Q3 2021 Kilroy Realty Corp Earnings Call

October 28, 2021

Good day and welcome to the third quarter 2021 Kilroy Realty Corporation earnings Conference call. All participants will be in listen-only mode.

Should you need assistance, please signal a conference specialist by pressing star then zero on your telephone keypad. After today's presentation, there will be an opportunity to ask questions to ask a question. You may press star then one on your telephone keypad. To withdraw your question. Please press star then two. Please note this event is being recorded.

I would now like to turn the conference over to Michelle Ngo, Senior Vice President, Chief Financial Officer and Treasurer. Please go ahead.

Good morning, everyone. Thank you for joining us on the call with me today are John Kilroy, Tyler Rose and Eliott Trencher. At the outset, I need to say that some of the information we will be discussing is forward-looking in nature. Please refer to our supplemental package for a statement regarding the forward-looking information.

On this call and in the supplemental. This call is being telecast live on our website and will be available for replay for the next eight days, both by phone and over the Internet. Our earnings release and supplemental package have been filed on Form 8-K with the SEC and both are also available on our website. John will start the call with an update on our market conditions.

And review our operational and strategic activities. I will discuss third-quarter financial results and provide you with updated earnings guidance for 2021, then we'll be happy to take your questions. Jonathan.

We will discuss third quarter financial results and provide you with updated earnings guidance for 2021, then we'll be happy to take your questions Jonathan.

Thanks, Michelle. Hello, everybody. Thank you for joining us today. I'll start with some macroeconomic comments before getting into our leasing and capital allocation.

Start with some macroeconomic comments before getting into our leasing and capital allocation.

It's been just over a year and a half since the pandemic began and we're really starting to see the revitalization of cities across the West coast. City dwellers are returning to their urban apartments, and once again, they're embracing city life.

City dwellers are returning to their urban apartments, and once again, they're embracing city life.

After a tough 2020 residential net absorption is approaching 100000 units in our five markets driven in large part by high-density areas like Hollywood, South of market, downtown Seattle, and downtown Austin. Restaurants, bars, coffeehouses or full concerts and events have returned and slowly but surely more companies are coming back to the office.

Events have returned and slowly but surely more companies are coming back to the office.

The recent easing of the San Francisco masked mandate is another step in the right direction that we believe will continue to encourage more in-person gatherings and collaborations.

The technology and life science companies that make up so much of our portfolio continue to thrive. Stock prices are near all time highs in VC fund raising is on track for a record year, which is translating into a war for talent growth and job postings and additional real estate procurement.

Improving market conditions helped to drive a strong and productive leasing quarter for Kilroy, we sign more leases in the third quarter than the first two quarters of 2021 combined. Since the second quarter, we signed just under 600000 square feet of development, new and renewal leases.

Since the second quarter, we signed just under 600000 square feet of development, new and renewal leases.

For the 510000 square feet in our stabilized portfolio that were sign GAAP rents were up on average, 26% and cash rents were up 14%.

Additionally, we have a number of leases under documentation. And in Austin, we're very encouraged with the market and our early-stage lease negotiations. A few facts according to recent reports about Austin. There are 185 people moving to Austin on average each day and interest among companies wanting to move to Austin and those that want to expand in Austin is above pre-pandemic levels.

Those that want to expand in Austin is above pre pandemic levels.

Let's look at some of these transactions. In the office sector, we signed a long term 71000 square foot lease in the UTC submarket of San Diego. The lease is for a new development projects, which we commenced construction on just last month. So now it's 100% leased just after a month after starting construction.

In the office sector, we signed a long term 71000 square foot lease in the U T C. Submarket of San Diego the lease is for a new development projects, which we commenced construction on just last month. So now it's 100% leased just after a month after starting construction.

The competition between technology tenants and life science tenants remains healthy, both sectors continue to grow and seek more modern efficient work environments and life science. The third quarter was particularly active for us we signed three leases totalling 330000 square feet of headquarter space with publicly traded companies in San Diego, including tandem diabetes care germ Tech in Sorrento therapeutics.

Modern efficient work environments and life science, the third quarter was particularly active for US we signed three leases totaling 330000 square feet of headquarter space with publicly traded companies in San Diego, including tandem diabetes care germ Tech in Sorrento therapeutics the.

The market rent increases on these three leases were approximately 45% with an average term of approximately 12 years. In residential we now are fully leased all 608 units at our one Paseo project at rent levels that have increased 25% since the beginning of the year. Jardin our Hollywood luxury tower that was completed last quarter is now more than 60% leased well ahead of projections.

In residential we now are fully leased all 608 units at our one Paseo project at rent levels that have increased 25% since the beginning of the year Jardin our Hollywood luxury tower that was completed last quarter is now more than 60% leased well ahead of projections.

With respect to leasing, I'd like to highlight the following trends, which we feel bode well for the future of our enterprise. Sentiment amongst corporate real estate exactly executives is more positive than it has been in the past 18 months.

Sentiment amongst corporate real estate exactly executives is more positive than it has been in the past 18 months.

We're experiencing significantly more tours and request for proposals within our portfolio. This is both for existing and development projects, rental rates and strategically located modern buildings are on the rise as the result of tenants seeking the best space in the market.

Vibrant and distinctive office curated retail and residential experiences are drawing a talented labor force back to metropolitan areas.

Moving to our capital allocation activities, we made two significant announcements during the quarter, first, in September we completed the off-market acquisition of West eighth in the Denny re grade Submarket of Seattle for $490 million. West State as a 539000 square foot LEED Platinum office tower situated on a full city block just steps from Amazon 5 million square-foot headquarters campus. We liked the opportunity for a number of reasons. The location is terrific with unmatched transit access in proximity to numerous retail amenities. Rents continue to increase in this sub market and we see significant rental upside, and given the quality and condition of the building, we expect limited capital investment and any releasing scenario.

