how other people on schedule and all the rest so where we have a pretty advanced model by which we manage.

Managing this stuff and more to come but they're there.

There's a there's a lot of competition right now for materials and that's gonna be exacerbated by.

This infrastructure Bill.

The next question will come from Steve <unk> with Evercore.

Evercore ISI. Please go ahead.

Thanks, a lot on my questions have been asked and answered, but I guess I just wanted to circle back John for the.

On the land parcel you did in <unk>.

San Diego I couldn't tell from your comments, if we thought that that was.

As important to control in order.

Land, a larger tenant and kattner or if that's just kind of complementary and you're like the area. You think that will kind of be 2 different projects.

I think it's both Steve it stands on its own.

We have a lot of interest in Canada, right now and if we broke it into a multi.

The only thing I think we've moved it up very very quickly. We also have a couple of big users that were talking with their coming back out on the woodwork.

And there was a big case, a big users. They do require more scale. So we think this is we're going to impact positively the value.

So I think Avenue size I would call it the car wash because that's what it is we might we might even named a project can throw off.

But.

I think it stands on its own were positively impacting the value of that these are the only 2 office buildings that can really be built in.

And little Italy.

But they're the only 100 kettner I think it's going to get a call me the highest rents in the city.

It's at this particular piece of property.

Are you on.

Coax that's for all of our stars new that people that owned it was able to convince.

For us to buy it from them. So it gives us the opportunity to work with a big company and provide them with scalability up it allows us to reap the benefits that accrue to that site from the development of 'twenty 100, together so.

It's kind of up.

Got it thanks, that's it for me.

Okay. Thank you.

The next question will come from Craig Melman with Keybanc capital markets. Please go ahead.

Hey, everyone, Michelle maybe just on guidance.

You'll notice there's no acquisition our guidance assume.

Assumed in guidance does that mean on the remaining 300 I know its getting close to when you have to decide on the special dividend is that what's in the the plan for the remainder of the proceeds that you guys on shelter yet.

Yeah.

And finally, maybe I can take that I mean, working on working through that and we have until the end of September to sort of finalized for 10.31 plans on and Theres other ways to shop for the game as well so more to come on that as we worked through the year.

Okay, and then just separately John you know you noted you mentioned, 20% to 25% of the portfolio could be.

This type science at some point soon.

And you guys have had a lot of good value creation, and what you've done so far but the stock you know it doesn't seem to be getting maybe the valuation that you know maybe a hurry or some others with life science have guy and I mean.

What would be the plan if you get to.

The 5% you guys are still trading at a similar discount to today to kind of narrowing that in getting people to understand the value of that life science piece.

Yeah, I think it's totally coming upon us to make sure that the investment community and the analyst community do give us recognition be recognized.

Of that 20 that value and I think they will.

But it's we've got to make sure they understand it and I think they take a look at the quality of the life science that we have.

They're going to see that we're a notch above most.

Would you ever spin it out or do something separate.

To realize that value.

Well I'm not going to say, 1 way or the other but you just saw sell a state of the art office building in San Francisco, There was only a couple of years old and if you'd asked me a couple of years before what we see in the future.

On the.

The relatively short term future the sale of that asset I would've said are very unlikely.

Who knows.

I mean, if you're you know if you look at the resi. If you look at our revenue right now that's a good trade AR in the threes.

And if you look at our.

Life Science Ah I think I would say.

On a very low cap rate as well and in fact, the office right now.

Face it until people know more about back to work on office demand characteristics. The office company isn't going away, but 1 thing we.

We have is the best product, there's nobody in the office area for its public or whether it's scale are similar to ours that has the quality locations from a quality of product news on supply.

Kilroy House, so I'm confident we're going to end up with that being valued.

Those sorts of things over this next year or 2.

Alright, thanks for the car.

You're welcome.

The next question will come from Jamie Feldman with Bank of America. Please go ahead.

Great. Thank you I think John So on your opening remarks, you had commented that you're increasingly seeing small tenants.

