Q2 2022 Kilroy Realty Corp Earnings Call
[music].
Okay.
Good morning, ladies and gentlemen.
Thank you for attending today's Q2, 2022 Kilroy Realty Corporation earnings Conference call. My name is Tia and I'll be your moderator for today's call.
All lines will be muted during the presentation portion of the call with an opportunity for questions that'd be great.
I would like to ask a question. Please press star one on your telephone keypad.
I would now pass the conference over to your Bill.
Bill Hutchison senior Vice President of Investor Relations and capital markets. You May proceed.
Thank you Tia and good morning, everyone and thank you. So thanks for joining us on the call with me today are John Kilroy, Our chairman and CEO Tyler Rose our President Rob brought our executive Vice President of leasing and business development and Elliott Trencher, our CIO and interim CFO .
At the outset I need to say that some of the information we will be discussing during this call 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.
Call is being telecast live on our website and will be available for replay for the next eight days, both by phone and over the Internet.
Our earnings release and supplemental package have been filed on a form 8-K with the SEC and both are available on our website.
John will start the call with second quarter highlights and Elliott will discuss our financial results and provide you with updated 2022 earnings guidance, then we'll be happy to take your questions John .
Thanks, Bill and Hello, everybody and thank you for joining us today.
I want to begin with some big picture comments, and then review highlights from the quarter.
Yeah Colotomy during the second quarter continues to show fits and starts elevated rents exist given stubborn inflation levels.
Equity markets and heightened geopolitical tensions on.
On the other hand unemployment remained low the dollar strengthen commodity prices are starting to decline in public capital markets remain open and functional.
The economic signals are mixed and some ways complicated and periods of uncertainty such as this we believe it is prudent to err on the side of caution.
Like the mixed macro trends the technology and life science sectors continued to demonstrate encouraging signs.
VC capital deployment remains robust.
First half of 2000 $20 billion to $144 billion was invested which roughly matches the full year deployment levels for both the 2018 and 2019 well.
Exits for VC backed companies have been slow.
That impacted capital raising in both cases, when compared to historical volume.
We've raised $122 billion year to date, which is on pace to be the best year by a significant margin.
The labor market also remains competitive nationally there are twice as many job postings as unemployed people.
And our markets postings are up roughly 40% year over year, a large cap tech companies highlighting the continued need for talent on the west coast and in Austin.
Well leasing in periods such as this is understandably choppy, we remain confident about the long term health of these critical industries and are cautiously optimistic on that.
Demand for space at our properties.
The progress our return to office continues across our portfolio with some differences across geography and industry Austin in Southern California Geographic leaders, while professional services buyer category and life Sciences had been the industry leaders noticeably these sectors have contributed to more activity in our <unk>.
Leasing pipeline highlighting the appeal of our properties to a range of tenants physically.
Physical occupancy in our portfolio and the overall market continues to improve and based on conversations with our customer base. We remain optimistic this trend will continue.
In light of the current economic uncertainty and the potential impacts on the labor market. The power dynamic is shifting to employers who have consistently expressed a preference for in person work.
Actually it's worth noting the phased on returned office data aggregated by Google, The UK, Germany, Japan, and Hong Kong are 15% to 30%.
Yes, 13 to 30 percentage points ahead of the U S, suggesting there was upside of physical occupancy.
Short and medium term.
And I was getting at varying rates of three occupancy of our marketing.
And it's continued to show their commitment to the office by leasing space. According to J L. L second quarter Opex leasing nationwide was up slightly from last quarter.
Sixth consecutive quarter of increasing volume with technology, representing the largest industry of demand.
While some companies are showing I'd, rather you are slowing their decision, making others, including Google Apple and Amazon signed major leases there are markets this quarter.
The headlines that many technology thought leaders are still figuring out what hybrid works like where.
For their employee base and real estate of requirements is accurate.
To that end some users are slowing down their build outs in order experiment with different layouts and configurations. While this may create some noise in the short term it sets companies up to make better long term decisions, which should ultimately benefit high quality and efficient buildings like those we own.