West State as a 539000 square foot LEED Platinum office tower situated on a full city block just steps from Amazon 5 million square foot headquarters campus, we liked the opportunity for a number of reasons. The location is terrific with unmatched transit access in <unk>.

to numerous retail amenities. Rents continue to increase in this sub market and we see significant rental upside, and given the quality and condition of the building, we expect limited capital investment and any releasing scenario.

Year to date. This brings our total acquisitions to $1.2 billion, which have been funded by our $1.1 billion dollar dispositions.

The second announcement relates to our continued allocation of capital to our life Science platform.

Earlier this year, we commenced construction on the second phase of our approximately 50 acre 3 million square foot Oyster point project. Which is a life science campus in South San Francisco. KOP2 which totals just under 900000 square feet across three buildings will be home to numerous amenities that will serve all phases.

Which is a life science campus in South San Francisco.

Two which totals just under 900000 square feet across three buildings will be home to numerous amenities that will serve all phases.

We're particularly excited about phase two given the strong demand, rising rental rates and timing. No other competitive project will be delivering in this time frame.

We are in early discussions with multiple prospective tenants interested in securing major portions of the project and expect even more interest in the buildings once construction goes vertical in the first quarter of next year.

In addition to KOP, we are expanding our San Diego life science significantly, availability for top tier space in the regions most sought after life science Submarkets is essentially nonexistent. Barriers to entry are high and rental rates are at historic levels and we are capitalizing on these dynamics in del Mar UTC, and the I56 corridor, where we have modern highly convertible assets and a land pipeline.

dynamics in del Mar UTC, and the I56 corridor, where we have modern highly convertible assets and a land pipeline.

In the UTC in del Mar submarkets as I noted in my earlier remarks, we signed 330000 square feet of pre leases across three buildings, which will be converted to life science use. And just a few miles east of the 56 corridor, we expect to commence construction next year on the first of two phases.

Of our Santa Fe summer project. Each phase consists of approximately 300000 square feet.

To summarize, we will deliver $2.5 million square feet of state of the art life science facilities over the next 30 months. And over time, the three future phases of Kilroy Oyster point will expand our life science portfolio by another 1.5 to 2 million square feet.

When completed we have assembled a best in class life science portfolio in the strongest locations, which will total $5.5 million square feet with an average age under five years. With full build-out life science, and health care tenants will be 25% to 30% of our NOI.

With full build out life science, and health care tenants will be 25% to 30% of our NOI.

Lastly, delivering our in process development and positioning our future development projects remain a high priority in our capital allocation strategy, we have $2.6 billion of in-process projects on track for completion over the next two years. This pipeline is 52% leased and 74% leased when excluding that just commenced KLP2 which we started five months ago.

This pipeline is 52% leased and 74% leased when excluding that just commenced K L. P. Two which we started at five months ago.

They will generate approximately $170 million in incremental cash NOI when stabilized, which will grow our current annual NOI by more than 20%, all else being equal. The cost is fully funded through the year-end 2022.

I'll wrap up with a few final observations. In nearly every conversation we were having these days with our tenants and potential tenants one big theme emerges. Companies want a work environment that attracts excites and motivates their workforce.

They want location, scale, a contemporary design, a healthy environment and a relaxed ambience that will draw people in and support their creativity and productivity.

This is the most profound impact the pandemic has had on the office sector. And we think KRC is well-positioned to capitalize on these conditions. Over the last 10 years, we created the youngest best in class platforms across office life Science, and residential and we are poised to deliver strong growth and value creation over the coming decade, we're more encouraged every day about our markets recoveries.

And we think <unk> is well positioned to capitalize on these conditions over the last 10 years, we created the youngest best in class platforms across office life Science, and residential and we are poised to deliver strong growth and value creation over the coming decade, we're more encouraged every day about our markets recoveries.

The reopening is going to happen in fits and starts but it is happening. And a final comment on sustainability. And GRESP rankings, we have been named number one in sustainability across all publicly traded companies across all asset classes in the Americas for the eighth year running.

And a final comment on sustainability.

And G. Resp rankings, we have been named number one in sustainability across all publicly traded companies across all asset classes in the Americas for the eighth year running.

That completes my remarks, now I'll turn it back over to Michelle.

Thank you, John. FFO with 98 per share in the third quarter. Quarter over quarter the 10-cent increase was largely driven by the acquisitions to date, NOI contribution from our one paseo office. And our residential projects. As well as a penny and a half lease termination fees. On a year over year basis as a reminder, the sale of the exchange had an impact of approximately 13 cents of FFO per share.

The increase was largely driven by the acquisitions to date NOI contribution from our one paseo.

And our residential products as well as a penny and a half lease termination fees.

On a year over year basis as a reminder, the sale of the exchange had an impact of approximately 13%.

On a same store basis third quarter cash NOI was up 16.6%, reflecting strong rent growth, and a $17 million cash termination payment. GAAP same-store NOI was up 3.2%. This termination payment as it related to the new 12-year lease we executed at 12 400 high blast for 182000 square feet of space. On an earnings basis, approximately $7 million, which is the net amount after lease write-offs will be amortized over the next three years. 700000 of it was included in the third quarter.

<unk> 82000 square feet of space on.

On an earnings basis, approximately $7 million, which is the net amount after lease write offs will be amortized over the next three years.

700000.

That was included in the third quarter.

Adjusted for termination payments same-store cash NOI with 3.7% and same-store GAAP NOI was up 2.2%. At the end of the third quarter, our stabilized portfolio was 91,5% occupied and 93,9% leased.

At the end of the third quarter, our stabilized portfolio was 91, 5% occupied and 93, 9% leased.

Third quarter occupancy was down 30 basis points from the prior quarter driven by approximately 90000 square feet of move outs.

Set by the West eighth acquisition and the Cytogenetics lease at KOP1, which was added to the stabilized portfolio at the end of the quarter. Revenue recognition for 100% and with 235000 square foot building commenced October 1st.

Revenue recognition for 100% and with 235000 square foot building commenced October 1st.