Active in the market for leasing can you just talk more about maybe what's changed.

This quarter or even in the last month or so in terms of the types of tenants that are looking for space on.

Where which markets.

Okay, Rob you want to take that 1 sure hi, Jamie.

Let me start with San Francisco.

So I think 1 on the most interesting things going on in the city right now is that a great bulk of the tenant activity that's going on in the market aside from the larger deals I mentioned that are signed or the tenants in the 15 to 35000 foot range are very active and they had pretty much been on.

On the sidelines for a year and a half.

Including coming out of the pandemic and I think that's a really important precursor indicator of what the future will be because you know these smaller towns for typically the ones that you know that you read about if they had a lease expiring not they'll just not renew and have everyone work from home and all that sort.

A thing and we're starting to see that sort of pick up in the market.

I think also if you look at our long Beach project, where we've done.

We have for about 46000 square feet in leases right now in discussions those are primarily smaller tenants and several of them over half of them on a new deal.

<unk> not renewals, so you're seeing a pick up.

In the smaller tenant market some of its tech and VC backed but also some of it's just private sector architects et cetera, the use space and occupy urban areas.

Okay. Thanks, and then I guess sticking with San Francisco, and we keep hearing about safety issues crime homelessness I mean, when you are our tenants holding off to see things improve or that's not really impacting the leasing market at this point.

It's you know, it's not impacting leasing market and I would say that as people you know.

You mentioned people are.

The city is much more full than it was 6 weeks ago and as people are re occupying the city and this isn't just San Francisco, but other urban areas. The more workers that are back in the city. It is having a sort of displacement effect on the homeless. So.

They are being kind of moved out of the financial.

As John is if you will.

On probably on their own volition, but we haven't seen any pullback in in fact.

On the major tech companies that are in San Francisco, including Google continue to remain bullish on it and continue to invest in space and expansions.

Hi, John for a little different.

Yes, if I may Rob we might not see eye to eye on everything here I do think the homelessness issue is a serious problem for some.

On people on and if you have on spokes camped out in front of your building its going to impact you.

Rob's right.

Thanks.

Return.

More.

Towards normal, but certainly not normal.

This thing has been pushed off 2 different areas.

But we just have a real fundamental problem in California with for homeless situation and it stems from the fact that a couple of years ago.

Citizens voted for proposition to decriminalize drug use.

And therefore the.

Good day, let out tens of thousands of drug users of drug sellers.

On a large portion of those folks ended up on the streets and then we've had the decriminalization of drug but the decriminalization.

It.

As unfortunately come to decriminalization of drug sales and we have these idiot district attorneys and Los.

Los Angeles, and San Francisco much like you have back from your neck of woods, and they're absolutely stupid individuals and their misguided in my mind and.

So homeless is an issue that we have to deal with it we have to deal with it we have a recall going on in California, right now to recall Governor Newsome and so that's on the ballot here shortly in September and if that is voted for concurrently they're voting for who will be the next governor.

And my view as good news surrounding it he's an idiot and we got to solve these problems and so Jamie is a reality as homelessness does hurt notwithstanding we're seeing.

Were seeing increased leasing and whatnot.

Not but I don't want to be Pollyannaish about homelessness isn't real problem in this country. So that's a real problem in California.

Okay.

Alright.

I appreciate your thoughts on absolutely.

Can fix it everywhere, obviously, a major issue on a lot of Citi.

Yeah memo.

And then can you just talk about maybe the net effective rent side I know you know markets are clearly stabilizing and even starting to improve.

Are you seeing any change on the net effective rents and can you talk maybe about how you think your mark to market looks now.

Pretty big leasing spreads in the quarter.

Sure Jamie.

Again.

Up in Seattle, I think let's just start with Belvieu I think youre going to continue to see net effective rent growth.

Probably in the mid to high single digits.

Seattle itself I think youre seeing have the opportunity to see some rent growth starting in the CBD, especially.

It's Robert high quality space.

San Francisco.

