Q4 2022 Kilroy Realty Corp Earnings Call

Yeah.

[music].

Good afternoon. Thank you for attending today's K R. C for Q 'twenty two earnings Conference call. My name is to me and I will be your moderator for today I'll.

All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. If you would like to ask a question. Please press star one on your telephone keypad. It is now my pleasure to pass the conference over to your host Little Hutchison Investor Relations and capital markets. Please proceed.

Thank you it's EMEA good.

Everyone and thank you for joining us on the call with me today are John Kilroy, Chairman and CEO , Tyler Rose President Justin Smart, our incoming president and current president of development and construction services, Rob brought our chief leasing officer, and senior adviser to the chairman and the Elliott Trencher.

<unk>, our CIO and CFO .

At the outset I need to say that some of the information we will be discussing during the 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 fourth quarter highlights and Elliott will discuss our financial results and provide you with our 2023 earnings guidance, then we will be happy to take your questions John .

Hey, Thanks, Bill and Hello, everybody, thanks for joining us today.

<unk> 2022 was a year of transition as evidenced by substantial increases in interest rates that impacted the economy on the capital markets.

As we entered 2023, there are signs of inflation cooling.

Slowing down the pace of interest rate hikes, and a resilient consumer.

Kilroy is focus on things, we can control our portfolio is top notch our balance sheet is strong and we are patiently waiting for opportunities to allocate capital the theme of <unk>.

Transition can also be seen in the office market as more companies are adjusting to a post pandemic life and many of our re establishing an office policies snap pardon me Disney Paramount Netflix first Republic, Salesforce, Starbucks and Twitter are amongst some of the most recent demand day to return to the office.

Days of week, this fall as Microsoft and Apple who have been leaders among such tech companies and returning to in person work in a recent conversation about remote work Tim Cook. The CEO of Apple stated you collaborate with one another because we believe that one plus one equals three.

We have all heard the recent announcements regarding corporate layoffs, while layoffs or not are never a good thing for office companies. We believe that they have and will continue to drive an increase in physical.

Office occupancy.

For many of the biggest technology companies head count exploded during the pandemic growing upwards of 50% while office footprint grew only 10%. According to J O L. The recent layoffs or only a small fraction of those hard during the last few years and seem to consist of many folks that never went to.

Into an office, nor had any office space dedicated to them.

<unk> reported a flight to quality trend continues to get more pronounced.

With trophy brands generally are holding and commodity red softening. According to J O L. Newer buildings generate a 60% premium in rent compared to commodity properties.

The <unk> premium has the potential to grow even larger with the vacancy rate for older space in markets like Seattle, and Silicon Valley nearly twice as high as the vacancy rate our newer buildings. In addition.

There is and will continue to be a scarcity factor that exists with quality space as new supply is slowing per J O L square footage under construction fell by seven 5% quarter over quarter, and 50% year over year, and we suspect that new construction in 2023 will fall even for.

Further.

Over multiple cycles Kilroy is strategically assembled a portfolio of premier markets. They have the talent base and infrastructure to continuously pursue innovation.

And the innovation is alive and well as an example.

San Francisco, and Seattle, There've been compelling breakthroughs in artificial intelligence and machine learning punctuated by the recently reported Microsoft cumulative investment of $14 billion into chat GBT, a local San Francisco company.

The Bay area remains the largest market for venture capital and represented over 30% of U S funding in 2022.

As this or other innovations translates into demand we believe our portfolio is well positioned to capitalize on this growing technology sector.

As we highlighted at our Investor event in November our portfolio is young well located amended ties and attractive to many of the best companies in the world a flight to quality dynamic has never been more pronounced and should drive outsized market share for kilroy in the years to come.

Turning to recent highlights we signed approximately 460000 square feet of leases since the end of the third quarter with an average term of approximately seven five years.

Highlights include a five year 65000 square foot lease with media Tech USA.

Semi conductor company in San Diego.

A five and a half year 50000 square foot lease with Reddit.

Technology company in San Francisco, a seven 535000 square foot renewal in San Francisco with NBC, Universal a Premier Broadcasting company and over 70000 square feet of leasing and indeed tower in Austin with page Sutherland, and H and TV Corporation.

Bringing the project to 71% leased.

This year, we anticipate some challenges in office leasing.

As you likely saw in our earnings release, our occupancy will be lower in large part due to our move out.

At our West <unk> property in the Denny re grade Submarket of Seattle, We plan for this possibility when we bought the building in 2021 and have begun implementing our plan to re tenant the project and roll up the rents to market.

We believe west eight is very well positioned in the market. It occupies nearly a full city block at a centralized location and it's surrounded by lots of amenities, making it appealing to many types of companies.

Turning to life Science, which now makes up over 15% of our NOI demand continues to be resilient, we have multiple prospects interested in kilroy Oyster Center phase II.

Oh.

Oyster point phase two which consists of three buildings totaling 875000 square feet upon delivery of this project.

Our project, our life Science, NOI will grow to more than 20% of the company total and over time, we expect this number to grow to over 30% as we deliver future life science projects currently in our pipeline.