Turning to the balance sheet after funding the West eight acquisition for 490 million issuing $450 million of Green bonds, which closed October 7th, and the redemption of 300 million 3.8% bonds, which was completed earlier in the week, our liquidity today stands at approximately 1.5 billion.

Including $390 million in cash and full availability of the $1 1 billion under the revolver. We have no material debt maturities until December 2024.

We have no material debt maturities until December 2024.

Our net debt to Q3 annualized EBITDA was 6.7 times pro forma for the bond activity as noted above, which should decline as we continue to deliver our lease development projects all else being equal.

Lastly, our explorations over the next five years remain modest with an annual average expiration of 7.2%, excluding any impact from Directv, we do not have an update to provide on the Directv matter at this time.

In 2022, we only have one lease expiration greater than 100000 square feet in San Diego. This tenant is expected to vacate in early 2022.

This tenant is expected to vacate in early 2022 now.

Now, let's discuss our 2021 guidance provided in yesterday's earnings release. To begin, let me remind you that we approach our 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 shifts in the economy, 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.

To begin let me remind you that we approach our 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.

shifts in the economy, 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 those caveats, our assumptions for 2021 are doubtless.

With those caveats, our assumptions for 2021 thoughtless.

CAP interest is expected to be approximately $80 million. Same-store cash NOI growth is expected to be between 5% and 5.5% for the year.

Same store cash NOI growth is expected to be between 5% and five 5% for the year.

We expect year-end occupancy of approximately 91.5% for the office portfolio and north 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 $1 million a month, when we get back to pre COVID-19 levels.

With respect to the three San Diego Life Science transactions, we will be adding them to the redevelopment portfolio on capping interest in phases as follows. On average we are modelling six to nine months of redevelopment, which are estimates based on what we know today and could be impacted by a variety of factors, including tenant modifications.

At 12340, El Camino Real, which is 100% leased the Genpact, we expect to add this 96000 square foot building to the redevelopment pipeline this quarter. At 12400 high blood, which is approximately 85% leased with tandem diabetes, we expect to add 75% of this 182000 square foot lease to the redevelopment pipeline in late 1Q next year. At $46.90, executive drive, which is 100% leased of Sorrento Therapeutics, we expect to add this 52000 square foot lease to the redevelopment pipeline and two phases happened late 1Q next year and the remainder in early 2023. We do not have any additional acquisitions in our forecast.

182000 square foot lease to the redevelopment pipeline in late.

<unk> next year at $46 90, executive drive, which is 100% leased of Sorrento Therapeutics, we expect to add this 52000 square foot lease to the redevelopment pipeline and two phases happened late <unk> next year and the remainder in early 2023, we do not have any additional acquisitions in our forecast.

Taking into account all these assumptions, we project 2021 FFO per share to range between $374 to $380, with a midpoint of $377. This updated midpoint is the same as our prior guidance, even after including the debt redemption costs of $11.05 in the fourth quarter.

This updated midpoint is the same as our prior guidance, even after including the.

The debt redemption costs.

$11.05 in the fourth quarter.

This is largely driven by the acquisition of <unk>, which contributed 6 cents to our results in earlier revenue recognition of cytogenetics and better-operating results, including a penny and half of lease termination fees. Totalling 5.5 cents. Excluding the $11.05 of debt redemption costs, the midpoint of our guidance would have been up 3% or $3.89 of FFO per share. That completes my remarks, now we'll be happy to take your questions. Operator.

Totaling five 5%.

Five five cents.

Excluding the $11.05 of debt redemption costs, the midpoint of our guidance would have been up 3% or $3 89 of <unk> per share that.

That completes my remarks, now we'll be happy to take your questions operator.

We will now begin the question and answer session. To ask a question you may press star then one on your telephone keypad. If you were using a speakerphone. Please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question. Please press star then two. At this time, we will pause momentarily to assemble our roster. The first question comes from. Nick Yulico from Scotiabank. Please go ahead.

At any time. Your question has been addressed and you would like to withdraw your question. Please press Star then two.

At this time, we will pause momentarily to assemble our roster.

The first question comes from.

Nick <unk> from Scotiabank. Please go ahead.

Thanks. Hi, everyone. Maybe just first question if Rob could perhaps go through some of the leasing dynamics you're seeing in your markets.

Leasing dynamics Youre seeing in your markets.

Sure. Hi, Nick. Hello, everybody, let me start with some highlights that I think may address questions that others have and there are four key ones I'd like to make.

Hello, everybody, let me start with some highlights that I think may address questions that others have and there are four key ones who'd like to make.

What we're seeing on the ground and this isn't necessarily just strictly our five markets are our five markets that we operate in. I think it's a national trend, but the office will remain the center of the work ecosystem. It may change and its configuration, but it's going to remain the place where people come to conduct meetings and collaborate.

And we're seeing companies, both our clients and others are spending a lot of money on their office space. So.

I think that's one important point. Hybrid work is going to be a given we know that the third point I'd make is that the net impact of the hybrid work we think is going to be minimal in terms of space demand reduction or footprint shrinkage. Recently CBRE conducted a survey nationally at 185 companies and only 9% of those surveyed expect to experience a decrease in square footage. So I think that's really telling and as John alluded to in his comments, health, safety and wellness are going to continue to be a very high importance to employees. So you will see.

85 companies and only 9% of those surveyed expect to experience a decrease in square footage. So I think thats really telling and as John alluded to in his comments health safety and wellness are going to continue to be.

Very high importance to employees. So you will see.

A flight to quality as we've talked about to buildings that provide that sort of outdoor space. Stairwells, where you can walk rather than take elevators et cetera.

Stairwells, where you can walk rather than take elevators et cetera.

Going into the market just some overall general again highlights tour activity across our five markets has continued to increase, particularly in San Francisco. Restaurants, retail and hospitality are visibly improved in terms of just sheer numbers of people in the streets in bars and restaurants driving in this week to San Francisco, it's truly amazing.

Driving in this week to San Francisco, it's truly amazing.

