Q4 2021 Kilroy Realty Corp Earnings Call
Speaker 1: of COVID-19 related charges in 2020.
Keene related charges in 2020.
Speaker 1: At the end of the fourth quarter, our stabilized portfolio was 91.9% occupied and 93.9% leased.
At the end of the fourth quarter, our stabilized portfolio was 91, 9% occupied and 93, 9% leased.
Speaker 1: Turning to the balance sheet, after the sale of Saber Springs Corporate Center for $37 million, our liquidity today stands at approximately $1.4 billion, including $290 million in cash and full availability of $1.1 billion under the revolver. Our current in-process development and redevelopment program along with the soon-to-commence Santa Fe Summit is funded through year-end with cash on hand and projected disposition.
Turning to the balance sheet after the sale of Sabre Springs corporate center for $37 million, our liquidity today stands at approximately $1 4 billion, including $290 million in cash and full availability of $1 1 billion under the revolver.
Our current in process development and redevelopment program along with the soon to commence Santa Fe Summit is funded through year end with cash on hand and projected dispositions.
Speaker 1: Our net debt to Q4 annualized EBITDA was 5.8 times.
Our net debt to Q4 annualized EBITDA was five eight times.
Speaker 1: Lastly, as John mentioned, our expirations of the next five years remain modest.
Lastly, as John mentioned, our explorations over the next five years remained modest specifically in 2022, we have approximately 585000 square feet or 4% of lease explorations remaining we had 145000 square foot tenant in San Diego vacate that space at the end of January .
Speaker 1: Specifically, in 2022, we have approximately 585,000 square feet, or 4% of lease expirations remaining. We had 145,000 square foot tenant in San Diego vacate its space at the end of January .
Speaker 1: In the third quarter, we have a 65,000 square foot expiration in Los Angeles. It is too soon to tell whether this tenant will renew for a portion or all of the space or vacate entirely.
In the third quarter, we have a 65000 square foot exploration and Los Angeles.
It is too soon to tell whether the tenant will renew for a portion or all of the space or vacate entirely.
Speaker 1: In 2023, the largest exploration is at a recently acquired West States project in Seattle, where we underwrote both a renewal and a vacate scenario. More to come.
In 2023 of the largest exploration is that our recently acquired Westgate project in Seattle, where we underwrote, both a renewal and a vacate scenario more to come.
Speaker 1: Now let's discuss our 22 guidance provided in yesterday's earnings release.
Now, let's discuss our 'twenty two guidance provided in Yesterdays earnings earnings release to begin let me remind you that we approach our near term performance forecasting with a high degree of caution given all of the uncertainties in today's economy. Our current guidance reflects information and market intelligence as we know it today any COVID-19 related.
Speaker 1: To begin, let me remind you that we approach our near-term performance forecasting with a high degree of caution, given all of the uncertainties in today's economy. Our current guidance reflects information and market intelligence as we know it today. Any COVID-related impact or significant 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.
<unk> significant 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.
Speaker 1: Projected revenue recognition dates are subject to several factors that we can't control including the timing of tenant occupancy
Speaker 1: With those caveats, our assumptions for 2022 are as follows. As always, we don't for-
With those caveats, our assumptions for 2022 are as follows.
As always we don't forecast acquisitions.
Speaker 1: We assume $200 to $500 million of disposition proceeds.
We assumed $200 million to $500 million of disposition proceeds.
Speaker 1: Cap interest is expected to be approximately $70 to $80 million. G&A is expected to be approximately $82 to $87 million.
Cap interest is expected to be approximately $70 million to $80 million G&A.
G&A is expected to be approximately $82 million to $87 million.
Speaker 1: Same-store cash NOI growth is expected to be between 4.5% and 5.5%.
Same store cash NOI growth is expected to be between four 5% and five 5%.
Speaker 1: We expect year-end occupancy of approximately 91% to 92% for the office portfolio, and north of 90% for the residential portfolio.
We expect year end occupancy of approximately 91% to 92% for the office portfolio and north of 90% for the residential portfolio.
Speaker 1: Our guidance assumes a steady increase in transient parking revenue starting in the summer. As we've said on prior calls, we expect to pick up about a million dollars of revenues a month when we get back to pre-COVID levels.
Our guidance assumes a steady increase in transient parking revenue starting in the summer as we've said on prior calls we expect to pick up about $1 million of revenue per month, when we get back to pre COVID-19 levels.
Speaker 1: We expect to commence revenue recognition for the following office and life science projects within the following timeframe.
We expect to commence revenue recognition for the following office and life science projects within the following time frame.
Speaker 1: At 333 Dexter, we expect the remaining 51% of the 635,000 square foot project to come online by the third quarter.
At <unk> III Dexter, we expect the remaining 51% of the 635000 square foot project to come online by the third quarter.
Speaker 1: At 2100 Kettner, we are expecting leasing activity on half the project, or approximately 100,000 square feet, by year end.
At 2100, Kettner, we're expecting leasing activity on half the project or approximately 100000 square feet by year end.
Speaker 1: Across our three life science redevelopment projects, we expect about 250 of the total 330,000 square feet to come online by early fourth quarter.
Across our three life science redevelopment projects, we expect about 250 of the totaled 330000 square feet to come online by early fourth quarter.
Speaker 1: We anticipate development spending of $550 to $650 million on our in-process development and redevelopment projects, including the commencement of Santa Fe Summit.
We anticipate development spending of $550 million to $650 million on our in process development and redevelopment projects, including the commencement of Santa Fe Summit.
Speaker 1: Taking into account all these assumptions, we project 2022 FFO per share to range between $4.35 to $4.55, with a midpoint of $4.45.
Taking into account all of these assumptions, we project 2022 <unk> per share to range between $4 35 to $4 55, with a midpoint of $4 45.
Speaker 1: This midpoint would imply a year-over-year FFO increase of 13% when you add back the debt redemption cost and one-time items in 4 Q2 021.