Political wins in our markets are also shifting the actions taken by San Francisco voters over the past several months starting with the recall of three board of education members and most recently last month recall, a former district attorney both gain is a clear sign that people have had enough.
Subsequent to the appointment of a law and order D. A district attorney Jenkins combined with major changes of her staff.
An increased budget for police funding shows it increasingly disgruntled voters are demanding accountability from their elected officials and we're happy to see that.
These changes in San Francisco.
Come on the heels of Seattle Boaters, taking action late last year, when they elected a business friendly law and order mayor.
And the city attorney and Lafayette for similar movements drove book.
The theme, we continue to consistently see across markets is the preference for high quality office space tended to have more choices today and they wanted to be and newer and highly and monetize buildings leasing the best product is desirable and desirable locations is critical for companies to attract their employee base back to the office.
The data backs this up according to C. B R E effective rents and talk to your office buildings nationwide are up roughly 8% since 2020, while lower tier office rents are down 3% over the same period as more and more companies want the newest and best buildings, we believe our modern it sustainable portfolio.
All with an average age of 11 years is well positioned to capitalize on this trend.
Turning to the highlights from the second quarter, we signed roughly 250000 square feet of leases with cash spreads in the stabilized portfolio plus 21%.
Subsequent to quarter end, we signed an additional 73000 square feet in our stabilized portfolio highlighted by a five and a half year renewal of a financial services tenant and Menlo Park.
On our last earnings call, we referenced 350000 square feet of deals in late stage negotiations as of today, we have executed on more than 90% of that number with much of the balance remaining and ongoing discussions activity combined with our modest rollover increased our percentage lease by 60 basis points from last quarter.
<unk> to roughly 94%.
Looking forward demand in the leasing pipeline is solid.
Both in our core portfolio and also for our projects under development, we have a number of transactions across our stabilized portfolio in various stages of negotiation and expect to have continued activity or the balance of the year. Our development pipeline also has strong interest specifically in 'twenty 100 chatter indeed.
Tower and K O P phase II demanding is coming from life Science technology Finance and professional services.
Negotiations continue to progress despite recent market volatility while there can be no guarantees until leases are actually side were really encouraged by the many negotiations that are advanced discussions and expect this to translate into good news.
On the capital allocation front, we intend to use caution when evaluating new investments and new development starts the bar for us to make meaningful acquisitions or start something new on a speculative basis is higher than three months ago. Having said this we remain we maintain high conviction and our recent acquisitions.
Of the sites in Austin.
The development of our stadium tower project and expect to begin construction later this quarter.
Austin market remains strong and capable of supporting their development area around stadium tower is one of the most vibrant in the region anchored by companies, including met to Amazon and most recently Paypal, who just signed 60000 square feet. This month light rail that will service area is fully funded and hosted a groundbreaking.
Last week, our nearby 500000 square foot for our nearly 500000 square foot project will.
State of the art with the most desirable floor plates in the Submarket multiple terraces outdoor amenity areas and 50000 square feet of walkable retail.
Construction is projected to take 30 months, if the project will be ready by the first half of 2025.
Now, let's shift the real estate capital markets volatility in the debt market has made it tough for borrowers to get quotes and there's limited price discovery. Additionally, landlords are much better capitalized today than in prior cycles. So there are not many for sellers as a result, very little as trade it.
We are maintaining our 2022 disposition guidance of 200 millions of $500 million. We will only proceed with sales if we feel it is the appropriate capital allocation decision.
In summary, the company is very well positioned for both defense and offense. Our downside is protected by our strong balance sheet minimal lease and debt maturities diversified tenant credit and top notch portfolio of quality.
When the time is right, we expect that our development pipeline and capital allocation abilities will generate upside and create meaningful value for shareholders that completes my remarks, now I'll turn the call over to Elliot.
Thank you John .
<unk> was $1 17 per share in the second quarter.
This includes roughly two pennies of nonrecurring items from tenant catch up payments and retail tenants going back onto accrual accounting.
The increase in <unk> relative to last quarter was mainly driven by the balance of $3 33 decks that are coming into service in mid April .
On a same store basis second quarter cash NOI was up more than 10%.