At 8 or 8:30 in the morning, seeing the number of people that are in coffee houses and coffee shops gathering and enjoying one another. Our parking garage here, where John and I office at 101st. Two months ago was relatively empty and today and yesterday they already had the full sign out, so traffic is back and we're starting to see a major increase in parking occupancy.

Enjoying one another.

Our parking garage here, where John and I office at 101st.

Two months ago was relatively empty in today and yesterday they already had the full sign out so traffic is back and we're starting to see a major increase in parking occupancy.

A large majority of them have opened up offices on a voluntary basis to people and you can see that in the lobbies of various buildings, particularly in San Francisco. With relation to office occupancy, Austin is probably the leader in the country with almost 50% occupancy. San Francisco and San Jose are trailing other metro areas at roughly 20%, but those two markets are increasing fairly quickly, primarily because San Francisco relaxed its mask mandate on October 15th.

In the lobbies of various buildings, particularly in San Francisco with relate to with relation to office occupancy Austin is probably the leader in the country with almost 50% occupancy.

Dan Francisco and San Jose are trailing other metro areas at roughly 20%, but those two markets are increasing.

Early quickly, primarily because San Francisco relaxed, its Matt mask and the <unk>.

<unk> date on October 15th.

The last thing I'd say as a general commentary is that real estate executives are focusing on two primary things today when they're doing their planning. It's what will hybrid work models look like and what will lease work models mean in terms of future space requirements and needs within the office environment.

And then I'll just touch on our markets quickly and then if you have more questions go ahead. San Diego, let's start at the South and work North. San Diego's large tech and local VC backed companies are extremely active right now.

San Diego, let's start at the South and work North San Diego's large tech and local VC backed companies are extremely active right now.

To be honest fire category and legal requirements are slower to emerge, but we're starting to see an uptick.

I know people have questions about 20 100, kettner, we've seen a pretty significant uptick in activity. In fact last week, we had three tours alone, we received an RFP yesterday.

And we are pursuing a multi tenant strategy at the project based on the activity we're experiencing today.

In Los Angeles, more positive news and I think it's really focused in the Culver City Hollywood and West LA portions of the market.

We're seeing a reduction of space on the market as sublease space is either leased or taken off the market, particularly in west LA. Continued expansion of gaming, media and technology companies are focused on west LA Culver City in Santa Monica and there's demonstrated proof just by the absorption. Recent new significant deals in the market are Apple, Roku, Hulu, Activision snap riot, Sony and Amazon and that's very encouraging compared to where we were a year ago with particularly the west side, where there was more sublease space on the market that it had been there for quite a while. Quality assets and I would say this is sort of a general comment on our markets quality class a assets that are well located are able to hold rates here and there there may be some added concessions that generally there is a flight to quality and landlords are able to maintain rates. San Francisco again.

Deals in the market are Apple Roku, Hulu, Activision snap riot, Sony and Amazon and that's very encouraging compared to where we were a year ago with particularly the west side, where there was.

More sublease space on the market that it had been there for quite a while.

Quality assets and I would say this is sort of a general comment on our markets quality class a assets that are well located are able to hold rates here and there there may be some added concessions that generally there is a flight to quality and landlords are able to maintain rates.

San Francisco again.

We are hoping that we've plateaued and started to see a slight decrease in sublease space were down to 7 million from 9 million square feet. We have in Q3, which is pretty encouraging 2.25 million square feet of lease deal signed which brings us to a total of $3.9 million for year to date.

We have a in Q3, which is pretty encouraging to two.

225 million square feet of lease deal signed which brings us to a total of $3 9 million for year to date.

That's the highest level of activities since Q4 of 2019 so.

We're watching this very closely and hoping that we are turning the corner here. Right now today there are seven tenants in the market over 100000 square feet.

One thing I'd like to finish with San Francisco, because again, it's probably out of our markets has the most sublease space and has been the focus of many questions in that sort of thing is that the city really is going to move into a haves and have nots and to illustrate that point that I'd point out that for trophy buildings.

Questions in that sort of thing is that the city really is going to moving into a haves and have nots and to illustrate that point that I'd point out that for trophy buildings.

Most landlords on average have increased their asking rates to an average of $98.36 a foot on a fully serviced basis.

And when you contrast that with class B buildings, they've been lowering their asking rates to $72 a foot. So there's a real disparity between class A trophy and class B space and sublease space would fall into that latter category, and that data is borne out by JOL. So.

Space and sublease space would fall into that latter category and that data is borne out by J O L. So.

Again, we're watching that closely. Luckily we don't have a lot of space available right now and so we see continued improvement in San Francisco.

A lot of space available right now and so we see continued improvement in San Francisco and.

Again as I said earlier, hopefully, we're plateauing. South San Francisco is a great story. I could go on and on but we're very pleased with the activity we have.

I could go on and on but we're very pleased with the activity. We have we are.

We have just started our phase two at Kilroy Oyster point, we're seeing very strong demand when we deliver and in around 23, we think the window will be optimal given that there's very little product competing with us at that time. And the last thing I'd say about South San Francisco is projects that are vertical.

Meaning they are under construction and starting to appear in the skyline are either fully leased or the space is largely committed so again, we're feeling very good about not only the absorption of space, but also what we see happening with rental rates in San Francisco.

Moving to Seattle again, just a very good story, particularly for a year and a half we talked about how strong the Bellevue market is but. The CBD of Seattle is really coming into its own sublease space has continued to decline. We've seen rental rates pick up slightly and class A, again trophy well-located product, the Rainier square new product that Amazon has been sub leasing in the CBD. The traditional CBD continues to have a lot of activity in its leasing up.

The CBD of Seattle is really coming into its own sublease space has continued to decline we've seen rental rates.

Pick up.

Slightly and class a again trophy well located product the Rainier square new product that Amazon has been sub leasing in the CBD. The traditional CBD continues to have a lot of activity in its leasing up.

And so we think that bodes really well for our recent Westgate acquisition, which is in the most highly or monetize modern portion of the market.

Highly or monetize modern portion of the market.