This midpoint would imply a year over year <unk> increase of 13% when you add back the debt redemption costs and one time items in <unk> 2021.
Speaker 1: This increase is the second highest earnings growth across the past 10 years.
This increase is the second highest earnings growth across the past 10 years.
Speaker 1: To help walk you to this 445 midpoint, we start with our adjusted fourth quarter FFO per share run rate of $1.10 or $4.40 on an annualized basis.
To help walk you to this $4 45 midpoint, we start with our adjusted fourth quarter <unk> per share run rate of $1 10, or $4 40 on an annualized basis.
Speaker 1: we subtract 12 cents of NOI from the midpoint of our projected dispositions in 2022 and the sale of Saber Springs Corporate Center in December of 2021.
We subtract <unk> <unk> of NOI from the midpoint of our projected dispositions in 2022 and and the sale of Sabre Springs Corporate Center in December of 2021.
Speaker 1: We add $0.13 from development and redevelopment projects coming online. And lastly, we expect a net positive $0.04 from various items, including pickup from our stabilized portfolio and lower GNA.
We had 13 from development and redevelopment projects coming online and lastly, we expect a net positive <unk> from various items, including pickup from our stabilized portfolio and lower G&A.
Speaker 1: That completes my remarks. Now we'll be happy to take your questions. Operator?
That completes my remarks, now we'll be happy to take your questions operator.
Speaker 2: Thank you. We will now proceed with the Q&A. If you'd like to ask a question you can press star one on your telephone keypads. If you'd like to withdraw your question you may press star two. Please ensure you're unmuted locally when asking your question.
Thank you we will now proceed with the Q&A.
I would like to ask a question you can press star one on your telephone keypad.
If you would like to withdraw your question you May press Star two.
Please ensure you're on mute locally when asking your question.
Speaker 2: Our first question for today comes from Nick Ulico from Scotiabank. Nick, your line is now open.
Our first question for today comes from Nick <unk> from Scotiabank.
Your line is now open.
Speaker 3: Thanks, hi everyone. Maybe a question for John or Rob. Can you just talk a little bit about latest on tenants returning to your portfolio? Parts of the West Coast have been slower than some other cities because of tech decision making or government mandates. Maybe you can just talk about what you're hearing from tenants on that side and then also how it's affecting leasing activity in your markets.
Thanks, Hi, everyone, maybe a question for John or Rob could you just talk a little bit about latest on your tenants returning to your portfolio.
Parts of the west coast slower than some other cities because of.
Teck decision, making or government mandates maybe you can just talk about what youre hearing from tenants on that side and then also how it's affecting leasing activity in your markets.
Yeah, you want to take that wrong.
Speaker 3: Sure. Hi Nick, how are you? Let me hit on three sort of macro points related to your question because there are various moving parts to it. I'd say for the first time since the pandemic started and the conversations we're having with executives and business leaders, large employers have really started to communicate formalized plans for people to return to the office.
Sure Hi, Nick how are you.
Let me hit on three sort of macro points related to your question.
Because there are various moving parts to it I'd say for the first time.
Since the pandemic started from the conversations we're having with <unk>.
Executives and business leaders large employers.
We have really started to communicate formalized plans for people to return to the office.
Speaker 4: And they've communicated that to their employees in writing as well as in town hall type meetings.
And they have communicated that to their employees and writing as well as in town Hall type meetings.
Speaker 4: And if you look at some of the big tech examples, Amazon, Microsoft, Meta, they have various
And if you look at some of the Big Tech Examples Amazon Microsoft.
They have various.
Speaker 4: models of how people are going to come back, but they're basically, despite Omicron, they're basically talking about components of the workforce coming back in mid to end February , March, and April . And they're saying that with more conviction than they have at any time in the past, at least in the conversations we're having. And frankly, interestingly, I think some companies have given up predicting, and it's probably a wise thing to do, and rather than predict, they just start talking to their teams about bringing them back.
Models of how people are going to come back, but they are basically despite all mccraw and they're basically talking about components of the workforce coming back in mid to end of February March and April and they are saying that with more conviction than they have at any time in the past at least in the conversations.
We are having and frankly interestingly I think some companies have given up predicting and probably a wise thing to do and rather than predict they just start talking to their teams about bringing them back.
Speaker 4: I think secondly, in the conversations we're having, a lot of the executives we're talking to have conducted internal surveys with their workforces and have determined that there is a clear difference between the attitude and productivity of employees that have come back versus those that have not. So they are working toward making their office space more attractive to bring those in and get them over that hump of not, you know, coming into the office.
I think secondly in the conversations we're having a lot of the executives were talking to have <unk>.
<unk> internal surveys with their workforces and have determined that there is a clear difference between the attitude and productivity of employees that have come back versus those that have not so they.
They are working towards making their office space more attractive to bring those in and get them over that hump of not coming into the office.
Speaker 4: Gensler just conducted a workplace survey of 575 companies, and I think what's interesting in that is that two-thirds of the companies surveyed are saying they're going to have flexible work policies, but only 9 percent of those 575 are going to give total control to the employee in terms of where they work and how long they're working from home.
Gensler just conducted a workplace survey of 575 companies and I think what's interesting in that is the two thirds of the companies surveyed are saying theyre going to have flexible work policies, but only 9% of those 575 are going to give total control to the employee in terms of where they work and how long they are working.
From home.
Speaker 4: And I think the third point I'd like to make to address your question is we're embarking now on what I would call is the great experiment between work from home and the office.
And I think the third point I'd like to make to address your question is we're embarking now on what I would call is the great experiment between work from home in the office.
Speaker 4: And and what we're hearing from our our clients as well as prospects is that the majority of Employers that we're talking to are not talking about a reduction in footprint Despite work from home despite some functions that may be able to work from home and definitely They're predicting either a stable footprint or a growing footprint. They're focused on providing hospitality Like amenities as we've discussed before and I think it really comes down to the core
And what we're hearing from our clients as well as prospects is that the majority of employers that we're talking to are not talking about a reduction in footprint. Despite work from home. Despite some functions that may be able to work from home indefinitely, theyre predicting either a stable footprint or growing footprints. They are focused on providing <unk>.