The growth was driven by free rent burn off for some larger office leases improved parking revenue and higher occupancy at one paseo residential.
GAAP same store NOI was up three 5%.
At the end of the quarter, our stabilized portfolio was 91% occupied and 94% leased the.
The increase in occupancy from the prior quarter was due to the balance of 333, Dexter coming into service and the transition of our 26th Street property in Santa Monica into the future development pipeline.
The increase in percentage leased was driven by the deals we signed during the quarter, specifically in long Beach and the I 15 corridor in San Diego.
Turning to the balance sheet, our liquidity today stands at approximately $1 2 billion, including roughly $120 million in cash and full availability of our $1 $1 billion revolver.
Our cash on hand unused line capacity and projected dispositions are more than sufficient to fund the balance of our projects under construction.
Net debt to <unk> annualized EBITDA was six times and we have no debt maturities until December of 2024.
Now, let's discuss our updated 2022 guidance 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 impacts of significant shifts in the economy, our market tenant demand.
Construction costs for new supply going forward could have a meaningful impact on our results in ways not currently reflected in our analysis.
<unk> revenue recognition dates are subject to several factors that we can't control, including the timing of tenant occupancies.
The caveat our updated assumptions for 2022 are as follows.
I always know acquisitions are forecasted.
We continue to assume $200 million to $500 million of dispositions that we are now expecting the majority of these sales to happen in the fourth quarter as John mentioned at the capital markets are not supportive we are not going to force the issue in 2022.
Development spending for the balance of the year is expected to be $300 million to $350 million a decrease from our prior full year forecast due to the expectation of fewer new starts.
We expect to commence revenue recognition for 250000 square feet of life science redevelopment during the fourth quarter of this year.
Year end occupancy is projected to be 91%, 92% for the office portfolio and residential occupancy is projected to stay around the current level of 94%.
It is important to note that 'twenty 100, kettner will be coming into the stabilized portfolio next quarter.
The building is not yet leased stabilized occupancy for the company will be impacted for the balance of the year. As a result, we expect to be at the lower end of the occupancy range.
Same store cash NOI growth is still expected to be between 5% and 6% as implied by our guidance same store will decrease in the back half of the year due to some tenant concessions that kick in and some one time items in the prior period.
Putting this all together our updated 2022 <unk> guidance is projected to range between $4 53, and $4 63.
With the mid point of $4 58, which is a 7% increase compared to our prior guidance. The increase is due to the solid second quarter results.
And the adjusted timing on our dispositions.
Similar to what we discussed last quarter guidance implies a drop of roughly <unk> <unk> from the $1 17 achieved in the second quarter. These <unk> can be broken down as follows two pennies from nonrecurring items previously discussed and <unk> from dispositions that completes my remarks, now we'll be happy to take your questions.
Tia.
Yeah.
We will now begin the question answer session if.
If you would like to ask a question. Please press star followed by one.
Pat.
Is there any reason you would like to turn that question. Please press star followed by team again to ask a question press Star one.
As a reminder.
Thank you.
Please remember to pick up your handset before asking your question.
We will pause briefly to allow questions to generate in Q.
The first question is from the line of Nick Jones Carl.
Just a question of bank you May proceed.
Hi, everyone. First question. It was just in terms of Oyster point, maybe you could frame out where you're seeing leasing demand in that market right now because I know there's been a sense that.
Going out what's going on with the biotech index and DC funding et cetera, there's been maybe a slowdown in demand, but I was hoping you could just kind of frame out how you're seeing demand in that market, let's say now versus earlier this year.
Sure. Nick This is Rob how are you doing.
So recently within the last 20 days two leases in the South San Francisco region Life Science leases have been signed that total in excess of 435000 square feet. Both are a great tenant names.
And I think Thats, an indicator of where the market is for very high quality space as John mentioned in his comments, we're seeing a lot of activity at Kilroy Oyster point phase to our team. There is actively engaged we had meetings yesterday with a large user.
We have a few users that could take.
Take entire buildings that we're talking to and we're also speaking to tenants that.
Could take portions of buildings so.
For the product, we have and the type of tenant we're seeking.
