Q3 2022 Kilroy Realty Corp Earnings Call
Good afternoon, everyone.
Thank you for joining today's Q3 2022 Kilroy Realty Corporation earnings Conference call. My name is Dante that'd be the moderator for todays call all lines will be muted during the presentation portion of the call what's the opportunity for questions and answers at the end if you would like to ask a question. Please press star one on your telephone keypad.
I would now like to pass the conference over to our host Mr.
Your Bill Hutchison Senior Vice President of Investor Relations and capital market, Sir the floor is yours.
Thank you.
Good morning, everyone. Thank you for joining us on the call with me today are John Kilroy, Chairman and CEO Tyler Rose, our President Rob brought EVP of leasing and business development and Elliott Trencher, our CIO and interim CFO at.
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.
This call is being telecast live on our website and will be available for replay for the next eight days, both by phone and over the Internet our earnings release and supplemental package have been filed on a form 8-K with the SEC and both are also available on our website.
John will start the call with third quarter highlights and Elliott will discuss our financial results and provide you with updated 2022 earnings guidance.
Then we will be happy to take your questions John .
Thank you Bill and Hello, everybody and thank you for joining us today.
I'll begin with some big picture comments and then reviewed recent highlights.
Over the course of the past several months the economy is increasingly.
Come in certain while at the same time, showing some encouraging data points labor markets remained strong supply chain constraints are easing and the consumer continues to spend however, the unprecedented pace with central banks are raising interest rates to tame inflation is by many accounts, increasing the likelihood of a heartland.
Resulting in increased volatility in the public markets and limited transaction activity in the private markets well.
While we cannot control the fed or know for certain ramifications. It's actions will have on the real estate market. We are laser focused on the items, we can control.
Just as we position Kara sea to play offense coming out of the 2008 2009 recession. We believe we are similarly, well positioned this time around our leverage is low.
We have no debt maturities until the end of 2024 and over $1 6 billion of liquidity, including a fully untapped credit facility, while no. One wants to recession Kilroy is cycle tested and prepared during the third quarter that pushed you to return to the office intensified as many companies.
Implemented stricter policies to encourage in person work and collaboration these efforts have been led by financial services and professional service firms, but we are seeing increasingly technology and media companies followed suit multiple large cap companies and their smaller brethren are requiring employees to it.
Back in the office, two or three days, a week, which has generated tangible progress in both our physical occupancy and castle data, which recently hit a post pandemic high.
This is also driven steady improvement throughout the year and our parking income like many we believe that softness in the labor market will likely strengthen employers resolve around encourage you work from the office and we'll also resolved in employees adhering to those plants more closely.
The bifurcation between high quality space and commodities space continues to grow which bodes well for our young and modern portfolio. According to J O L. In the third quarter, 90% of the space added to the sublease market was an older and less desirable buildings for.
More throughout 2020 to nearly 50% of markets nationally set records for a high water Mark rents on Premier class a properties. This includes several of our markets such as San Diego Austin, San Francisco companies that are making decisions today understand the importance of locating in modern amount of time.
As buildings and we're seeing that.
Turning to recent highlights we signed 390000 square feet of leases since the end of the second quarter with an average term of eight years and average rent roll ups of plus 7%.
The cash basis, and plus 27% on a GAAP basis. Some highlights include a 63000 square foot renewal, but financial services tenant in Menlo Park.
55000 square feet of renewals and expansions from two apparel companies in Culver City, an 11 year 28000 square foot new lease with Boston Consulting group at 'twenty 100, Kettner in little Italy.
10 years, 70000 square foot renewal with a scientific research and development company in del Mar, a seven and a half year 35000 square foot renewal in San Francisco signed.
Late yesterday afternoon, with the major broadcasting company.
The 15 year 51000 square foot lease with page <unk>.
National full service design firm and indeed tower, bringing this project is 68% leased.
As we've previously signaled demanded indeed towers increased over the last couple of quarters and we expect to have more good news to discuss in the coming months life science demand, especially in top tier markets has been holding up well. They can see is roughly 2% in south San Francisco and roughly 2% in the del Mar height.
In U T C region, our two biggest clusters, we have multiple prospects interested in kilroy Oyster point phase two which consists of three buildings and 875000 square feet.
Our 1000 luxury residential units continue to perform well occupancy is approximately 94% and rents increasing meaningfully compared to last year. Additionally, Los Angeles is removing the eviction moratorium effective early next year, which is another encouraging sign a policy moving in the right.
Erection.
On the capital market side, we closed the sale of 31 30, Wilshire, a 46 year old building in West L. A for $48 million in gross proceeds of roughly $500 per square foot. This property no longer fit our strategy given its age and future capital requirements there.
Bigger picture the sales market was quiet during the third quarter asset level debt, it's hard to secure especially for non trophy assets and capital while plentiful as generally on the sidelines.