Hospitality.
Like amenities as we've discussed before and I think it really comes down to the core actually of John's philosophy on development you are seeing a flight to quality and that flight to quality is happening not only in our portfolio, but nationally.
For example, 400000 feet with creative artists in century city consolidating into new development, Sephora and Yelp consolidating into a 350 mission sublease space that Salesforce had the market had on the market. That's over 300000 feet, so with that backdrop I'd say.
We are encouraged about what we're seeing in terms of activity and the conversations we're having omicron no doubt did slowdown tour activity.
But things are picking up in Q1 already.
Speaker 3: Okay, thanks Rob. That's helpful. The second question is just, you know, going to the guidance for occupancy and, you know, if you just look at the range, it's a, you know, midpoint is a slight drop in occupancy this year. You know, you talked about that in the San Diego move out.
Okay. Thanks, Rob that's helpful. Second question is just going to the guidance for occupancy and.
You just look at the range. It's a midpoint is a slight drop in occupancy. This year you talked about the I know the San Diego move out.
Speaker 3: is one factor. I guess is there a way to just give us a feel for how you're thinking about the least number in your portfolio? Meaning that, you know, should we assume that you have more confidence in, you know, the least rate growing this year by some magnitude, even if the actual in-place occupancy doesn't?
Is one factor I guess is there a way to just give us a feel for how you're thinking about the lease number in their portfolio, meaning that.
Should we assume that you have more confidence in the leased rate growing this year by some magnitude even if the actual in place occupancy doesn't.
Speaker 4: Let me try to address that in two ways. One, let me just talk about the last quarter. And this is, I think, really interesting. It goes back to some of the comments I made earlier.
Yeah.
Let me, let me try to address that in two ways. One let me just talk about the last quarter and this is I think really interesting goes back to some of the comments I made earlier.
Speaker 4: At the end of the last quarter, and this is really from Thanksgiving through the end of December , we signed three what I think are significant leases. We signed 80,000 feet with a media company.
At the end of the last quarter and this is really from Thanksgiving through the end of December we signed three what I think are significant leases, we signed 80000 feet with a media company.
Speaker 4: in Southern California. We signed a 71,000 square foot lease with a major technology company. We signed a 38,000 square foot lease with a life science company in the Bay Area.
In Southern California, We signed a 71000 square foot lease.
Lease with a major technology company, we signed a 38000 square foot lease with a life Science company in the Bay area and we signed our first two.
Speaker 4: And we signed our first two leases in Austin at above our underwriting. And that literally, Nick, is from November to December in the midst of.
Leases in Austin at above our underwriting and that literally Nick is from November to December in the midst of omicron.
Speaker 4: I'm encouraged that momentum has continued, I'm encouraged by the amount of activity that we have across our platform right now, including Austin.
I am encouraged that momentum has continued I'm encouraged by the amount of activity that we have across our platform right now.
<unk> Austin.
Speaker 4: where it seems like every week we're getting RFPs and requests for information on the building. But we have a fairly significant amount of leasing activity, proposals, that sort of thing that we're working on right now and have been working on in January . So I do think
Where it seems like every week, we're getting.
We're getting rfps and request for information on the building, but we.
We have a fairly significant.
The amount of leasing activity proposals that sort of thing that we're working on right now and have been working on in January . So I do think as momentum picks up as some of the factors I addressed earlier take hold we will see that pick up throughout the year.
Speaker 4: As momentum picks up, as some of the factors I addressed earlier take hold, we'll see that pick up throughout the year.
Speaker 4: And then, of course, there's always a lag between at least, sorry, the last thing I'd say is, you know, there's that lag between at least being executed and then physical occupancy of the space.
And then of course.
Between.
Sorry, the last thing I'd say is you know there is that lag between at least being executed and then physical occupancy in the space.
Okay. Thank you.
Thanks, Nick.
Speaker 2: Thank you Nick. Our next question comes from John Kim from BMO Capital Markets. John , your line is now open.
Thank you Nick.
Our next question comes from John Kim from BMO Capital markets. John Your line is now open.
Speaker 5: Thank you. I'm looking at your lease expirations for 22 and you have a footnote that you have 215,000 square feet that have already been addressed through leases signed. Are any of those going to be occupied this year and contributing to FFO or those all 2023 commencement.
Thank you.
I'm looking at your lease explorations for 'twenty, two and you have a footnote that you have 215000 square feet that have already been addressed through leases signed.
Are any of those going to be occupied this year and contributing to <unk> are those of 2023 commencement dates.
Yes.
The roughly 200000, that's leased but not yet occupied will likely come in towards the end of the year.
The fourth quarter.
Okay.
Okay.
That's helpful.
John You mentioned.
One of your objectives for the year is to look for unique external growth opportunities I want to ask if you could elaborate on that.
Does that mean.
Plex development opportunities or when you mentioned your unique because it's a new market new appetite just any comment that you can provide.
Yeah, well, we always look at it.
So the calls before we look at it by different markets. We don't have our sights on anything specific right now we did grow in Austin as we all know this last year, we're very pleased with what we acquired we've been very active in looking for.
The next act in Austin, I think we will have something.
To address with.
All of you.
In the next quarter or two.
If you take a look at what our pattern was and I referenced the Columbus between.
San Francisco and.
Seattle.
And.
Hollywood and so forth.
Typically what we did was we went and we bought a building.
We bought a couple of more buildings.
And.
Buildings, where we can add value, but where we have where we have the scale to support the organization.
People that will allow us to grow the enterprise and what you should.
Youll be seeing with Kilroy is a similar pattern for Austin, we've made some big moves with regard to the people that we're going to have in that market, we'll be announcing more on that.
Next quarter.