Our activity is still remains very encouraging.
Physically on the site tower cranes will be up and visible from the freeway by within the next 30 to 45 days.
So a lot is happening on site and it's.
Having a.
The visibility of what's happening on the site is having an impact on the conversations we're having with tenants.
Okay, Thanks, Rob and a follow up on that is I think stable.
Ably stabilization date got pushed out.
A bit farther on the project. This quarter can you just talk about what drove that.
Hey, Nick this is Elliot I can take that.
The reason for the adjustment was because there was a change in the timing tied to remove removal of an existing gas line by the utility company. They just took a little bit longer to remove the gas line than we had anticipated. So one of the building because remember there's three buildings, they're going to deliver.
In stages. So one of the buildings will come in a little bit later because of that adjustment.
Other two are not going to be impacted to the same degree and as a reminder, our stabilization deeps has 12 months of leasing.
Lease up baked into them so.
I guess the takeaway here is more tied to that removal of a gas line in our view on the market.
Okay. Thanks, just one last question as you guys are thinking about heading into next year.
Major explorations you have to deal with.
Next year I mean is there any update you have there on car leasing traction just trying to think about how occupancy could trend next year I know, it's early but some companies are starting to get a little bit of a feel for that.
Yes.
Yeah, Hi, Nick it's Rob again.
So we have four.
Exploration in 'twenty three that are over 100000 feet three of them were in active negotiations with and the fourth one which is the smallest of before.
We expect will be a move out, but thats not 100% certain yet.
Okay. Thanks, everyone.
Thank you.
The next question is from the line of John Kim with BMO capital markets.
Please proceed.
Thank you.
I was wondering Johnny with the pullback in tech hiring and potentially office space.
Do you think the newer not headquarter markets like in Austin will be impacted more.
Retrenchment or would allow us to be more significant in silicon valley and just given the higher cost structure.
I don't know.
Yes.
Speculate a lot.
I just don't know.
The.
The things that we're hearing right now is that people want to be back in the office.
They want to be in these areas, where they can attract.
The talent that they need.
Austin.
No of a number of companies that are looking to either expand dramatically or move into Austin.
The tower and where.
Seeing that in our early stage negotiations or savings.
Those cases, but.
Rfps and so forth in connection with our <unk>.
To be built stadium towers, so I think that market is going to do just fine.
Everything we're hearing there is people who continues to expand.
When we talked to law firms and others that are there some of whom are bdcs in connection with indeed tower.
They are projecting their business activity their book of business in Austin is going to increase so I think that feels pretty good in terms of the city. There is a lot of stuff going on meaning San Francisco some recent.
Headlines people both.
Standing as well as some puts subsequently sublease, it's just really hard to say, but trend wise.
I think that we're going to continue to see.
A replay Appalachian of buildings in downtown San Francisco and elsewhere, we're seeing big growth in San Diego and more to come we're seeing big growth as I said in Austin in L. A it's things have ticked up it's been a bunch of lease deal done.
It's just kind of all over the map.
It remains to be seen but I am.
Cautiously optimistic because we are seeing more to her.
Big users.
And then seriously interested in property I will say the decision timing for a lot of these companies has been elongated there are more hurdles they've got to go through to just device.
And as I mentioned in my formal remarks.
They're trying to figure out exactly how they're going to improve their space, which model is going to be the model.
Thats, a that theyre going to utilize.
And we've seen a couple of tenants reconfigure their designs for space Theyre going to occupy.
And it makes significant changes.
Theres just a lot of things at play.
Now that all as positive.
Mentally ill say more positive now than I saw last quarter and so forth. So I think the trend is going to be better.
You're only going to stock market shock chart, even if it's going up it doesn't go up every day it goes up and down we will see what happens.
Yes.
I appreciate your honesty and or any color.
My second question is on.
Blackstone they've kind of position in your company for the last couple of years and I am wondering if you had any direct conversations with them either as a long term shareholder or potentially.
Okay.
I'm sorry, John for some reason you cut out a lot on that and I'm not sure I got your question could you.
Please.
Sure Blackstone they have been.
As shareholders of the company for a while.