If anything it's probably slightly off but if you look at the trophy quality.

Assets that have space. So for example, a bank of America Center, and Embarcadero Center, 1 market Plaza. They continue they have transacted during the pandemic.

For <unk> continued to transact in the 112 to $115 fully serviced rental rate.

<unk>.

And those are pre pandemic rates, so I would say for trophy quality.

Abuse space rates are holding and may uptick, there's a real shortage right now.

New space.

And it is in high demand in San Francisco, which again goes back to John's previous comments about this flight to quality that we will see all.

All of our markets I think.

Oyster point.

I don't want to get into predicting rent growth there, but with what I said earlier about 1 million square feet of transactions that should close in the next.

In next 2 quarters.

We think theres continued pressure on rents there.

Los Angeles again, I think is probably I would call it even.

With.

There has been quite a bit of activity on the west side, which is good to see because of the large movements by Hulu and Snapchat and others.

And then San Diego again, I don't like to generalize on rent growth, that's very specifics, so UTC youre going to see significant rent growth I think del Mar Carmel Valley Youre going to see rent growth and I think as John was saying earlier as you see tenants migrating into the <unk> hundred 56 corridor.

See rent growth there as.

Well.

And Austin frankly.

I think there is some real movement in.

Rent in that.

Tenants are coming back big tickets back Apple as John mentioned.

The big ones that are there already but apple or Tesla.

Oracle are all.

Aside from the fact that you're a major campuses that are expanding now they've just started expansion plans for.

For facilities. There. So Austin is going to have I think a pretty good run up of rental rates, particularly in the CBD because young people are coming back into the central business District.

Yeah.

And Jamie you asked about Mark to market I think we said our overall portfolio pre COVID-19 was roughly 20% below market and given the limited data points, but given the momentum and transaction.

If we were to guests.

Where it is today, we'd say, it's you know plus -15% or so.

Okay, great. Thanks, Bob for you for your.

Our thoughts and color.

The next question will come from Frank Lee with BMO. Please go ahead.

Hi, good morning, everyone Ravi.

Rob you touched a bit about this but I wanted to ask about tenant sentiment in Austin versus San Francisco.

On 1 hand, you have like Austin, leading the U S. In terms of office utilization utilization, while SF is near the bottom.

Are you seeing any notable trends in terms of how tenants are evaluating space needs or tenants, making Quaker decision.

<unk> on basically youre trying to get a sense that there's any significant correlation between higher utilization rates and leasing demand for timing.

Not really seeing the correlation I mean tenant sentiment in Austin keep in mind a lot of other tenants in Austin are also tenants in the Bay area Silicon Valley Seattle.

New York et cetera.

And then the large tech companies are.

Very optimistic about Austin, we spoke a lot to our clients.

In our due diligence and looking and exploring Austin all of them have plans to that are there to stay and grow and.

Despite despite a statistic that I think you might find interesting the economic development Corporation has 267 different companies looking at moving to Austin or expanding in Austin.

From other areas. So it's a very vibrant market a very business friendly.

Market, we found it.

We found it relatively easy to penetrate the business community and really get to know who the movers and shakers are there. So we're very excited as John said about just the whole outs.

Outlook for Austin, but back to your question I, just don't see a correlation between the 2 I think if anything San Francisco.

Return to office has been slower than other urban areas and so that does impact how quickly tenants can assess how their space is going to be used and what their space needs are.

Okay. Thanks, and then you mentioned the 170000 net.

Of leasing already in the third quarter.

The majority.

This quarter's leasing also largely new leases maybe outside the life Science day <unk> and then do you have a sense of the new tenants are.

Upgrading their spaces or just simply relocations.

Well on the on the latter part of the question, they're upgrading their spaces. We're.

We're seeing tenants investing money, whether they're renewing or expanding.

Investing quite a bit of money into their premises. It's all about.

The 1 constant throughout everything has been recruiting and retention of talent.

On the companies, we talk to are essentially doubling down theres a lot of news.