We were pleased to close the sale of 31, 30, well sure, but as we alluded to last quarter. We think it is prudent to let the capital markets stabilize before selling additional properties.
On the investment side, we are staying patient waiting to see how market conditions evolve and whether a motivated seller excuse me to come to market. While we expect there will be acquisition opportunities at some point, we are not there yet.
Our operating permits over the past 25 years as a public company is that there are times to buy <unk>.
The cell times develop and times like now to be patient.
That and we said on our second quarter call that we were delaying the startup Santa Fe Summit.
600000 square foot plus life Science development in San Diego.
Similarly, we intend to hold off on the construction of stadium tower, our Austin development side until the economy gives us more confidence or we pre leased to a substantial portion of the project.
As a reminder of the stadium tower site is fully designed and permit ready for a roughly 500000 square foot building.
Since we acquired the project earlier this year, we have done Preconstruction work, which reduces the lead time to deliver a completed building. Additionally, we have the right to add density now given our proximity to the light rail, which we plan to study in more detail over the coming months as I mentioned.
And in my earlier remarks in 2009, we position the company. So that we can play offense as the economy improved which resulted in some well timed acquisition and development starts in the Bay area, Seattle and Hollywood. We are doing the same today by curbing span bolstering liquidity and getting on.
Top notch development sites shovel ready so that we can be an early mover when the time is appropriate.
Summary, our strategy can be summarized via three tenants.
Best in class real estate disciplined capital allocation and fortress balance sheet. This recipe is cycle tested having guided us through up and down markets over the past and we are confident that adhering to these principles positions positions us to be opportunistic as circumstances warrant.
Lastly, we want to remind you of our upcoming investor event in South San Francisco to be held on Monday November 14th right before NAREIT. We are eager to show everyone Kilroy Oyster point and has some interesting speakers lined up to talk about the project. The overall market and the company if you need more details. Please.
<unk> reached out and we hope to see you all there that completes my remarks, now I'll turn the call over to Elliot.
Thank you John .
<unk> was $1 17 per share in the third quarter similar to the second quarter on.
On a same store basis third quarter cash NOI was up roughly 6%.
Growth was driven by free rent burn off for some office leases improved parking revenue and higher occupancy at one Paseo residential GAAP same store NOI was up approximately 2%.
At the end of the quarter, our stabilized portfolio was 91% occupied and 93% lease included in this number our three development and redevelopment properties, which were brought into service during the quarter.
These three projects were 59% occupied and leased as of quarter end.
Turning to the balance sheet, we enhanced our liquidity post quarter end by a $400 million unsecured term loan at a rate of adjusted Sofa, plus 95 basis points.
We have $200 million of the 400 million outstanding which is subject to an interest rate cap and can draw down the balance at any point over the next 11 months.
We believe this is an efficient source of capital and it gives us enhanced liquidity to fund our development pipeline, while continuing to provide predictability to our interest expense.
Net debt to third quarter annualized EBITDA remains about 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 impact of significant shifts in the economy, our markets tenant demand construction costs of new supply.
Going forward could have a meaningful impact on our results in ways not currently reflected in our analysis projected revenue recognition dates are subject to several factors that we can't control, including the timing of tenant occupancies.
With those caveats, our updated assumptions for 2022 are as follows.
As always no acquisitions are forecasted and as John referenced we do not anticipate any additional sales for the balance of this year.
Our new term loan has 200 million outstanding as of the beginning of the fourth quarter, we do not expect to draw anymore in 2022.
Development spending for the balance of the year is expected to be $100 million to $150 million, which translates to roughly $400 million of spend for the full year. This is a meaningful decrease from the roughly $600 million of development spend we were projecting earlier in the year.
As we discussed last quarter, we expect year end occupancy to be at the low end of our range or approximately 91% for the office portfolio and residential occupancy is projected to stay around the current level in the mid 90% range.
Same store cash NOI growth is now expected to be between six and six 5% to 75 basis point increase from our prior estimate the increase is due to strong results to date, specifically around parking revenue and the residential properties.
Putting this all together our updated 2022 <unk> guidance is projected to range between $4 62, and $4 68 per share with a midpoint of $4 65 per share, which is a 7% increase compared to our prior guidance. The increase is due to the solid third quarter results and the adjustment to our disposition.
Expectation.
The new range implies a 2% decline for the fourth quarter as compared to the third quarter, which is predominantly due to the term loan that closed in the beginning of October that completes my remarks, now we'll be happy to take your questions Dante.
Thank you.
If you would like to ask a question. Please press star followed by one on your telephone keypad if for any reason that you'd like to remove that question. Please press star followed by two and as a reminder, if you are using a speakerphone. Please remember to pick up your handset before asking your question.