I'm wondering if you've had any direct conversations with them either as a shareholder or as a partner.
I'm not aware of any.
I think that is enough.
Well I only say that it's sort of a question I don't think I don't think anybody else in the company as anybody else in AR.
From Kilroy on the call had any conversations with them I have it.
I haven't heard of anything Oh no.
Okay.
Thanks.
Thank you.
The next question is from the line of Kevin salesman with Bank of America. Please go ahead.
Thank you.
Starting with 2100 Kettner I mean can you talk about the potential pipeline for that project and you think it's the location do you think it's the timing I know, it's kind of a new sub market for you guys just wanted to get some more thoughts.
Hi, Jamie it's Rob.
Let me answer the last part first which is timing.
The project really was ready for tenant improvements in the midst of the pandemic, which didn't help but that said throughout towards the end of the pandemic and into this current quarter. We've had continued activity and interest from a variety of tenants, whether its professional services or technology.
And I think.
Because this little Italy, Submarket borders downtown San Diego, which is just in general those two markets have been slower to repopulate.
That's impacted some of the leasing demand not only at kepner, but elsewhere.
At Diamond view another other projects in downtown San Diego all of that said, we've made meaningful progress with a very well known company I don't want to go further than this.
Comment about it but.
We feel like we're making very good progress with them and more will be we'll be able to share more with you in the near future.
Okay. Thank you.
And maybe just Jan Francisco's sorry go ahead, David Sorry, This is John .
The other thing is I think I've talked about this before but.
Originally we thought we would end up with a likely big tenants that we're talking with.
With regard to that property there.
Their requirements, we're bigger than what we could deliver and we've made the decision to break it up and go multi tenant which was kind of the same path. We went down when they came on stream or when we were under construction and late stages with our once a sale office space, whereas if we didn't have the pandemic to deal with.
So that for those buildings. So it's a very similar path and I'm confident we're going to end up with really.
Very successful rental rates and client base at 'twenty 100 cabinets.
Okay, and when do you have to stop capitalizing that project.
You don't have a tenant.
Yes.
It's going to come into service next quarter, so by next quarter.
Okay. So if it's still there for Q youre no longer capitalizing.
Correct.
Okay.
And then maybe just to shift gears to CBD San Francisco I mean, we all see the headlines I know you made some comments that it's slower but I mean can you just give more color on what it's really like to try to do business. There right now I know you've got a high quality portfolio.
Just any more information on.
How youre thinking about how that market is going to look the next six or nine months.
Sure Jamie this is Rob again.
Direct I'll answer that.
Let's frame up Kilroy is positioned in San Francisco first of all right.
Right now we're at 95% leased in San Francisco, our portfolio is and I would remind everybody that we have very minimal role between 'twenty three 'twenty four 'twenty five averaging about 7%. So I'd just like to set that as sort of the.
Groundwork.
Leasing volume in the second quarter in San Francisco rebounded up to about one 7 million square feet and I think two very notable transactions happened.
Within the last again, 20% to 25 days, one is Google taking 295000 square feet of very high quality sublease space in Soma, and secondly, Wells Fargo Bank renewing 661000 square feet.
In San Francisco CBD. So those are two very notable transactions and again I think you have to separate what the headline say into the facts about specific submarkets, but I think those are.
Very indicative of the best buildings in San Francisco have an 11, 6% vacancy rate so meaning the premier assets in the city or 11% versus the 20% vacancy rate reported.
Bye bye brokerage firms so.
On the ground, how things are feeling as John said, it's sort of up and down it's not linear.
Tuesday, Wednesday Thursday are very busy last week at 101st where bill and I are speaking to you today.
One of our tenants had a major event for their employees. The elevators lobbies, we're completely full with people. They looked like they were having a really good time.
That's spilled over into Thursday, and.
So we're seeing that not only at 101st but in other parts of our portfolio and as you know we've said on previous calls or at NAREIT or what have you that a lot of this year is going to be focused on making coming back to work funds. So youll see a lot of aside from bringing teams back together to actually do work youre going to see a lot of entertained.
And how fatality type focus.
Last thing I'd say is that the streets.