We'll be a development company. There is we are in all of our other markets. So I think you'll probably see our next act there'd be a development opportunity.
We like that market a lot they all the all the growth and.
So forth that we love us.
Full display there.
So we're looking at a lot of opportunities in that.
And I think as well our next announcement will probably come.
Got it thanks for the color.
No.
Thank you Jim.
Next question comes from Manny Korchman from Citi money. Your line is now open.
Hey, it's Michael Bilerman here with Manny.
John I Wonder if you can just step back a little bit and just think about sort of capital raising plans as you move forward with sort of sites on additional external growth.
Think back to last two years.
February 2020, well timed offering at $86 $500 million of liquidity and then over the course of the pandemic.
The asset sale market to produce even more liquidity, which has allowed you to do a number of the developments and acquisitions that you talked about.
So I'm curious how going forward do you think about your capital raising plans I know hutches now around the table.
Good to see you there has that changed at all I guess as you as you look at the capital markets now that you've put someone in places sort of in that seat IR and capital markets has your thinking evolved around capital raising and how you want to execute it whether it will be more.
Sort of self funding or whether you think about raising leverage whether you're thinking about raising more equity just how your thoughts have changed.
Well, yes, those are all good points, Michael Hello, and happy new year.
We are happy to have touch board.
It would be a great addition.
It really provides a lot of additional character to the organization.
We're not interested in selling the stock.
The.
Share price that we have today, we do think we're going to see a recovery in share prices as the back to work.
Accelerates to this COVID-19 .
Starts to diminish in People's minds.
All signs seem to indicate that.
Things are going to be happening.
But I don't see selling stock in terms of leverage on that big leverage Guy as you know.
We've put forecasted 3% to $500 million of asset sales.
I think that's eminently doable, we always look at what's the product.
Might qualify for that where we were.
Were either where it's known strategical wear it.
It may not be able to add a lot more valuable value sort of like.
Conclusion for the change.
So we're going to stay in a very conservative leverage position.
It would be very prudent with regard to any equity.
We issue in the future.
And I think there's plenty of ways to to move forward with.
Funding requirements will be.
So more to come.
And then John how are you.
Putting in place for the first time, followed you lost 20 years, you haven't had a proper capital market to IR sort of position. It was always sort of wrapped up with the CFO and the treasurer, what led you to sort of bring that into the full today and what do you expect to get out of it over the next 12 months.
Yes, that's a good question too we've been debating this for some period of time, our enterprise has grown.
We recognize that.
There are a lot more investors in the REIT space, a little bit and they're dedicated selling them or not.
We think a lot of the analysts have lot more to do than they used to do they're covering a lot more companies. We obviously have greater geographic reach now and so that generally means that there is increased communication requirements and by having.
We ended up with individual that not only knows the industry very well.
Knows the markets very well.
Many of the investors extremely well, but it is a great communicator and I think what we can do.
What we intend to do is to be in front of people more explaining our story.
And making sure that people have.
Complete understanding of the things we're doing we're pretty excited about all the opportunities we have some of which we can't really talk about on these calls.
And I think that you'll be a great.
Ambassador for Kilroy.
Great.
Your next month in Florida.
Yeah, Okay, great well thank you.
Yeah.
Thank you Manny.
Our next question comes from Steve <unk> from Evercore ISI, Steve Your line is now open.
Yes, thanks, good morning out there.
John I guess first question.
San Francisco has certainly been probably the slowest.
Large city that to get back to the office and crime and homelessness has has certainly become a bigger problem I'm just curious the discussions that youre, having with city officials to sort of improve quality of life. There in order to kind of make the RTI process kind of more amenable to people.
Yeah.
Well I figured somebody would ask this question.
I always have an opinion about politics and politicians.
I think we're making progress Steve.
It sometimes looks slow.
But if we take a look at the root cause of a lot of this stuff.
Both in Los Angeles.
San Francisco.
It's prevalent in some of the other big cities in the country in which we don't operate.
We have district maturities that came in.
Talking about.
Reform and.
And what they have done in the case of San Francisco with chess about D and in the case of Los Angeles with George <unk>, who by the way happened previously B the district maturity for the San Francisco. So in both cases, we have people that are not enforcing the laws.
We have people that are allowing there to be.
The smash and grab things, where you can go in and steel under $900.
They will prosecute you so the stores don't even try to prevent it.
It's just created a terrible situation we have.
The sale of drugs and the use of drugs as well as certain other things that are illegal happening on the streets.
A number of areas of both of those mines cities and people are fed up.
So you have to have folks that that unite together to fight these people and the recall campaigns for both of these district maturities, both just a building in San Francisco.
Yes.
Yes.
Okay.
Okay.
Yes.
Homeowners.
Small business people.
But the.
Existing politicians.
Former members of their staff.
The sheriff in the case of a share of drilling the wave in the case of.
Los Angeles.
The number of city Council people, all of whom have come out.
Against the characters. So we have a recall campaign in both cases Kilroy is involved in that as are many of our peers as are many others from these other from other businesses.
We'll regroups, etc.
And we're going to clean this up throw these bums out.
At least that's what we hope to happen so I think that.
But I think the thing Thats really.
Very very positive is that this isn't a democratically effort were a republican effort, where independent effort is.
Effort by a broad coalition of people, who want lawfulness, what the loss will be in force.
And.
I am convinced these two will be thrown out and if theyre not thrown out now there'll be thrown out.
In the general election, when it comes up the recall is qualified and San Francisco.
The.
The election will be in June .
The job approval rating or chest at Bo Dean is under.
Is his job approval, but negative of 67% for the last time I looked.
Gas going down in Los Angeles is in a very similar situation. So market forces are dealing with this it's not as efficient as we'd like.
Seeing in San Francisco, and L. A and improvement in the homeless situation in many communities, but it needs to go further so that's kind of what's happening.
I'm spending a fair amount of time on this as our my counterparts in some of the other public real estate companies in private real estate companies, but I have to say this is a very broad coalition.