Our first question comes from the line of one the Sochua wherever core ISI. Your line is now open.
Your line.
Great. Thanks, I guess good morning out there John I was just wondering if you could provide a little color on the South San Francisco Life Science demand.
We've been out there several times and it seems like demand has slowed down out there and.
I'm just curious what you're seeing both broker deals and maybe non brokered deals for for K O P too.
Yes, sure Rob do you want to take that one.
Sure Hi, Steve.
What I would say is that for again, let's let's talk about <unk> compared to <unk>.
Other projects that are out there we have scale. We have three buildings, we can grow companies, which is what a lot of the larger companies are seeking which is the ability to establish a toehold and grow no doubt as we've talked about before early stage companies are a little bit on hold because their boards and putting them under more scrutiny.
And telling them to slow down taking space, while they sort through this uncertain environment. We're in.
I don't want to get into a lot of detail on our discussions, but we are as John mentioned in his comments, having discussions with several firms and.
We're pleased with the activity, we have and I would call. It steady in terms of the inquiries. We've had the tours, we've had and we are having some fairly in depth conversations with companies.
Okay, and then John maybe just on the broader leasing you know and maybe specifically what you're seeing in downtown San Francisco I know you've had some either tenant move outs or some spout sublease space coming back on the market like Nektar Therapeutics and I'm just wondering.
You know what youre hearing from kind of the business leaders about leasing specifically in downtown San Francisco for either vacancy or maybe pretending pending upcoming availabilities.
Yeah, well, let me deal with Big picture for a second I'm going to turn over Rob addressed some of the specifics that you already Steve.
I mentioned on the last number of calls that in a period of volatility and uncertainty, it's natural whether it's people or whether it's companies. If you don't need to make a decision you don't make the decision. If you can delay a decision to delay a decision thats just smart and that you know that continues to be in all of our markets. Although we are beginning to see a lot more active.
Specific to the San Francisco, Rob can you can you address that.
Sure Steve again, I think it's really important to emphasize.
The difference between property is right. There is class a premium properties, which I think our portfolio falls into if you've got a young portfolio young buildings, well located modern improvements amenities youre going to have activity and that's borne out in the data in San Francisco.
The top 20 buildings in San Francisco, According to J O L. Right now have seen effective.
Rent gains of 15% since 2019 and in some cases increases.
Beyond that so again, if you've got property that tenants, one they're going to be very selective and theyre going to absorb it in a really good example of that is Google.
Taking almost 300000 feet in Q3.
You know a lot of rumors floating around the text on the sideline, but I think that is not the case as we've seen in other markets, we have as well.
Sublease space has remained at about $7 2 million square feet, it fluctuates up and down but we've been holding in that range for quite a few quarters and again it really depends on the quality of the space. The Google lease I mentioned is actually a sublease and that's it's a high quality buildings that they took.
So there are the haves and the have nots and I think the last thing I'd say, if you compare the REIT industry to the private markets in terms of ownership.
Some of the private owners are going to have I think struggle as debt markets.
Continue to tighten and lending becomes more difficult, so theres going to be difficult in fulfilling capital requirements for leases and.
Operating the building in a class a manner, so kilroy positions itself as a true partner with our tenants and what we're really doing as John mentioned, we got a lease signed later in the evening last night and that was a true partnership with the tenants working hand in glove with them to get their management onboard.
With the the lease as well as making.
Making the numbers work for Kilroy.
Okay, I guess, maybe just as a follow up John just big picture given the discussions you've had with the mayor I mean do you feel like the city's made enough progress both in crime homelessness and attractiveness to bring people back that.
Makes the city sort of viable going forward.
Well I'm going to start with the premise that no. They have not made as much product enough progress doing that that requires a lot more but it's that whole thing is the train is going south you got to stop it before you have a chance to turn around and go North I think were going north now.
But we've got a lot to do and we have an election coming up to reelect, the narrow appointed district Attorney Jenkins.
She's running for election now.
It's an important races, a couple of supervisor races are important and I'll say this about San Francisco I'm not in New York as you know, but in terms of ownership, whether it's New York San Francisco L. A Seattle wherever.
Leadership and policy makes a difference I've been as you all know everybody on this call you've heard me speak for 10 years and my biggest concern in the world has been politicians and some of them are not in our country, but the fact is we need good policy. We've made we've seen some real good changes in San Francisco.
And elsewhere, the selections that are coming up that affect the state effective country effects are the various individual cities that we're in are all important some we're going to win on some we're probably going to lose I don't know, but directionally I feel that we've really made a difference and what's happened is it's because people have united.
Rather across the political spectrum, because they're sick and tired of some of the bad stuff policy wise, its going on and so I'm optimistic Steve but.
But we need to go further it's certainly not enough, but I'm far more optimistic than I was a year ago, because we finally get them sort of stopped the triangle in south that doesn't mean, it's still not going thousand a few little spaces.