And we also are noticing that that shift toward this modern amenity base in and around the West States area, where our 6O project is creating more interest from companies even outside of the Seattle area. So more to come on that but Seattle is really coming into its own.

More interest from companies even outside of the Seattle area, So more to come on that but Seattle is really coming into its own.

The last market that probably you don't want to focus on is often we're very pleased as John said with what we have going on in Austin, we have over 200000 square feet of activity at our building right now in some stages of documentation and I don't want to make any promises about timing those companies sort of run the range from professional services to tech.

From professional services to tech.

And the last thing I would note is that there are two pending, I think I've said this before during demo, there are two large pending transactions that total over 900000 square feet that are imminent in the CBD and that bodes even better for R&D tower.

There also was one large transaction tech transaction that closed in the domain Submarket. It was over 300000 feet. So all in all that's the wrap up on the markets and we're feeling better about everything we're seeing in each of the Submarkets.

Everything we're seeing in each of the Submarkets.

Thanks, that's very helpful. On Oyster point can you remind us I guess two things one can you just give us a feel for where market rents are right now? And then separately you know remind us how on phase one the rest of the NOI is going to flow in from a GAAP standpoint over the next few quarters? Yes, Nick I'll handle the first one.

On Oyster point can you remind us I guess two things one can you just give us a feel for where market rents are right now.

And then separately you know remind us how on phase one the rest of the NOI is going to flow in from a GAAP standpoint over the next few quarters, yes, Nick I'll handle the first one.

I don't want to pinpoint because the market is moving and it's moving in the right direction, but safe to say I think rents are achieving $7 net right now. And we'll exceed that just based on the absorption that's going on in the activity.

Safe to say I think rents are.

Achieving $7 net right now and we'll exceed that just based on the absorption that's going on in the activity.

Yeah, and Nick with respect to KOP phase, one and the remaining revenue commencement, we said Cito commenced in early October and Stripe, who occupies the remaining two buildings come online. In November.

<unk> commenced in early October and stripe, who occupies the remaining two buildings come online.

In November.

Okay, great. Thanks, everyone.

The next question comes from Manny Korchman with Citi. Please go ahead.

Hey, everyone. Maybe as you expand the development pipeline have you seen any issues with the supply chain disruption or especially as it feels like some of it's coming a little bit faster than you expected? Yes. John.

Maybe as you expand the development pipeline have you seen any issues with the supply chain.

Option or especially as it feels like some of it's coming a little bit faster than you expected.

Yes.

John.

We obviously you have a group that monitors all of that stuff and there are some disruptions for sure. We made a decision that Kilroy, a couple of years ago that we were going to reduce our dependence upon offshore suppliers as much as we could possibly do. And we have but we are still dependent because still we don't fabricate any steel in China, but you have to buy the bulk still bring it here.

<unk>, we don't fabricate any steel in China, but you have to buy the bulk still bring it here.

We're very focused on what we can control, and so as you probably know there's a lot of ships that are at anchor waiting to unload at all of our ports. And we've been very focused on making sure that the stuff we are coming from offshore is going to ports that don't have the jam up that LA has as an example.

On what we can control and so as you probably know there's a lot of ships that are at anchor waiting to unload at all of our ports and we've been very focused on making sure that the stuff. We are coming from offshore is going to ports that don't have the jam up that L. A has as an example.

<unk>.

In regards to delivery of things, we forecast everything it to take longer and with regard to construction costs we've been forecastings anywhere from 5% to 6% per annum increases across the board and in cost. So we've done better than that everything that we have under development right now has been bought.

Forecasting.

Were from 5% to 6% per annum increases across the board and in cost. So we've done better than that everything that we have under development right now has been bought.

The things that we are going to start we will buy, we've had pretty good luck in that regard we've been able to deliver everything at or below what we forecasted.

Everything at or below what we forecasted.

But we're keeping a close eye, we've had to make some selections of alternative materials in a few cases to make sure that we don't have a supply problem.

Materials in a few cases to make sure that we don't have a supply problem.

So that's kind of general comments and more to come but we do have a pretty robust risk management function within our construction development activities.

Function within our construction development activities.

Thanks, Jonathan. Michelle going back to your prepared remarks. You spoke about one large vacate and I think you said early '22, if I look at your exploration schedule for '22. If that vacates in the first quarter. It seems like those rents are well below the rest of your portfolio.

You spoke about one large vacate and I think you said early 'twenty two if I look at your exploration schedule for 'twenty two.

If that vacates in the first quarter. It seems like those rents are well below the rest of your portfolio and.

I'm wondering if this tenant falls into that or otherwise if you could just give us some more details on the move-out. Thanks.

Yes.

Yeah, Rob, I don't know if you have any color on the move-outs, but I guess with respect to market rents. I'd say you know last quarter, we said across our portfolio rents are about 15% below market.

I'd say you know what.

Last quarter, we said across our portfolio rents are about 15% below market.

I think in looking at '22 exploration in that 20% to 25% below market range. Yes, Manny, this is Rob just a little more color.

Yes, Manny this is Rob just a little more color.

We've anticipated this vacate we've been talking to the tenant off and on. Some of their work is related to the government in contracting.

Some of their work is related to the government in contracting.

And so we are pursuing and have activity sort of in a wide variety of sizes somewhere from 50000 feet to in excess of 100. So given we haven't gotten the space back yet we're already working on some things and feel pretty good about it. There's a lot of activity as John said in his comments just a lot of activity out in that corridor right now.

<unk> said in his comments just a lot of activity out in that corridor right now.

And Michelle just from a modelling perspective can you be more specific on the timing we should soon for next year? It's in the first quarter. Thank you.

It's in the first quarter.

Thank you.

The next question comes from Jamie Seidman of Bank of America. Please go ahead.

Great. Thank you just to confirm what was the size of the San Diego move out? It's about 120 530000 square feet. Okay, and then I guess thinking about next year. It sounds like you think nothing else sizeable. No. That was the only sizable one. Okay.

It's about 120 530000 square feet.

Okay, and then I guess thinking about next year.