Homeowners some cases religious groups. It's just people are setup.
I appreciate that.
End of long answer Jon I, just wonder, maybe if you or Rob could you just comment on the given the current situation today to what extent is that impacting.
The leasing discussions that youre, having so that there seems to be promise down the road, but if some of these things don't really get cleaned up till the middle of the year that just might slow the pace of leasing kind of until the second half or possibly in the next year. So do you just worried it delays the recovery on the leasing front in downtown San Francisco.
Yeah.
Yes, well, let me let me give you a couple of points the law will fill it in.
Let me go between the two cities the <unk>, which is our new 20 storey luxury apartment building, which is part of the Netflix campus, we call online in Hollywood.
We projected that to be at 20% occupancy by the end of this year. It came on stream mid year.
85%, the highest rents ever and it's right in the thick of all that so I'm not saying it doesn't influence leasing but.
Notwithstanding that we're making good progress Rob would you would you talk through the bigger point in the specifically the San Francisco for Steve.
Sure Steve.
We are seeing momentum picking up in the leasing front as I mentioned earlier.
<unk> sub leasing at our 350 mission space Thats. Those are two 300 totaling 300000 foot deals the chime deal at 101, California happening at the end of last year.
No doubt the question you raised in John's answer are very serious.
Matters and considerations, but.
Thus far it hasnt slowed.
Deal momentum in fact I think.
On the last Investor call. We had with you had asked about Autodesk and their announcement in January of this year that they were vacating 117000 square feet at 300 mission.
Apparently right now that space is fully committed to another tenant so thats 100000 feet.
That's in play literally two to three weeks after a tenant announces theyre not going to be occupying the space. So.
We're definitely not out of the woods, but it's feeling like momentum is picking up and again speaking with our competitors.
That have view space quality stays top floor space on the Bay.
They are actually starting to talk and proposals at 10% to 20%.
Over pre COVID-19 rates for that trophy quality space. So in a very tight segment of the San Francisco market I think it's.
Pretty encouraging if youre in a class B C situation, where you don't have the amenities you don't have the common areas.
That space is not moving or if you have a lot of second generation space, it's not moving tenants.
Tenants are looking for plug and play and they are looking for quality.
Great and then just one clean up item for Michelle Thanks for all the detail on the guidance I guess, the one number that I didn't hear what is your expectation for straight line rent and Fas 141 income within the guidance for 'twenty. Two do you have a range for that.
Yes, I think for straight line rent it'll be somewhere between $40 million to $50 million.
And I think on Fas 141, it shouldnt be too dissimilar to our 2021 range.
Great that's it for me thanks.
Thank you Steve.
Our next question comes from Jamie Feldman from Bank of America, Jamie Your line is now open.
Great. Thanks for taking my question.
Just listening to the comments on the call and hearing how tenants want new high amenity, whether it's new development are redeveloped.
I'd like to get your thoughts on kind of assuming we make it past COVID-19 here and things do reopen what do you think the development cycle looks like across your markets and do you think theres going to be it could be even more.
More opportunities than in the past given tenants just want new unique buildings.
Just trying to kind of get your thoughts on that.
It may be in store in Calgary is always kind of been ahead of the curve.
Those types of assets, so we'd love to get your thoughts.
Well, Jamie it's a little too early.
To make those kinds of predictions.
Because there has been such volatility and we've had the reversals with the various variations with Covid and so forth I think what's encouraging now as people are really stepping up.
Making some big commitments will significant space.
I believe that that bodes well for us given our development prowess.
We will land positions, we have and whatnot.
I think we will see a continued.
<unk>.
Desire to be in.
Necessarily have to be brand new buildings, but they have really believes that have location. The physicality of the amenities and so forth that people want so it could be converts and so forth, but we're seeing.
A lot of pressure.
In our markets, whether it's in the Bay area, whether it's at San Diego.
Two good examples of that and we've talked about this before of the competition between.
Life Science.
And technology. They want the same kind of building locations and they have the same need for amenities to attract and retain.
So if you think about our project down at Oyster point, we've had we continue to have tech interested in it we have life science interest.
The largest entitled properties I think in the state.
With regard to what we can deliver there we think we're a really great position.
Perfect environment for.
Outdoors, and so forth so I think.
Theres going to continue to be a trend of having space that people can control and where they have that was outdoor amenities and so forth, whether theyre vertically or whether they are horizontal.
But where they can be assured that they have the environment that works for their purposes, we hear a lot about wellness now and you've probably read there.
There's been articles, including some that were out this morning about how companies are so focused now about wellness.
Roy owes more well buildings than anybody in the world, except for the United States government there's nobody.
Second close circuit. So we saw that trend and what we're seeing now is its sustainability. Its wellness, it's greater ceiling heights all of these things and if you're an owner of a building where you don't have that stuff.
You should be really conserve.
So the observation.
Being obsolete.
In the office space is something I've been talking about for 10 years and it's accelerating.
At a significant rate now.
So I do think it will translate into more modern space being built because we will see a bifurcation.
Buildings that work and buildings that don't work if they don't work. They just don't work. So some can be revised many cannot.
I think you will see more development.
And we need to think that's very helpful. When you think about your markets or are there. Some that you think have more commodity or more pop sweet space and others.
Well I think of you have not seen us buy one building north of a market.
<unk>.
In the 12 years, we've been at San Francisco.
Even though it seems to do that you've seen this ourselves more towards the not as tall buildings with much higher ceiling heights and all the amenities that we've talked about over the years I do think the area in central Soma, where the flower Mart is where others have projects will become the next big.
Thing in San Francisco and by no means predicting that those projects are warranted right now because I think we need to get through this over the next year or two for the dust to settle a little bit in San Francisco.
But we're already having discussions we have a building that we're going to build in Santa Monica that we just got approved it's a little it's a 100 and 150000 or 75000 feet actually two or three buildings.