But I'm I'm optimistic, but it is a battle.
Like a health issue.
You're all of a sudden you see that your health is improving but you still have a ways to go to get to to be a place where you are really healthy and I would I would say that's very similar.
Okay, great. Thanks, that's it for me.
Okay Super Thank you.
Thank you for your question Sir.
Okay.
Our next question comes from the line of Juan Camille Banal from Bank of America. Your line is now open.
Hi, good morning, I seen leasing activity improved in October with their teams.
Nearly a third of leases year to date and one month can you provide a bit more background behind this leasing activity in the sunset. How long are these conversations going on for and how does it compare to leases you are signing up the start of the year.
Bob do you want to take that one sure.
Sure Hi, Camille.
As John said earlier I think on this call and he said it multiple times over the year that.
If we're in a position right now where decision makers are faced with a lot of uncertainty and if you don't have to make a decision today youre not going to make one and thats. The prudent thing to do and that's borne out in the leasing that we see and why.
Transaction velocity seems slower and it is slower because what's happening is.
On our client side, the tenant side the real estate executives are being scrutinized more in terms of the deal that may get approved say in may by our board of directors are subcommittee of aboard.
It is coming back up for review in September as an example.
Because the board wants to make sure it's still a viable as it is.
Is it a viable transaction for the company do they needed et cetera. So that is taking more time.
I think that we just we just are very <unk>.
Prudent about how we report our leasing during earnings calls and quarter to quarter, but we have had quite a few deals in our pipeline, which you see now coming to fruition in October and I would say we.
We have more in our pipeline as John alluded to that we'll be announcing.
Sure Hope.
Shortly so it's just a complicated environment and you've got a lot more eyes looking at transactions than you did in 2019 for example.
But again, if you have the right property in the right location tenants are making choices and theyre, making decisions and some are making longer term decisions to lock in that space.
Yeah, I'd add to that.
Since labor since Labor day, we've seen a big increase in tours throughout all of our markets and we've seen more deals green lighted that were sort of not on hold but just going through this added scrutiny that Rob was talking about.
So there has definitely been a shift to the positive since labor day.
We hope that continues to gain momentum.
But I think that that's sort of a place at which we could we can say we've seen a big difference.
Okay I appreciate the color.
And second question for me can you comment on any suddenly space, if any in your portfolio and speak more broadly.
And whether youre seeing any changes in the market whether people are leasing our taking back space.
Neil It's Rob again, yeah.
As far as we know now we don't have any new major blocks of sublease space in our buildings.
Often what happens, particularly with.
A sub tenant that comes along that is somebody we really want we will we can make a direct deal. We can do a must take at the end of the term and that sort of thing. So we do work with our tenants as well as good sub tenants when we find them. So.
So far I think the quality of our portfolio is bearing out that we're not seeing a high proportion of sublease space as I said earlier.
San Francisco Sublease space has remained fairly static in the $7 3 million square foot range I would I would say that about 40% of that $7 million is.
Class B and C space, that's going to be the last to lease if it does leased again or it will be converted to some other use at some point and then taking a step back across the markets.
I think a fair answer to your question is that sublease space is up in most markets, but again, it's got to be you really have to differentiate between contiguous floors of sublease space, which is more competitive to the product we have versus <unk>.
Spots of space in a building so.
Most markets have seen an uptick in sublease space, but youre also seeing pretty much.
Supply constraints going on also as far as new development goes.
Thank you for taking my questions.
Okay.
Thank you for your questions ma'am.
Our next final question comes from the line of one Derek Johnston from Deutsche Bank. Your line is now open.
Hi, everyone. Thank you.
You know John a little while back end and even briefly in your opening you know you noted the indeed tower I think the pricing was strong while the lease up is slightly behind schedule.
Another lease signed.
You provide an update versus plan and then more broadly.
What makes you confident about the demand you expect to see in the Austin market going forward.
Yes.
As Rob did comment that <unk> directly involved in all of those deals I would say this that we could increase the rents dramatically and the roster of people. We're dealing with are kind of like who's who quality.
And I think we're going to I think we're going to do extremely well in that asset but rob.
Can you add some color sure.
Sure just a little more color, what we really like about the Austin market and if you look at our lease up it. Indeed is that it's a diverse market. So we have a mix of tech and we have a <unk>.
Mix of professional services and that's borne out in our tenant roster.
And indeed in that that allows us to cast a wider net in terms of.
Who we're going after and indeed because of again the amenities the scale of the project.
Food and just the the life in the CBD is attracting both both sides of tech and professional services.
A lot of the companies I would say, particularly on the tech side that are expanding in Austin and continuing to expand our doing it because of the talent, they're getting and they're locating in locations where that talent wants to be and where the young engineers and people coming out of college wont be there.