Like you think nothing else sizeable.

No.

That was the only sizable one.

Okay.

Looking at, first of all I liked the revised supplement also thanks for refreshing it up, that's great.

The revised supplement also thanks for refreshing it up that's great.

And in page 30, you have the future development pipeline. I'm just curious what your thoughts are given the multi-year lead time. To get something built, what are your thoughts on starting incremental projects now? It seems like you guys think the markets are starting to recover.

To get something built what are your thoughts on starting incremental projects now it seems like you guys think the markets are starting to recover.

Well. This is John, we are, as I mentioned in my comments, we will be starting a phase the first phase of what were the two phases that remain at Santa Fe Summit, that's about 300000 square feet. So we have 2 phases there for 600000 feet. It could be that we start both if we have. If we've leased one of the phases.

Phase the first phase of what were the two phases that remain at Santa Fe Summit, that's about 300000 square feet. So we have 202 phases are for 600000 feet. It could be that we start both if we have.

If we've leased.

One of the phases.

So that'll that's that's going to commence next year.

We've got a few other things that we're looking at but nothing to announce at this point from an entitlement standpoint, we did receive all our entitlements now for the flower Mart, we were able to revise the phasing and whatnot on that project. To be roughly plus or minus 500000 square feet per increment, which is very good, but we don't have any plans to start that right away, we want to see the market solidify here in San Francisco. And then we have our six O project up in Seattle, but that I think it was about a year away from being able to start. We do have a little project I've I failed to mentioned that is on 26th Street in Santa Monica.

To be.

Roughly plus or minus 500000 square feet per increment, which is very good but we don't have.

Any plans to start that right away, we want to see the market.

Solidify here in San Francisco, and then we have our six O project up in Seattle, but that I think it was about a year away from being able to start we do have a little project I've I failed to mentioned that is on 26th Street in Santa Monica.

An existing building of about 40000 square feet it'll be remodeled and then about another rough.

Roughly 100000 square feet, plus or minus <unk> two adjacent buildings that were receiving approval on and that'll be sort of a low rise very modern campus and we could end up starting that next year, which we'd be inclined to do because we were already a pretty strong demand for it so that's sort of.

The development.

Uh huh.

<unk> that we have right now we are.

Redding phase three and four of Kilroy Oyster point, and we're not ordering material, but we are.

I wanted to be in a position to start that as soon as we've made some leasing.

So our progress at <unk>.

<unk>.

Okay.

I mean, the announcements of expansion in Austin, just continue any latest thoughts on how you can grow there beyond indeed.

Yeah.

I don't want to share them publicly for competitive reasons, because it is a competitive market, but elliot and his team.

He had been working on a number of things there and we're hopeful that we're going to be able to.

Complete some other things.

Maybe as early as this quarter, but maybe maybe it'll be next year.

But you're quite right I mean, what we see there is that.

Sort of reminds me Jamie of when we bought Oyster point and Cambridge was that.

$90 Triple net and Oyster point area was sort of at 50 550, $657 Triple net and we said we think the same these are the same tenants, they're going to end up paying.

More like Cambridge prices in due course, and Thats exactly whats happened at Oyster point and now Cambridge as you know is well north of $100 Triple net and it's the same tenants that are paying high rates around the world that are moving into Austin and at least in the big Tech.

I think theres going to be a lot of lift.

We're not really interested in older product that doesn't meet the.

The the demands and needs of the modern tenant unless it's an old building with a lot of floor heights that we can convert.

So where we are.

Scouring the market regularly we're in negotiations all the time nothing now to report, but hopefully something.

We will break loose here.

And the next few quarters.

Okay. Thanks for your thoughts.

Welcome.

The next question comes from Derek Johnston with Deutsche Bank. Please go ahead.

Hi, everybody. Thank you.

L. A L. A remains a bit of a hole in the portfolio.

Really what otherwise is pretty well occupied I think it's around 87%.

What do you see going on in that market and what's it going to take to get back to the ninety's or maybe even 95 or higher.

In line with your other core markets.

Yes. This is John I'm going to turn it over to Rob here in a minute but.

If you look at L. A.

There are a lot of big tenants and there are a lot of small tenants and small tenants have lagged in this.

Pandemic area.

For obvious reasons thats easier for them to move.

A move into the home or move into wherever they are moving they are more of those kinds of spaces available.

But we are seeing really strong signs of life. The big users as Rob pointed out are making moves forward. We're seeing a lot more request for proposals we've done an awful lot of little deals recently and Rob you want to add.

We'll get more color on that yet.

I guess, what I would say Derek is that L. A is such a large market. When you really look at it considering can run from long Beach, all the way up to 1000 Oaks in Carlsbad.

It gives me an calabashes.

So it is a.

<unk> have very many submarkets, we don't focus on downtown L. A.

West L. A as I said in my comments earlier did have quite a bit of space on the market between 'twenty 100, Colorado and.

Santa Monica business Park, and the water garden, but particularly at Santa Monica business Park in Colorado, they've had significant absorption and.

The gaming industry is actually coming.

Coming out of sort of from the background now competing with tech companies for space on the West side. So we're seeing I guess I would say Culver.

And Hollywood have been fairly stable throughout the pandemic because of all the film production in those locations are just attractive to the media companies and I think what's happened is that west L a and particularly.

Deeper into the west side like Santa Monica Youre, starting to see that that increase in activity and it's starting at the big the big tenant level like the name site went through but to John's point.

Smaller sized firms are now starting to surface. They really didn't, when you look about it. If the city is shut down and you're not going into the office and you don't have to do something with the lease.

Starting to surface.

They really didn't when you look about it.

If the city is shut down and Youre not going into the office and you don't have to do something with the lease.

You're not going to do it and they haven't for about a year and a half, but we're starting to see more activity in that smaller.

You look at it as an example, our Tribeca West project, which is very much geared towards shorter term production directors all that movie content stuff a lot of those people could go to work last year.