Not even marketing it we haven't told many people about it and we already have three or four people that want it and they're all tenants that are in older office buildings in that area, but it wouldn't be in the area. They just would it be able to do modern stuff. So I'm.
Thank you.
See this I think we're going to see that in Austin as well.
Austin, obviously has a lot of folks have been moving into it. It has some good buildings has gone over buildings I think theres going to be an opportunity there to make a bigger play.
And I think you're going to see it nationally.
Think about what are the buildings that are leasing in New York.
I was just back to the last week and I was going through Hudson yards, and one Vanderbilt and all the rest.
It seems to me that if people are voting there to be in the modern latest and greatest buildings, because they want to attract and retain their most important.
<unk>.
Asset, which is there are people.
Alright. Thank you for that and then if I could just ask a follow up on San Francisco.
It looks like your percent lease declined to $93 nine from 96 six this quarter.
Next year about three 5% of your revenues expire in San Francisco.
I just wanted to get your thoughts.
But it seems to be kind of a deterioration in the percent leased there and then.
How comfortable are you with the explorations coming next year.
Given market conditions.
Yes, Jamie I can start on.
The percentage leased in San Francisco, I think in the fourth quarter that decline because there was a tenant that terminated its lease early so that was.
That contributed to some of the onetime income that we picked up but that was one specific tenant related to credit.
And we're in renewal do you think that that went back into work okay.
Okay, and then the 'twenty three explorations I know, it's a ways out but.
Any of any discussions already a potential move outs or nothing to report just yet.
No no no.
Yeah.
Go ahead go ahead Michelle.
Ahead.
I was just going to say the 23 exploration the largest one is related to the Westgate acquisition in Seattle.
And like I mentioned in my comments.
Too soon to tell whether or not they.
We'll renew or stay.
But we did underwrite both scenario, what I'm, saying, we're comfortable with that.
Sorry, I was just I was focusing specifically on CBD San Francisco It looks like your.
I think three 5% of your revenues in 'twenty three expire in San Francisco.
Yes, there wasn't anything that's large I think it's our 25 to 30000 square footers.
But rob.
I know you already have.
Early renew.
Yes, we have discussions going on Jamie.
A good portion of that 23.
Okay great.
Hi, Thank you for the color.
Thank you Jamie.
Our next question comes from Blaine Heck of Wells Fargo. Blaine. Your line is now open.
Great. Thanks, Good morning out there maybe for John or Rob, It's great to hear that discussion seem very positive with your tenants, but I wanted to see if you could talk specifically about lease negotiations and any differences you might be seeing in your lease contracts relative to what was being negotiated and agreed.
Reed.
On prior to the pandemic are there additional expansion or contraction causes any additional optionality on early terminations or extensions or even differences in the lease term that tenants are willing to agree to.
Hi, Blayne this is Rob.
It's interesting we're not seeing much discussion or change in terms of things like contraction or terminations. We typically avoid those in our leases and are known for that.
Especially if you're a ground up development Thats just not our.
<unk> path to go down and I think others other owners feel that way as well.
It's interesting in certain discussions we're having timing is probably the most important point that's raised by the tenant meaning they want to be in their space and they want to be in and soon.
We have a deal we're working on now.
We're using our development construction team to really help expedite permitting and that sort of thing. So this tenants can be in place by September <unk>.
It's not signed yet, but that's that's the focal point, it's not so much what's the rent or what's my term I think the other component that comes up particularly if you have a standalone building is okay. If I if I lease in your building, how do I grow where do I grow outgrow that building if I take the whole thing what do you have.
Me, where I can expand in that that trend started a little bit in 2019, but it seems to be popping up in various again, depending on the size of the space and the tenant you are talking to.
The tenant improvement because of cost escalation that sort of thing that tenant improvement discussion is.
One component of an overall negotiation that's going to be driven by Okay, then whats the corresponding rent.
So that sort of capital investment.
Luckily in the markets. We're in we have the ability to.
<unk>.
Have our rents correspond to or exceed what the price increases we forecast are.
Okay. Great. That's helpful color. John can you just talk about the dispositions you guys have targeted and whether there is any color you can give us on which properties. They are whether there are any common themes like selling out of a particular sub market or selling lower quality assets and then any guide.
First is around pricing would be helpful as well.
Yeah.
Not going to tell you which buildings.
But there has always been a theme with kilroy and that is if you would be non strategic.
Then by definition.
Canada and in some cases, we have.
<unk>, we really can't add value for a building that is fabulous and otherwise strategic and that would be at that extreme would be the exchange, which we sold last year.
We regularly go through.
The portfolio and determine which assets. We think are candidates Elliot can speak to that process, but he is not going to speak to the specific assets, we don't like to tell you.
What assets, we're thinking about selling until we've made a decision to sell them because you can imagine it impacts two relationships impacts are.
Our student body and so forth.
But.
We.
Elliott I don't know, whether you want to add to that I mean in terms of.
Guidelines on pricing I mean, obviously.
We can't until we determine which asset it's going to be we can't really talk about pricing, but pricing tends to be pretty strong in all of our markets.
To add color to that.
Not much more to add beyond that we are looking at things across several markets. So there is nothing.
Particularly I can see us wholesale get out of any one market or not it's just sort of selectively looking at things that make sense for the reasons John outlined.
Yes, I mean, if you look at that Okay, Great Springs project that we sold.
Sorry, that's Sabre Springs project, we sold.
On the fifth or out on the <unk>. It was a property that it was.
Until that building it was nice that wasn't really the kind of building that we that we specialize in any more if we didn't see how it added much to us the people that bought it I'm sure you're going to do well with it but it's a smaller asset but a good example of something that just wasn't really.
Any longer than Kilroy is wheelhouse.
Okay, Great. That's helpful and one more quick one if I can can you guys give an update on your estimated mark to market for the entire portfolio and maybe even on a market by market basis, if you have that detail.
Yeah, Hi, Blaine.
So similar to the third quarter were estimating.