In the CBD in south of market and.
Parts of the market are in much better shape than they have been and I think thats a function of more people being back in the CBD.
As well as increased police activity and enforcement.
Okay, and then just going back to the four large expirations next year can you remind us.
Where they are and then the one that sounds like it could be a move out can you give us more color on that one.
Yes.
I don't really want to give more color. It's the smallest of before that we think may be a move out is in San Francisco the others are.
In southern California, it kind of spread throughout the portfolio.
Okay alright, thank you.
Thank you.
The next question is from the line of Brian <unk> with Evercore ISI Hi, you May proceed.
Alright. Thanks.
Just just going back to the stadium project John I was wondering if you could talk to what's giving you the confidence in starting this project just given the economic slowdown and what youre seeing on construction costs and the growing competitive supply pipeline down in Austin.
Yes, I think we have a pretty good mousetrap and we have a lot of conversations going on with full floor users a handful of those.
They're all big names.
And.
I think we'll end up in a very good time frame for it.
There's where competitors are delivering space either of those are under way are those that would fall assuming they start.
So that gives us confidence.
You have to make choices and we have a we.
We have postponed the start of Santa Fe Summit, San Diego, we've taken a pause on that we are ready to go.
When whenever we want to push that button.
We are entitled and are pretty much ready to go with 26th Street in Santa Monica.
Mauler project, maybe a couple hundred thousand square feet.
And we think Austin is.
At that location is going to be a winner and so that's our thinking.
Got it okay.
And just on the disposition target for the year.
John can you just talk to your confidence level in hitting that number where we're at you havent done any so far this year and maybe just more broadly what interest are you seeing in the transaction market today for office product.
Do you want to take that island.
Yes sure.
I think kind of breaking it down into pieces.
We as we sort of described in our remarks.
We're in the market with various transactions.
We are adjusting the timing of them.
In terms of the confidence we're kind of approaching it as if we see that there is a market that we like and there's enough depth to it that we think we're executing at prices that are commensurate with where values ought to be then we're pretty confident we can.
Get $200 million to $500 million done but.
We obviously are not.
We obviously adjusting the timing so we'll have to see how that plays out and if it doesn't make sense to sell we're not going to sell so we're not going to force the issue and.
And we're kind of seeing the market real time and evaluating it.
I think bigger picture there is still a bid for.
Lots of different types of assets and I think it's a little bit.
Stronger for those that are all cash buyers the levered buyers.
A little bit more reliance on the debt markets and as John described the debt markets are changing by the day.
Yes.
Thanks, that's it for me.
Thank you.
The next question is from the line of Michael question Sandy.
May proceed.
Hey, Thanks for taking the question.
Wanted to go back to the 25th Street redevelopment, adding it into the pool this quarter sort of kind of what drove that and sort of what our expectations are for that going forward.
For the <unk>.
Part of it the construction.
Yes.
Yes.
<unk>.
La market West L. A market is cleaning up pretty nicely.
You just have to make decisions from out of the capital allocation.
From a capital allocation standpoint.
<unk>.
I feel like this.
This is it's kind of similar to a period that frankly the markets. We're in better shape, but you might recall when we had the exchange under construction, which is three quarters of a million square feet in South San Francisco, we were looking to get starting.
And I think we had dexter, which roughly 700000 feet up in Seattle under construction, we didn't have either leased and we are.
We're being asked would we start.
Hooper, which.
And my point was well it's right. It's the same market as the exchange will start if we have a tenant for us we've.
We've made significant leasing at the exchange, but we're not going to just add another 400000 feet on top of 700000 square feet that was underway in the same market spec and so I look at it I say to myself from a company standpoint.
K O P. We're confident we're going to lease that up but that's a big project is roughly 900000 feet. We've got kettner down in San Diego, we are starting to say, Tim we've delayed south.
Santa Fe summit, and we're going to delay.
The project inquiry.
About 26 Street and they'll come on stream and we'll start at some point.
We don't feel compelled to start anything we're in great shape and our balance sheet, we're not like a merchant builder that if you don't build it youre not going to get your fees or whatever.