Most generally want to be in a CBD, where you have an active nightlife and things to do after work. So I think that's a fair description of what gives us confidence about the market and then I can't disclose but I just know what our pipeline is.
And.
Negotiations and discussions we have going on and as John said in his comments.
We expect to be able to make some more announcements.
All right excellent. Thank you.
Okay. I know you mentioned this is a market to be patient right, but with 55% of development committed to life science.
That'll bring the exposure to just under a third of NOI. So I guess I wonder whats the capital investment and priority between you know at some point at least right. When we're not patient anymore between increasing life science exposure.
Andrew are pushing into new markets, how do you balance both of these.
Well I mean.
Evolving question, obviously, we spent five years Analysing Austin and looking for the right opportunity we would have been there earlier.
If we had found the quality that we wanted.
But.
We don't have another market that we are looking at and Earth. We look at a lot we always have.
Looking less right now.
In terms of product.
We have I think what it's got to be if not the one of the <unk>.
Best located positioned life science projects in the country in K O P.
That's a very proven market we have some incredible.
<unk> and <unk>.
Physical <unk>.
Physical characteristics of that property that people love.
Rob mentioned, we've got some real great interest in there and I think we're gonna be very successful in phase two.
So I looked downstream and I go we don't have a magic ratio with regard to what should be life science, how much should be.
In new markets, we're going to be very prudent as we have been in the fab in the past when we go into a market. It will be to establish a beachhead quickly end up with sufficient scale to have the right kind of people make sure that we have a product that differentiates itself. So that we're not just a commodity or.
Or is just another player where we really think over time, we can create a lot of value. So that's kind of a big picture.
And we're going to we're going to be flexible and and you mentioned patient I've been doing this for a long longer than most people in the REIT world today.
A lot longer.
Just because I'm old and I've been through a lot of cycles as a private company I've seen near death experiences I've had a lot of friends that have had experiences in terms of business and liquidity is all important to the thing I would emphasize about us.
As you know the balance sheet is in Fabulous shape liquidity is huge we've got plenty of capital and we have a very straightforward story, we don't we're not complicated everything is pretty simple.
And we're very straightforward with our client base and we worked with them a lot about where they want to go that's what drove us to Austin to begin with as a number of our tech companies, saying, Hey, you need to be there you guys can really differentiate we like youre kind of product and we think a lot of you do well there. So that's just big picture and we'll see.
Alright, great that's it for me.
Thank you for your question Sir.
Our next line of question comes from the line of one Nick <unk> from Scotiabank.
Your line is now open.
Thanks, Hi, everyone. First question is just on the lease expirations over the next year, hoping to get an update there on the traction you have on space I know last quarter, you mentioned you know.
One likely moved out in San Francisco, So just to get a kind of feel for.
What activities like on the expirations.
Yeah, Hi, <unk> this is Rob.
We have four explorations over 100000 feet.
The other three were in active discussions with and that's about all I can say, but we continue to have dialogue with the remaining three.
Okay. Thanks, and then in terms of.
The asset sales.
Using that guidance certainly dig into that a little bit.
Was that was there.
That a situation where you specifically brought assets to market and you got disappointing bids or is it just sort of informed by your color you are hearing from the investment broker world that.
On a real time basis asset values are down by some level because you know.
That costs are up and so you just chose to to avoid selling right now for that reason.
It's the latter.
We actively put 31 30 on the market.
I think we have more than a dozen bids or whatever we had a lot of dozens and dozens of people sign NDA and whatnot. So that was a fairly efficient process.
As far as the other buildings that we were thinking about we didn't take the market. We monitor the market we regularly dealing with the big brokerage companies. These deals of the world and so forth and we're also having conversation with some of the law logical buyers not specific about an asset, but we follow them with regard to.
The level of activity that they have we kind of understand what whose debt dependent.
Debt that they like to have in the percentages and so forth and in a volatile a confusing times like right now if youre going to sell an asset we have plenty assets that we can sell that fabulous prices that are long term leased to high quality tenants, but we really don't want to sell those assets and we just say to ourselves why.
Well into an inefficient market, where you have fewer bidders more.
More contingency or with regard to debt or otherwise that doesn't make any sense. We built the company around the premise of having a stall work.
Our balance sheet and that allows us the opportunity to be sellers when it makes sense, but not have to sell to fund things and that's what we've elected to do the markets will come back I mean, who knows what the new normal will be.
But there are a lot of things in the system right now that create uncertainty.
And we built the company to weather the storm.
And when it returns then we'll be back.
As sellers and some of the properties, we want to sell.
Okay. Thanks, Sean.
Thank you for your question Sir.
Our next line of question comes from the line of one Blaine Heck from Wells Fargo.
Your line is now open great. Thanks.