The portfolio is roughly 15% below market.
And by market.
San Diego is about 20% below market <unk> about 15, and San Francisco, and Seattle are about 10% to 15% below market.
Great. Thank you all.
Okay.
Thank you.
Our next question comes from Craig Mailman from Keybanc capital markets. Craig Your line is now open.
Hey, everyone.
Just a couple quick ones here just Michel maybe following up on the disposition question could you give us a sense that 12% drag from dispose what would that be either on like a timing or cadence or if you have an annualized number of what that 12 cents would be.
Yes, we assume the midpoint of that.
In the midyear.
Okay.
And that includes Sabre Springs also.
Yes, Sabre Springs, we solved.
Towards the middle of December so that would have.
Roughly <unk> <unk> impact for 2022.
Thank you and then just the last one for me as we think about occupancy I know you you mentioned 145000 square foot tenant at.
That vacated so should we think about it that <unk> kind of dips to the midpoint of your guidance and kind of stays there as the 500000 or so kind of trickle through the portfolio or do you have any other like smaller known move outs.
Add up that will impact given quarters.
Yes, I think youre right the first quarter will that.
The San Diego exploration and then we have some development projects coming online in the third quarter that I mentioned with <unk> III Dexter.
And then some of the small move outs that I mentioned in L. A will be a dip again.
Also further impacted by 'twenty 100, kettner coming online.
Okay.
Okay perfect. Thank you.
Thank you. Our next question comes from Vikram Malhotra from missing.
Your line is now open.
Good morning, Thanks for taking the question.
I just wanted to go back to sort of the.
The relative markets and your positioning you talked about the quality device quite a bit.
Through all the markets, but just two specific questions. One can you talk about relative pricing power in each of your office locations.
And related to that is there something different about sort.
The San Francisco.
<unk> Slash peninsula recovery this cycle versus prior cycles in your mind.
Yeah.
Hi, Vikram this is Rob.
Let me touch on the pricing power question first so.
Clearly probably the three strongest submarkets for pricing power for us are the Bellevue Seattle market.
The Oyster point life Science market, where John was mentioning our 50 acre site 3 million square feet, and then lastly would be actually I shouldn't exclude Austin, either we have pricing power there and then lastly, San Diego because of the combination of life science and technology in that market. So it's really <unk>.
Diego Austin Oyster point in the Bay area, and the Seattle Bellevue market.
And then just on part of your question, Yes, just on San Francisco I mean, its historically bounce bounce back faster and quicker than I guess other markets. If there is something different in your minds about specifically San Francisco.
At this time.
Yeah.
Yes, you are right that it has bounced back.
<unk> and other than other downturns I think the crux of the two points I think one is that the city more than any city in the country. As we've said before we'll shut down more so than other cities and longer.
That's behind Us now.
<unk> I think it's really been impacted by technology employers not really.
Pushing their employees to come back to work or we're putting more formalized plans in place and as I said earlier I think now that they are announcing plans in.
Shortening the timeframe.
For people to come back that that will improve but what's interesting if you compare silicon Valley Silicon Valley in San Francisco are often worked in tandem. So when you have large headquarter expansions in Silicon Valley. There is usually a <unk>.
Subsequent spillover into San Francisco, just because theres. So many employees that work in the city.
In San Francisco This cycle has lagged, but I think it's because of the reasons I mentioned earlier being shut down and employers not really bringing people back in but.
The last piece is anecdotal, but if you look at every bar and restaurant in San Francisco, There Jam packed in full so I kind of don't get why people can go out eating and drinking but they can't be in the office.
Fair enough.
Just maybe turning to Austin, you referenced potentially some opportunities in the next one or two quarters on the development side can you maybe remind us of.
Are there specific submarkets, you're exploring within Austin, and maybe just remind us of the grand sort of vision over there in terms of how large would you want your portfolio over there to be.
John You want me to.
Yeah sure.
So vikram there is no magic number for how large we want to be we want to do deals that we think are smart deals and if that means we are.
2 million square feet, great. If that means were 3 million square feet, that's great too.
We're not going to we're not going to anchor ourselves to a particular number as far as the parts of the.
The market that we're focused on.
Obviously, the CBD, where indeed tower is and the surrounding areas around CBD.
And then we also like the area in and around the domain.
As well as some others.
Okay, Great and sorry, just one last clarification, Michelle maybe the Mark to market you referenced I just wanted to confirm that's a cash mark to market.
That's correct yes.
Okay.
Okay. Thank you.
Okay.
Thank you Vikram.
Our next question comes from Michael Carroll of RBC capital markets. Michael Your line is now open.
Yes. Thanks can you guys give us can you guys give us some color on your life science used in San Diego I know a number of your projects are just north of the traditional core markets.
You were indicating that the market is starting to move upwards given the tight market overall I mean, how quickly is this migration occurring and how attractive are these submarkets today.
You Wouldnt take that Rob.
Sure I can start with pitch and John .
So as we've said before Torrey Pines was the initial life science Submarket in San Diego and that quickly filled up that's traditionally been the basis of life science.
The UTC submarket.
Routed relatively recently and because it's such an attractive location in terms of housing.
As well as just access and amenities it became attractive to life science because it was the natural next next natural geographic spot to locate.
But it also came became very attractive to technology and I would say that to your question. The migration is happening very quickly.
<unk> seen a lot of life Sciences, we've mentioned in our del Mar Heights of del Mar one for sale.
Office campus and that trend is continuing and as John has mentioned before youre seeing it out into the 56, I 15 corridor because.
On the West Coast, you have really the oyster point location as a life science hub and you've got San Diego's a life science hub and both are driving so.
I think youre going to see a lot of expansions and.
New.
Moves into Submarkets within San Diego, where Theres housing, where theres amenities and whereas the type the type of project that these companies want.
The last thing I'd say is that tech is really adding pressure to life Science to act more quickly.
Life Science typically has been slower to act another company's leasing space just by nature of their character.