On the press about Google et cetera, making major investments in their space.

<unk>.

Further and make it attractive for people coming back to work.

Yes, Frank on the 1.

70, new on leases signed credit to day those are on new leases.

Okay, great. Thank you.

The next question will come from Dave Rodgers with Baird. Please go ahead.

Yeah, maybe John or Robert I, just had a question you guys talked about about the smaller leases being more active on larger tenants still a little bit more hesitant to make decisions.

<unk> I guess, what gets those larger tenants to make decisions on the west coast here in the near term is it COVID-19 related is it something else. It seems like theres plenty of hiring thats been coming back and then maybe the second part of that question is as you build bigger spaces <unk> phase 2 and kettner kind of north of 200000.

How.

How do you think about kind of flower Mart, and where that fits in the long run and when the demand comes back for something like that.

Scott.

John do you want to you want me to handle part of that are you okay.

Sorry, I was on.

Let.

Let me just start off on.

I don't think we wanted to indicate the big tenants are still paying its little twos mid sort of actively said my comments, we're the big day.

So many examples of them growing substantially but were also down seeing mid and smaller tenants do the same.

So Robin go.

Go ahead.

Yes, I think.

Yeah.

I can't name names and I, just wish I could give more color, but large tech are.

Focusing on expansion and particularly in San Francisco, we talked about Seattle.

And I think youre.

Going to see a lot of for here a lot of announcements in the next quarter.

To that effect.

But again I guess.

The last thing I would say Dave is that companies are.

Theres no doubt Theres, a hybrid work model right on the other hand, there is no doubt.

King has continued during the pandemic with tech so what companies want to do is assess how that lays out on an office floor and they are not really going to be able to do that efficiently until her.

Understand it until people are really back to work and what is the hybrid model mean, it can be all over the map.

It's higher it's going to be as John said sort of an ebb and flow, but no doubt week by week month by month, but more people coming into the office.

Into the cities.

Okay.

Okay, Yes fair enough. Thanks for the added color maybe just 2 quick follow ups, then with respect to Austin and your plans for expansion at some point in the future or are you open.

And with Submarkets, there or at least are there key submarkets you'd look at would you consider the domain are you focused primarily downtown and then the second question, maybe just for Michelle you've covered in your guidance the capped interest and NOI for indeed, but when do you expect GAAP revenue recognition for for indeed to begin.

Yes, I guess I can take on.

On the auto question Elliot on the Cowen can take.

Alright.

On MD tower.

We're expecting roughly a 100000 square feet of tenants to moving towards the end of the year and then indeed will depend on when they built out their ti and rethink.

Technical to start sometime in the second half of next year.

And on <unk>.

Austin I think that our strategy is similar to other markets, where we're kind of focused on.

More urban but in particular are monetized Submarkets I think that you hit on some of them.

There are some others, but we're generally focused on areas, where there are a lot of walkable amenities that kind of fit with the balance of what we've done across our other locations.

Alright, thank you.

The next question will come from Daniel Ismail.

Now with Green Street Advisors. Please go ahead.

Great you mentioned, a variety of potential new developments and Redevelopments during.

During the call and I'm, just curious on the funding side.

Just how you plan to send those whether it's true accelerated dispositions or presumably common equity.

Third consideration given them for the stock trades per day.

Yes. This is Tyler.

We have over $800 million of cash and full availability on our bank line as Michel mentioned, so in the near term.

We have plenty of capital to fund.

The development, we talked about.

And also we have as you say disposition opportunities.

And all the other alternatives, we've always had.

Equity is is there's always an option.

On our first choice at this point for sure but.

But right now with the cash use.

Great.

And then I assume your peers have become more bullish on spec office starts in the Sunbelt, specifically and then also 1 in Silicon Valley.

Curious just given the resiliency of trophy and class a office rents as well as the demands by tech tenants. If that's changed your plans are for new forward plans on flower Mart.

It.

It was same last quarter.

John John who on handle it.

Please go on mute.