We'll just split the market continue to improve and we will pull the trigger when we think it makes sense, both with regards to that specific project and.
And then looking at the company.
Thats total contact.
Thanks for that I appreciate the color on that and then John just going back to what you mentioned in your prepared remarks about sort of political wins shifting in a lot of your markets.
Recall, the VA in San Fran and the run off from here in Los Angeles coming up I'm curious if you believe that this will be a bit.
Driving factor to people feeling more comfortable coming back in the office or do you think that it's too quick shift and then it might take longer to play out.
I think it's a major component of.
Of the solution.
There is a lot of things going on as you know and if you. If you have all this homelessness and all of this lawlessness.
I was looking at the statistics the other day that were put together.
And I don't have them with me.
But in order of magnitude nine might be off 10 percentage points.
Any one of these but directionally.
Murder is up in every major city hugely this year violent crime is up major in every major city.
Car theft is up in every major city, they don't even in most cities.
Deal with any steps or snatch and grab under $1000. So those statistics I think it would be off the charts people are sick and tired of this stuff they are sick and tired of it in San Francisco.
The four Republicans that live there.
Probably voted for this but I would say kiddingly there may be a few more but the reality is this is a broad base disenchantment with this woke sort of stuff.
And people are pissed off and cleaning up the street.
And for companies seeing the streets are starting to clean up for company seeing that long or is being on the forefront of people's lines and being restored as a major part of the equation.
It's not the only thing of course.
There is the whole work from home situation, but I think this is component of that so I'm very encouraged by the fact that it's not one political group, it's a broad.
Wausau people every age every background.
Every not every but most political affiliations or whether they are and some of them of course are like me and Theyre independent, but the fact is you.
We needed to get people pissed off is it changed and stuff and I'm really encouraged by it's not going to happen overnight. So what.
Company is what I'm hearing is that they're encouraged by seeing that is moving forward. There is a lot of work to be done.
But it's a huge first step.
And it's not going to mean, a crime goes away day, one it well because there are a lot of bad people out there.
And they need to be dealt with.
Great. That's it for me thanks for the time.
Youre welcome.
Thank you.
The next question is from the line of Blaine Heck with Wells Fargo. You May proceed.
Great. Thanks, good morning out there.
Hoping you guys could give us an update on the mark to market in each of your markets and whether you've seen any change in that metric recently, especially in Los Angeles, where you have a pretty large proportion of your expirations in the next several years.
Hey, Blaine this is Elliot I can handle that no material change in our mark to market from what we've talked about previously it kind of ranges on the west coast between 10 and 20% by market.
In Austin.
30% Mark to market and it kind of blends somewhere in that 10% to 15% range.
Okay great.
Second question is it sounds like the beat this quarter was largely due to early revenue recognition at 333, Dexter and we looked back and saw that revenue recognition on development has been earlier than guidance four times in the last two or three years. Obviously this has a positive impact on actuals versus guidance, which is great.
But I'm wondering if there's anything specific going on that's enabling you guys to consistently beat your expectations for the timing of revenue recognition on developments or is it just a matter of staying kind of conservative on guidance and building in a bit of a cushion for for those moving.
Yes. This is John .
Go ahead Elliot.
I'll make a comment after that sorry.
Yes, Theres definitely we talk we give a lot of the disclaimers in our prepared remarks about calculating the timing of revenue recognition because there's definitely a lot of our behind it.
So we try our best and to try to project when the.
<unk> will be spent by tenants in place and that we can actually start to recognize revenue, but there's certainly there's no exact science that goes to it and we've been fortunate as you pointed out to have beaten it in the last few instances, but.
That doesn't necessarily mean, it will happen next time, but we're certainly going to try our best to do better.
Yes.
Just John I make this comment.
Adjusted and smart our EVP will now present development.
Construction and development at Kilroy and his team his group.
They're the best I've ever seen they really really work with the tenants along with the rest of our Youll making squad.
To move these things along and make things easy.
Easier for tenants to decide on.
I kind of think that that's it.
I don't know if we'll have the success.
That we've had in the past with that.
We'll see but.