Now all of a sudden our occupancy is increasing substantially so as things loosen up people get back to work, they need space to work in a daily space. So that's a good trend and that's what we're saying.

As things loosen up people get back to work they need space to work in a daily space. So that's a good trend and that's what we're saying.

Alright, great color. Thank you. Last one. So looking at some office companies that have already reported so far. They seem to have been able to drive longer-term commitments from the tenants. I know you guys were always a little lighter on term historically, but is this like a California thing or is it a tech issue? And could you share any insight and when you think your lease terms will return to like the 7 to 10-year levels?

So looking at some office companies that have already reported so far.

They seem to have been able to drive longer term commitments from the tenants I know you guys were always a little lighter on on term historically, but is this like a California thing or it alright tech.

Issue and could you share any insight and when you think your lease terms.

return to like the 7 to 10 year levels .

I don't know, how you're getting that statistic and Michel or Rob you can help me, but I think Kilroy has had amongst the longest term leases.

Because we do so much with big companies and those are generally anywhere from 10 to 16, 17 years. So I'm not quite sure where that's coming from. Eric. This is Tyler. I think what you are looking at is the lease term on some of our renewals was in the high four-year range, but if you take into consideration the leases we signed in San Diego, which are not in that category, those were averaging over 11 years. So the average lease term for what we actually lease last quarter was 9.5 years.

That's coming from.

Eric This is Tyler I think what you are looking at is the lease term on some of our renewals was in the high four year range, but if you take into consideration the leases we signed in San Diego, which are not in that category those were averaging over 11 years. So the average lease term for what we actually lease last quarter was nine five years.

So it is still in line with what we've been doing it it's a little hard to follow in those numbers.

In those numbers.

Okay. Thanks for clarifying thanks, guys.

The next question comes from Steve Sochua with Evercore ISI. Please go ahead.

Yeah. Thanks, I guess still good morning out there. I was just wondering maybe Rob if you could maybe touch a little bit on the life science demand specifically in South San Francisco. Realize that KOP2 doesn't have steel coming out of the ground, but maybe what are your expectations on timing? And maybe you or John could you just address the broader infrastructure issues in south San Francisco and how you guys sort of think about mass transit getting everybody that's going to be coming to that entire area as Genentech looks to double their footprint and you and many of your peers look to continue to add density of South San Francisco.

Realize that.

Two doesn't have steel coming out of the ground, but maybe what are your expectations on timing and maybe you or John could you just address the broader infrastructure issues in south San Francisco and how you guys sort of think about mass transit getting everybody that's going to be coming to that entire area as genentech.

Looks to double their footprint and you and many of your peers look to continue to add density of South San Francisco.

Yeah.

I look at this as a little bit as fly fishing, Steve Dangled, a fly out there, but I'm not going to snap at the fly with respect to. Timing in what we're doing and when we will be able to announce something but I would say that demand in the market, even though theres been tremendous absorption in the market today demand is still tracking at about 4 million square feet. So as space gets absorbed there is new demand. Appearing so that's a very positive sign.

Timing in what we're doing and when we will be able to announce something but I would say that demand in the market, even though theres been tremendous absorption in the market today demand is still tracking at about 4 million square feet. So as space gets absorbed there is new demand.

Appearing so that's a very positive sign.

I mentioned earlier rental rates are on the move and we're very pleased by that. And then with respect to the second part of your question, we are in a lot of discussions with not only our existing tenants but potential tenants and others that are our neighbors on a variety of transportation solutions and ideas and so.

So.

And then with respect to the second part of your question we are in.

A lot of discussions with not only our existing tenants, but potential tenants and others that are our neighbors.

On a variety of transportation.

Solutions and ideas and so.

It's something that everyone in Oyster point and frankly, everyone in an urban area is going to have to address at some point as its circulation and moving people around but I think one of the best assets we have is the bay and Genentech as an example is a very significant robust ferry service that they run throughout the Bay area.

Oyster point and frankly, everyone in an urban area is going to have to address at some point as its circulation and moving people around but I think one of the best assets. We have is the the bay and Genentech as an example is a.

Very significant robust ferry service that they run throughout the Bay area.

Okay, and maybe piggybacking off.

One other question on Austin, and just your desire to grow down there I guess, John have you gotten closer to formalizing or finalizing who might be running that region in and sort of how you think about whether it's an internal or external candidate? Yeah. We have identified and if somebody from within that will be running it from an asset management standpoint from a leasing standpoint, and obviously Rob has dealt with the responsibility and has a very firm handle on that. We have one of our top leasing people from this area here in San Francisco, who is responsible for the leasing currently at India Tower. As we expand our platform there were obviously going to need more bodies and we're working on that. We've been going through that process, nothing to announce right now.

Yeah.

We have.

We have identified and if somebody from within that will be running it from an asset management standpoint from a leasing standpoint, and obviously Rob has.

All of them responsibility and has.

A very firm handle on that we have one of our top leasing people from this area here in San Francisco, who is.

Responsible for the leasing currently at India Tower as we expand our platform there were obviously going to need more bodies and we're working on that we've been going through that process nothing to announce right now.

But we're very actively looking not only to have the management team that we want and we have some really good candidates. We've been interviewing candidates now for several months right wrong, Yes, yes, and we're down to a couple of three.

Have the management team that we want and we have some really good candidates. We've been interviewing candidates now for several months right wrong, Yes, yes, and we're down to a couple of three.

We think it ended up being very senior to our efforts there.

The underwriting with regards to all the math the investment leads and so forth that's Elliot and his team Jeff chests that one it is young superstars is very involved in everything to do with Austin.

So we're going to have a great team and we're going to have the kind of team we've had in our other areas which is.

Capable of acquisitions dispositions, if and when that becomes appropriate obviously development.

And then managing and we're spending a lot of time with our tenant base, many of whom are in Austin and growing in Austin and have future plans to grow in Austin.

What we're doing and so forth and I think that's encouraging. So more to come.

More to come.