Yes. This is John .
Del Mar has always been a life science market there just hasnt been any space in del Mar.
Count Combo Valley, It's also called and that's where our offices, that's where one can say it is.
We announced last quarter I think it was that we converted we signed leases for 300000 feet of life Science Center in San Diego amongst the best in del Mar taking buildings that work very well with conversion from office space to life Science, and we move the rents up they were double or whatever.
And now Thats pushing out one of the tenants here in del Mar is moving up to the 56, new half million square foot building in sort of construction.
<unk>.
So based on what's right. After that if you look at the demographics of where people live where they want to be and so forth, we're sort of in the sweet spot and like Rob said traditionally it was jewelry clients and a good UTC then it jumped the freeway a little bit for secondary locations, where people really won't have when they wanted to have the quality of location with all of you.
Product.
The campus et cetera.
Got to push up east.
East now and Thats whats happening.
Okay, Great and then with regard to Santa Fe Summit I know this is a near term start in the first half of this year I believe you guys are targeting can.
Can you talk a little bit about that is what are you waiting for to break ground or are you looking for some pre leasing some entitlements are just getting things ready to break ground right now.
Yes.
We're negotiating a contract that will be under construction I think its six quarter.
We have the permits in hand.
We will start with a guaranteed Max price on the from a.
Contractor.
All the architecture is done and permitted so we're full steam ahead.
And our underwritten rents similar to the core sub markets, just given what youre kind of indicating that people are moving north.
Well I'm not going to get into what the risks are.
And.
I hope that information or brokers or whatever but let's just say that.
It is a better value than what.
Leases are going for in the <unk>.
Core.
Tori and UGC, but is also going to produce a much better yield than developers are getting there.
Okay, great. Thanks, John .
Youre welcome.
Thank you Michael.
Our next question comes from Caitlin Burrows from Goldman Sachs. Caitlin Your line is now open.
Hi, Good morning, maybe just following up on the point from earlier that some office buildings wont make it when you think about the vacancy in lower quality properties in San Francisco or otherwise what do you think ultimately happens to this product does it remain office with low rents does it get converted or does it get redeveloped and if so do you think thats something kill rate would be.
Interested in participating in.
Yeah, I'm not going to say this is John .
I'm not going to say never because I've learned that's a bad thing to say.
But a lot of the stuff that's over for example, the north side of market.
A lot of that is just dark smaller floor plate lower ceiling height.
Space in an area that is always the best minute ties in I think does it become residential I think that's probably what will happen or does it become some kind of boutique office space with smaller tenants.
If that could be the case I don't really worry about it too much because we're not actively seeking to be there.
<unk>.
But.
I do think there is a real.
Bifurcation and I've been talking about this for 10 years and now it's funny as it for the last 10 years I've been talking about not to the entirety of the 10 years some of its newer I've been talking about the obsolescence of office space in the country. What the modern office building is going to look like what kind of amenities and so forth. It's good to have.
<unk> ability wellness.
And all these things are now we're hearing about like they just came up I mean, some people have been talking about them for sure and a lot of people are just now sort of discovering them, but these trends have been going on and if you just look at them.
If there are fewer and fewer people I mean, ultimately there's going to be a discussion and they're starting to be right now of electric vehicles versus gasoline powered vehicles right.
People are making big bets in electricity, because they're saying that hey gasoline has killed in the environment. So where do you want to make your bet that does not seem to gasoline powered cars that going away anytime soon but they are diminishing and there is the political and public.
Kind of policies that are encouraging that and if you think back then we're taking that same sort of.
I put all of yours are thinking to office space I don't want to invest in things that are going to go bad I wonder who invest in things that are going to get better I want to invest in the markets, where there are where there is the energy and the creativity and the.
The multiplication of employers and so forth and therefore, greater demand greater rents and I wouldn't have the kind of assets that people would be and I don't want to have the kind of team that allow people to feel comfortable that we'll grow with them and we'll be able to deal with their their growth and scalability.
And so forth and to me, that's a virtuous cycle to get involved.
Might get involved in something here or there.
That is out of that.
Description, but by and large I think if you start looking at some of these older buildings, unless you really buy them at a big discount and you have a plan to convert them to housing or something.
It would not be an interesting debate.
Got it and then maybe just a question on lease execution volumes as you mentioned a lot of the trends and tenant demand do seem to be towards the higher quality newer highly monetized buildings, but it does look like calories execution volume is still below the 2017 and 18 average levels. So just wondering is there something that's.
<unk> that and could you go through your expectation for how and when it could recover.
Rob It's Hugh.
Yeah.
So caitlin or as I indicated earlier, our activity for the first quarter So far January .
Is picking off the momentum from the last month of.
'twenty, one so I feel very good about where we are.
What's ahead of US 2017, and 2018, we're really.
Extraordinary years, 2017, 18, 19, where really the ramp up.
To a peak in all of our markets and then unfortunately, the pandemic hit us, which virtually put a stop to leasing in 2020.
We slowly picked up out of 'twenty, one and I think we finished very.
Solidly in the fourth quarter and I expect more activity in volume.
As I've said for a variety of reasons and different market San Francisco, bringing people back to work.
Life Science and technology in the San Diego market competing for space Austin, because new companies continue to companies I announced that we signed leases with our move moving into Austin have never been there before.
So we're seeing continued activity there Seattle and Bellevue continue to remain very attractive I would say that as an example, belvieu now has.
Because of the market in Bellevue, so tight youre seeing tenants starting to look in the CBD of Seattle, So I think a lot of fundamental.
Strength is coming throughout our markets, it's just going to take time.
Throughout this year for that to manifest itself in leases.
Got it okay. Thank you.
Thank you Caitlin.
Today's Q&A session I'll hand back over to Michelle <unk> for any closing remarks.
Thank you for joining us today, we appreciate your continuing interest in KFC.
Goodbye.
Thank you for joining today's call you may now.
Okay.
Yeah.