Companies are experimenting more with the way they are using space. So sometimes there is slower now and moving forward with your improvements because they are all they're all scratching our heads saying.
Is this mix now the right mix or should we try something else and maybe do a pilot and then see about the rest of the space. So it could bounce around.
Got it that's helpful color. Thanks, guys.
Thank you.
The next question comes from the line of Vikram Malhotra with Mizuho you May proceed.
Hi, Thanks for taking the question.
Sorry, if I missed this I just wanted to go back and.
Maybe get some more color on your thoughts around capital deployment, you meant you mentioned the higher bar.
For asset.
Can you maybe give us a bit more specifics what are you changing in terms of underwriting or maybe what youre looking for and then given the quality device that you highlighted any thoughts on where they.
The value differential is for its high quality grid office versus the average product out there.
Yes.
Those are good questions.
The.
Fact is that as people are utilizing space differently now, there's probably an increased element.
Our view towards two buildings I've always said the buildings have the physicality for the modern tenant you may need to improve things, but do they have the physicality of the actual dimensions and whatnot, that's probably ratchet it down to a.
A little a ratchet up rather to a higher threshold of what is acceptable physically.
But the other thing is that.
Yes.
It's just to me it doesn't make a lot of sense to buy stuff today.
Assuming youre going to have big rent increases over the next several years, which we did see that punctuated most of our markets for the last several years and in periods like this it could be that we don't see the level of rent increases. So your underwriting is going to is going to is going to be more conservative and then you're taking.
You look at if you we always look at if you were to sell the asset what's the pool of buyers and so forth so slight.
Flight to quality is not just a tenant base.
Phenomenon is an investor base phenomena, the sophisticated investors looking to deploy capital to assets that have a lot of.
A lot of running room that are going to be performing well for many decades much of the existing stock doesn't have that so there's just a higher bar.
In the context of demand in the context.
Underwriting rental increases.
And and physicality and so forth with regard to development.
The nice thing about development is that we generally get to develop pretty much what we want and we're pretty good at developing excellent properties, but we also have to take a look at where construction costs are and they vary dramatically.
Radically between our markets.
Everything we have under construction from a development standpoint, we have a guaranteed max price with the contractor.
We were very comfortable with that same thing on major tenant improvement work.
We have that for example at the stadium tower.
That we want to build out at the main in Austin.
In other areas and we have that by the way at Santa Fe Summit of the project, we elected to slow down and not proceed with right now.
For example in Seattle construction.
Construction costs have probably been higher there than any other.
The increase is higher there than any other major market in the United States is because of all the construction of Amazon and others primarily in Bellevue.
And to us it makes no sense.
Notwithstanding the market makes sense or does it it makes no sense to go out and started building. What you are at your all time peak in construction costs and labor costs. We think those will moderate. So we're also going to look at how we time things not only based upon.
Demand visible demand, but also based upon what cost.
Are going to be and whether we think those costs might go down. So there's a lot of different things and then finally, just about capital allocation, we don't want to sell stock, we don't add a lot of debt.
So the likelihood of us having a whole bunch of <unk>.
Acquisitions and development.
Going forward.
Is is also more remote so those are the big factors that are in our thinking.
That's helpful and then just.
Talking of timing.
You highlighted the robust demand for quality life Sciences. The two big users are two big opportunities I think you referenced.
Just thinking about the opportunities in life science in the sunbelt newly made the push there in Austin I'm. Just wondering like are there specific life science oriented opportunity.
If you can share with us.
No.
And I would say that that would be a smart Alec just because we don't have any in the hopper right now.
And.
The life science, while Theres some tremendous.
Cancer research and so forth down in Houston, and whatnot, it's an emerging area and much of the south So of course, you got the.
There are a lot of activity down in North Carolina, but we're not down there. So we don't have any plans right now on life science in those markets might be in the future quite possibly but nothing in our consciousness right now.
Okay, great. Thanks, so much.
Youre welcome.
Thank you.
There are no additional questions at this time I will pass it back to the management team for closing remarks.
Thank you very much for joining us and for your interest in Kilroy.
That concludes today's conference call.
Thank you you may disconnect your lines.
Yes.
Uh huh.