Okay. Thanks, and then maybe just last question John on the Flower Mart I know there's some flexibility on that site, but how do you sort of think about toggling between office and residential. And would you look to maybe shrink the office component add residential to maybe jumpstart that project or how do you sort of think about that moing forward? Our basis is pretty attractive and I've always said that.

Going forward, our basis is pretty attractive and I've always said that.

We're not going to be doing stupid things in the short term impact negatively the long term.

You're quite right, we can do residential.

The key was to get the entitlements for the office and we now have the largest title property I think in recent history, if not ever. In San Francisco for office seven acres, roughly 2.5 million square feet.

The office and we now have the largest title property I think in <unk>.

In recent history, if not ever in.

In San Francisco for office seven acres, roughly two 5 million square feet.

You can you can go from office to Rosie.

You can't with prop and go from Rosy to office. So we sort of have an ideal menu if you will and we have a big enough site and three major streets. So we can slice and dice is we want to. As I started to say earlier the with the there's been a lack of clarity for sure with regard to.

A lack of clarity for sure with regard to.

When things are going to roll back in San Francisco, we're seeing the apartments come back with a vengeance and my understanding is they're getting record rates.

And once again, it's tough to find apartments, and one of the things that has happened and it departments.

Is that.

Sometimes the kids were loading up three or four people to a two bedroom and they don't want to do that anymore.

They want greater distance so.

Rob talked about greater and greater amount of square feet per person in office, it's sort of the same thing happening in residential.

We're going to we're going to see how this plays out here probably over this next.

There is no timeline, but over the next several quarters and we'll make a decision how we want to do things, but we we like Optionality and whether it's our property up in the six so up in Seattle or whether it's the flower Mart or whether it's the two blocks, we own an east village Inn.

San Diego, we have the ability to go office, we have the ability to go residential we have the ability to go some combination thereof, and we have the ability to add retail if we want so we have lots of flexibility.

Great that's it for me thanks.

Yeah.

The next question comes from John Kim with BMO capital markets. Please go ahead.

Thank you I wanted to follow up on <unk> question on lease term because if you look on page 18 of our supplement.

On leases executed.

Most of these leases were new leases.

And average lease term is about four three years.

So I was wondering if.

<unk> have come down on term or if there's been any month to month. That's in there that's driving that number down.

Again, the redevelopment leases that we signed in San Diego or not in that category.

Those are the leases in our stabilized portfolio. So when you add in the leases that are not in that category of the nine and a half year average.

And just to clarify so the lease numbers include the redevelopment leases, but the lease economics that you see in the weighted average term does not reflect the term.

The three redevelopment leases.

Which are on average about 12 years.

Right. So you have some redevelopment and life science leases that are long term and then you have others that are.

The tenant is committing at a shorter term basis.

That's correct.

Okay.

Rob you mentioned in your prepared remarks.

And in answer the bifurcation.

Between Trophy and class B performance.

Most of your portfolio is class and trophy.

And that's what we're focused on but what percentage of your portfolio do you think is in that other category.

I don't think we have any.

I'm drinking the Kool aid, but I don't think we have any fee or certainly no obsolete projects and as John said, we've got probably the youngest portfolio in the REIT industry. So I don't think we have any.

Can you also comment on sublease space in your portfolio.

I know you talked about it about the market overall, but whats in your in the killing put you on that.

Yes, probably the largest piece of sublease space is the 350 mission.

For sublease.

A good portion of that has recently been absorbed and they're continuing to market.

The balance of the space I'm not I'm not sure today, whether they intend to take some of that off the market and occupy because there as you know theyre downtown campus here right outside John's office multiple buildings have a lot of people back in at work.

And we know they've also started bringing sales teams back in on a mandatory basis here and there for me.

Meetings, so more to come on that but that's the largest.

Great. Thank you.

Yeah.

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

Yeah.

Great. Thanks, just one for me probably for John or Rob.

The pandemic, obviously office leasing activity was down everywhere, but maybe focusing on the bay area. It seemed like the valley did a little bit better than San Francisco, CBD, where you saw obviously a lot of the sublease space flooded the market.

You guys talked about the CBD markets, showing some encouraging signs lately, which is great, but how do you think about any differences in the recovery in the valley versus San Francisco CBD in particular.

Yes, Hi, Blaine.

We're actually really.

The valley is very interesting because there has been a tremendous amount of activity and again, it's one of the themes that we've said continually on our calls and investor meetings is that.

There's the haves and have nots in the valley and it really depends where properties located in proximity to both the major freeway arteries that run to the to the San Francisco, but also Cal train and there are some really significant.

Transactions that have happened in the last three to four months Apple <unk>.

Being probably primary at over 500000 feet.

New absorption.

But there are other fang companies that are expanding significantly there Sony has done another large requirement in the valley. And at least our experience with the valley as it relates to San Francisco. As these markets sort of operate in tandem and what's happened in the past cycles, where there has been major absorption in the valley. There is a spillover effect to San Francisco and so we're starting to watch for that now in the CBD of San Francisco. But the Valley if you just take a step back San Francisco was more shut down as I've said before than any city in the country. It's starting to open up, the valley was nowhere near as restrictive and so demand and activity has continued to increase.

Requirement in the valley and at least our experience with the valley and <unk>.

As it relates to San Francisco.

As these markets sort of operate in tandem and what's happened in the past.

Cycles, where there has been major absorption in the valley. There is a spillover effect to San Francisco and so we're starting to watch for that now.

In the CBD of San Francisco, but.

The Valley if you just take a step back San Francisco was more shutdown as I've said before than any city in the country. It's starting to open up the valley was nowhere near as restrictive and so demand and activity has continued to.

Increase.

Great that's helpful. Thanks, Rob.

This concludes our question and answer session I would like to turn the conference back over to Michelle Noh for any closing remarks.

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

Goodbye.

The conference has now concluded. Thank you for attending today's presentation you may now disconnect.

[music].

Okay.

[music].

Okay.

[music].

Yeah.

<unk>.

[music].

Yes.

Yeah.

Yes.

Hmm.

[music].

Okay.

[music].

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