Thanks, just following up on new leasing demand again, we're hearing that large tenants are at least taking a step back recently so.
If you could just talk a little bit more about the profile of the tenants that have active requirements in your markets and maybe some context on the size of that requirement pipeline relative to kind of historical averages I think that'd be helpful.
Sure Hi, Blayne this is Rob again.
As John mentioned earlier since Labor day, we've seen a real uptick in activity tours, and actually dealmaking and Thats really led by Los Angeles, San Diego in Austin, San Francisco, and Seattle are a little more muted. Although again, you can't generalize and there is activity thats going on.
In those markets and as I said earlier life science.
Is steady.
With users continuing to seek out the highest quality space. They can some examples for you are.
Seattle, we have blue origin doing a 250000 foot expansion not in one of our buildings, but in the Seattle market. Alaska Airlines is growing by 120000 square feet in Seattle, I mentioned, the Google Google Cloud deal of 300000 feet in San Francisco.
And U S bank expanding in San Francisco.
For example in South San Francisco recently, Astellas Pharma signed 154000 square foot lease and MGM bio did.
We did a renewal for 120 and I think San Diego has just been amazing. It just has a continued expansion of thing.
I can't one of the companies, we do business with US just recently expanded by another 500000 feet down there.
I can't mention the name, but its the same company.
And you look at vacancy in both Delmarva and UTC roughly at 2% so.
I think the market dynamics or are just.
Set for these larger tenants and again in specific markets Youre seeing activity and when you have quality space Youll see activity is it slower than 2019, absolutely end are some tech companies sitting on the sidelines, absolutely, but you can't you can't generalize that all tech is on.
Sidelines and if you look at the examples I just went through its sort of a mix between.
As a bank, there's Google there's blue origin, there's science theirs.
Professional services so.
That's pretty much what we're seeing and I think the pipeline for those deals.
Is the hard thing to predict what we're seeing and what we feel is that this will improve.
But it'll be moderate.
I think John used the term sort of fits and starts as what we see.
Great. Thanks, Rob that's really helpful.
Second question, you guys have a relatively strong balance sheet compared to peers, which is certainly an advantage in this environment, but you do still have some more spend associated with your development pipeline and dispositions are likely a little tougher as John just talked about so I guess, how should we think about sources and uses and how leverage could trend as we look forward.
Hey, Blaine as Elliot I can take that.
Think the way to think about it and we touched on our liquidity a little bit during the prepared remarks, but between the cash we have in the $400 million.
Unsecured term loan that we raised we have about 500 million. We also have a 1 billion won on the line.
Compares to our remaining spend on the projects under construction of about call it $750 million or so so that gets us a lot of the way there and frankly the term loan that we did in the fourth quarter was $400 million the midpoint of our disposition guidance was $350 million. So we actually.
Hence our liquidity as well so we do think we have quite a bit of runway.
To fund the pipeline and as we get a little bit further down.
Can make a decision on how to fund the balance, but we think a lot of the near term question is has been resolved, but the term loan as far as leverage.
We're about six times now.
I think we've said in the past is.
Not that we intend on debt funding everything, but if we did that fund everything just to show a sensitivity that six times goes up to seven times and then once the pipeline is leased it gets back down to around six.
Great. Thank you guys.
Thank you for your question Sir.
Our next line of question comes from the line of one Michael Griffin with Citi.
Your line is now open.
Great. Thanks, maybe back on onto leasing Rob I'm curious have you noticed from prospective tenants you're talking to anything that you're sort of asking are looking for that they might not have been call. It six to 12 months ago.
Michael I think from a concession point of view, they're having the one thing thats happening with concessions and I wouldn't call. It a concession that's just a fact of life that with inflation tenant improvement costs have gone up but we're not seeing anything out of the ordinary or at least in the deals we were making in terms of the <unk>.
Free rent and other concessions with tenants are really looking for and what.
What we're doing with them is they're looking for partners, meaning we need to partner with them, we have to help them in creative ways make deals where.
They're having to navigate their management and their CFO . They know they have the head count that they know they need the space, but we're having to do creative deal structuring and that doesn't mean <unk>.
Tons of free rent and then the high coupon rents so things look good it means to <unk>.
Going out how to help them grow how to help them grow and sort of a phased way in certain cases large tenant.
And working with them to really help make a transaction that.
Works for both sides and that.
It is taking more time than it did in 2018 and 19, because things are just moving at a quicker pace.
Yes.
Thanks.
Maybe shifting back onto the political landscape and some of your markets you know while it seems like things have improved somewhat I think John alluded to.
To stop the train before we turn it north I mean, if you do end up seeing a deterioration in the environment from a regulatory perspective, and some of these markets where it makes sense to reallocate that at some point out of some of these markets and into Texas.
Texas, maybe continued expansion there more kind of business friendly kind of environments.