I'd handle on except for I was I thought I was talking without being muted.

<unk>.

But every other word.

You were really pretty quiet from Meyer so could.

Could you restate the question, please or if you've heard of it Rob are you guys ready to handle it but I just couldn't hear it.

Yes sure.

Restate it.

It was on it was based on us on spec office starts.

There will be periods have become more bullish on spec at a Boston office starts, particularly in the Sun belt and then.

1 of your peers potentially looking at restart.

Going spec on our Silicon Valley Office development I'm, just curious given the resiliency of trophy and class.

Office rents across your footprint you.

When you have considered doing that.

Is that change plans on the flower Mart.

Well at this point the flower Mart.

John.

Think cleverly so.

As to sort of re imagined the flower Mart.

Sales of essentially the same project, but we now have.

The ability to do for the state's phases that are all plus or minus all within 100000.200000 square feet size wise with 1 another and they all can stand on their own. So we were able to work with the city and work with the ARPA.

March.

Work out that so that.

Originally we thought we were going to have to do a first phase it was roughly $1.2 million.

Our feet.

So roughly half the project.

Now half don't hold me exactly Daniel because I don't have the numbers in my head but.

So roughly $5.600000 square foot.

Please.

So we we.

We think we are.

The project more attractive from a standpoint of development and risk management.

And the ability to have at the board.

They're all digital lives for companies with 1 or have their name on a building.

In terms of starting the project expect I think we need to see San Francisco cleanup attack and also see the return to work.

Yet.

A few solid quarters under our belt.

Before kilroy.

So we're doing a spec project in the city.

And that's that's my view, we have plenty of places to invest there or at this point.

A more certain that that's not to suggest in.

In any way shape or form require them or there's something that has cooled our interest. It's just that the timing is everything so if I know that Fisher biding in these 2 locations and they may or may not be as evident in their bottom line as well.

Where am I on a cast my line.

I appreciate the color and then maybe just 1 last 1 for me.

<unk> seen private market values for class 8 inch for at the office.

Pretty firm across the U S, but I'm curious how you viewed land values.

Change since the start of the pandemic.

As youre going out there and looking.

Via land sites, how much do you think those values have changed for good development opportunities across your footprint.

Yeah, I think they've changed a lot.

You look at.

Some of the transactions and I'm not sure all of these had been announced yet.

So we you know we take on work.

2 we bid on some.

The order of magnitude.

Feel free to correct me here, but order of magnitude over the last couple of years, we've seen Bellevue.

Land prices on an FTE basis more than double.

And.

I think you're going to see that and a lot of different markets a function of demand and supply.

And obviously when you start to throw in the importance of Walkability and of.

Transportation access.

And so for.

There's.

Why certain sites command much higher value obviously, they produce it causes for the overall project cost more and of course, you're going to have a higher rent to justify it.

For most of the Big Tech companies.

And others with higher profit margins real estate is not a big expense.

It's for people.

And so real estate.

That's not to say they don't want to get a good deal.

But we don't see anybody, arguing about rental rates and most of the markets. We've been talking for reporting on today, where they are at record high rents.

More about can I can I get the.

The building and location I work I will say that in the case of.

The buildings that we've mentioned that we're.

We've leased them are down here in San Diego.

Since last quarter in all cases, we had 2 or 3 deep letters of intents with people.

Bidding on.

The sites in some cases people have a ROFO and they exercised it.

And this is a phenomenon that's going on it's why we you've heard us say before just as there's a bifurcation between high quality buildings that really support for the modern user and older style.

You know things that may not it's the same.

Very similar characteristic and in various locations and that's going to translate to higher land values.

They are the scarce.

Got it I appreciate the color on China.

Yeah.

This concludes our question and answer session I would like to turn the conference back over to Michele now for any closing remarks. Please go ahead.

Thank you for joining us today, we appreciate your interest in KFC.

Goodbye.

The conference has now concluded thank you for attending today's presentation.

You may now disconnect.

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Yeah.

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