This is John I think you have a good question and I think it's sort of.
I don't mean to be a smart Alec I think it's sort of self evident with the answers to that would be.
The.
We have a lot I think everybody knows I'm kind of a hard ask when it comes to these people.
Having their policies right.
I make no bones about what I think they ought to do and if they're not doing the right thing then forming coalitions to try to change and.
So you start with that.
Said earlier, we're starting to see some real improvement, but we probably have 40 years of abuse in some of these cities that have just lived in la la land and now they're having to come to reality.
As the company I'm not going to make a call yet with regard to we should invest more in this area and less in another area.
But.
We're pretty logical people.
And you had a very logical question.
And that's about as specific as I can get because I'm not going to rock boats in various places but.
We talk.
I don't think you're going to have any doubt.
Michael about my directness.
Kind of known for it and.
I have a lot of calls with politicians every day.
Well, John I think we appreciate the no nonsense and the candor there thanks for the time.
Well you know I got to tell you that everybody else has already demonstrated its owns properties in these cities I'm seeing a lot more join in but more needs to join in this.
This is a battle.
Is that all over the country and we just we just got to make sure that the sensible minds prevail over time and as I say I am encourage it's it's transcending the political landscape now because people have had enough and I and I don't really need to save more I'll, probably get in trouble, but thank you.
Thank you for your question Sir.
Our next line of questions comes from the line of <unk>, Dave Rodgers with Baird. Your.
Your line is now open.
Yes, good morning out there Elliot I wanted to start with you I think other income was up a little bit.
Big deal this quarter, but wanted to ask.
Asked then further about kind of parking deferral retail ancillary income how much more you might have to go in terms of a recovery against what your physical occupancy might be and maybe how thats impacting that other income line.
Yes, the biggest driver in the quarter and frankly in the year to date is on the parking side.
If you look at our same store parking year to date, we're up about $4 $5 million versus last year. So.
So we've seen tangible improvement there, mainly driven too as a result of higher physical occupancy.
And Thats what drove both a portion of the same store increase as well as the guidance increase.
So we're pleased about that as far as where we go from here.
Tough to say, but we're not describing.
Millions of dollars of upside from where we are we think there is a little bit more room to grow that.
I appreciate that Thats helpful.
And indeed, it indeed tower.
Can you give us an update on any timeline for move in rent payments build out et cetera that might impact your expectations going forward.
Yes, so specifically around the revenue recognition for indeed, which is what I think you're referring to they are paying cash rent. We are not recognizing revenue yet and we expect to start recognizing revenue in sometime next year.
Yeah.
Any more clarity on kind of the timing around that obviously pretty big Lee.
And.
Was that first effort.
Alright, I appreciate that and then last one maybe this is for Rob on the leasing front, it's a little ways out 24, the Linkedin space, you, probably arent talking to them, yet, but I guess, maybe the question would be are they using that space do you expect them to stay pretty engaged in that space.
Fairly large size lease and so just wanted to kind of touch on that quickly.
Yes, David.
<unk>.
The Silicon Valley in general has been really active.
In the last year actually a year and a half.
Linked in loves that space they love the buildings.
<unk> been in them quite a while.
We've had some inquiries from others and I don't want to give any other color than that but.
It is a ways out, but I feel at least with what we're hearing and seeing in the market.
It's going to be attractive to.
More than just linked in I'll put it that way.
Alright, thank you.
Thank you for your question Sir.
Our next line of question comes from the line of Juan Vikram Malhotra when does it help you.
Line is now open.
Thanks, so much for the questions maybe just first one.
A picture you've talked a lot about.
Cycle tested.
Sure.
What the west position balance sheet et cetera, I'm, just wondering like assuming we see a turn.
And the fundamentals here.
From a capital deployment or brought these strategic perspective, what would you sort of repeat as you've done in prior cycles, and what sort of either products or.
Avenues of growth would you just completely stay away from given this market that's become one of have and have not.
Well I'll start with that this John Vikram how are you.
So.
We've talked a lot about over the years, the increasing obsolescence of the office stock.
And that has been accelerated by Covid and it just continues to accelerate or set another way.
Larger percentage of.
The additional stock as a less desirable or not desirable to an increasing group of users.
And.
So if I sort of think about when we came out of 'twenty eight 'twenty nine and sort of began to buy property. In 2010, we were very focused on properties.
May not have been in perfect shape, but they had the bonds. The physicality that we thought was important that we can modernize them they would be desirable to the modern tenant.
And then of course, we bought.
A number of building some that were recently completed when we did a lot of development.
The problem that.
That this transition to sort of obsolescence is made the universe of buildings or the percentage of buildings that one could can buy is sort of reduce with regard to what qualifies for us.
We're not going to buy and areas. We don't think have great trends go up they can go up and down as we are seeing but over time, we want to know that the location is going to go up and with regard to physicality. It's even we're even that much more fixated and I think one of the things that has really been interesting.
I think our average age of our portfolio was 10 or 11 years and it was probably 12 or 13 years, three or four years ago and why is that because we've sold off older stuff and we built so much new stuff.
And I think thats going to be.
The place where.
We are very.
Well well positioned because we understand development, we're known for development.
Our tenant base knows us to be very good developers.
And I think that's going to position us very well that doesn't mean, there won't be opportunities to buy great buildings, there may be but but there may be.
Too much competition, there I just don't know so we're going to be flexible.
What we're not going to do is buy a portfolio of buildings, where they're mostly old and have problems just because we want to enter a market or because it's for sale.
That's just not our style you've not seen us do that they only company. We bought in 25 years with a little one for $300 million and it was almost all new product and that was the Allen group in San Diego in 1997 that that's that's that was it.
So I think that we're just that much more resolved towards the kind of buildings that you got to have to really have a good run of over a long period of time and we're fixated on that.
Okay.
Helpful. I guess just on that.
What I meant I remember last quarter, you had talked about potentially.
Incremental opportunities either acquisitions or development in Austin, specifically can you just update us sort of where are you in that process what's emerging.
Well, we do have the site, we bought I think we closed on it and it was March or April or thereabouts, we called the stadium, which is which was all approved entitled and.
Permitted and we're ready to go on that when and if it makes sense and we do have a number of tenants that we're working with on that building. So we'll see what happens.
But I'm not going to get into specific sites that we're looking at we do like the domain area. There arent that many opportunities there we do like downtown there are a couple of good opportunities that we think are going to emerge.
And there are a few other areas that we're looking at but nothing that is actionable at this time.
I don't see us loading up on new development.
For the foreseeable future do we pick off one or two sites that might makes sense, possibly but we're in a far more than the risk off mode. Given this climate.
Then we are in a risk on mode, and we want to make sure that if we buy something.
It is a site that is whether if we have to weigh the cycle or whatever that it's still going to be good it's not going to go bad because we overpaid for it or whatever so that's big picture, but I can't get into specifics because I'm not going to give our competitors that knowledge.
Sure.
Fair enough and then just last one maybe for Andy yet So I guess, sorry, I joined the call late I may have missed this but I did see in a specific occupancy.
The updated guide or just guide in the press release and the supplement is this sort of a metric that you just didn't provide this quarter or is it something you don't intend to provide going forward.
Yeah, what we said during our prepared remarks is that similar to what we spoke about on the call last quarter, we expect to be at the low end of our range or about 91% on the office portfolio and resi will be around current levels, which is sort of in the mid 90% range.
But I.
I mean, I guess, that's a metric you one of the components of guidance. Eventually when you provide next year you will have an occupancy estimate.
That's our plan.
Okay. Thanks.
Thank you for your question Sir.
Our next question comes from the line of Juan Arkansas.
Yes.
Your line is now open.
Hi, yesterday announced early morning hours.
Hello, excuse me I beg your pardon this John Kilroy the announcer there we didnt hear at least I didn't have cut out on the name of that.
Person speaking asking the question could you repeat that please.
Oh, yes, sorry of course, it is tayo okusanya from credit Suisse.
Okay, great. Thank you.
Yes, good morning, everyone over that my question is around the asset sales.
Elliot the southern.
The.
Increase in the midpoint of guidance.
How much of it is just because of the lower asset sales outlook and then second of all if asset still continues to happen because the transaction market in the capital market.
Or what have you how does one kind of think about funding future development going forward.
So so the second half of the question is similar to our Blaine discussed are asked earlier. So just to reiterate there we have $500 million of liquidity and a 1 billion one of an untapped credit facility and call it about $750 or so remaining in our development pipeline for projects.
Currently underway.
If we chose to debt finance everything we're not saying we're going to do that we temporarily go from six to seven and then back down to <unk> as it gets leased so.
As far as the first part of your question. The <unk> is roughly split.
Equally between.
Dispose less term loan and so it's important to remember that while we cut our disposal guidance. We did do a term loan which was not in our guidance previously so that's about half of the delta. The other half of that Delta is a combination of our revenue recognition on two life science.
<unk> happened a month earlier than we thought and our parking was a few million dollars better than.
What we expected as well and so that drove both the same store parking drove the same store increase as well as a portion of the guidance increase.
Great. Thank you.
Yes.
Thank you for your question Sir.
And with that we haven't exhausted all questions I would now like to pass the conference over back to Bill Hutchinson for any closing remarks.
Great. Thank you for joining us today everybody. We appreciate your continued interest in <unk> have a great day.
And with that we will conclude today's Q3 2022 Kilroy Realty Corporation earnings Conference call. Thank you for your participation you may now disconnect your line.