Our retail and residential portfolio, which comprises approximately 5% of our NOI has been steady residential occupancy is approximately 94% with rents increasing meaningfully compared to last year and limited new supply expected to deliver in our submarkets.

The investment market remains spotty and we continue to be patient and disciplined we have yet to see meaningful opportunities of interest to that end in 2022, we pause the start of new speculative development, thereby reducing our near term future commitments by over a $1 billion.

However, there will be a time to play offense and having substantial liquidity will be key.

In summary, our strategy is based upon three key tenets best in class real estate disciplined capital allocation and a fortress balance sheet. This simple, but effective approach is cycle tested and proven to work in various environments.

On the people front in December we announced the title rose will be leaving at the end of this month I want to thank Todd for his 25 years of service and I know all of the Kilroy team joins me in wishing him the very best.

Justin Smart a nearly 30 year veteran at Kilroy, and currently president of development and construction will be assuming the role of president effective March one.

We know all of US I know all of US are excited to work with adjusted in his expanded role I would also like to acknowledge raw products expanded role of Chief leasing officer, and senior adviser to the chairman Rob has been with Kilroy for nine years, and it's not just an excellent dealmaker, but also a leader within the company and <unk>.

The adviser as Bill mentioned in his introduction Elliott Trencher has been serving as our interim CFO for nearly a year and named our full time CFO effective as of yesterday.

I'm delighted to have Elliot via our permanent CFO .

<unk> bench is deep and talented and cycle tested.

In conclusion, I want to congratulate Jeff and Rob and Elliot on their added responsibilities and I also want to thank the entire <unk> team for its hard work and dedication.

And for all of our listeners we at Kilroy.

Back in the office.

That completes my remarks, now I'll turn the call over to Elliot.

Thank you John .

<unk> was $1 17 per share in the fourth quarter similar to the third quarter on.

On a same store basis fourth quarter cash NOI was down roughly 1%.

There were several onetime items in the prior period from termination fees tenant catch up payments and real estate tax true ups, excluding nonrecurring items same store would have grown roughly two 5%.

For the full year cash same store NOI was up 7% ahead of our increased guidance of five five to six 5%.

At the end of the quarter, our stabilized portfolio was roughly 91, 5% occupied slightly ahead of our full year guidance the portfolio remained roughly 93% leased.

Towards the end of the quarter, we commence revenue recognition for indeed lease in Austin as a reminder, this lease began in the third quarter of 2021, and we have been receiving cash rent since the first quarter of 2022 for modeling purposes. It is important to note that the space put into service. This quarter also stopped capitalizing interest.

<unk>.

At the end of the quarter, we came to a resolution with Directv in El Segundo as part of the agreement we took back approximately 150000 square feet effective at the beginning of the year and Directv continues to lease approximately 530000 square feet. We.

We are pleased with this outcome as it more closely aligns with the terms of Directv as original contraction rate. However, there will be an impact to occupancy in <unk> in 2023.

During the quarter, we moved our roughly 45000 square foot building at our Menlo Park campus into redevelopment in order to add life science infrastructure. The location is appealing to life science tenants and we already have several life science companies in other buildings throughout that complex.

Looking at the balance sheet, we enhanced our liquidity during the quarter with our previously announced $400 million unsecured term loan post quarter end, we exercised the $100 million accordion at the same terms of adjusted Sofa, plus 95 basis points, increasing the total term loan facility to $500 million.

Net debt to fourth quarter annualized EBITDA remains about six times and we have no debt maturities until December of 2024, and limited interest rate exposure with all of our debt fixed or subject to caps.

Now, let's discuss our 2023 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 market tenant demand construction costs and new supply.

Going forward could have a meaningful impact on our results in ways not currently reflected in our analysis projected revenue recognition dates are subject to several factors that we can't control, including the timing of tenant occupancies.

With those caveats, our assumptions for 2023 are as follows.

As always no acquisitions are forecasted and we expect dispositions to be between zero and 200 million weighted toward the end of the year similar to 2022, we do not have an immediate need for capital. So we will pursue dispositions. If we believe they are beneficial to shareholders.

$95 14, Towne Centre drive and the balance are indeed tower are scheduled to come into service in the fourth quarter of 2023.

The balance of our life science redevelopment at 46 90 executive drive is scheduled to commence revenue recognition by the third quarter of 2023.

We anticipate drawing down the remaining $300 million from our term loan throughout the first three quarters of the year.

Development spend for the full year is expected to be $450 million to $550 million, mainly driven by phase two we.

We have capacity to fund our 2023 spend through cash on hand, and proceeds to be drawn from the term loan.

As a reminder, we have $1 $1 billion line of credit that remains fully available if needed.

We expect occupancy for the full year to average between 86 and a half an 88% a 400 basis point decline from the fourth quarter. Most of this decline can be attributed to the Amazon and Directv move outs, which occur in the first half of the year.

Same store cash NOI is expected to grow between zero and 2%. The decline from 2022 is driven by the lower portfolio occupancy from the move outs previously discussed.

G&A is estimated to range between $80 million to $90 million.

Putting this altogether 2023, <unk> guidance is projected to range between $4 40, and $4 60 per share with a midpoint of $4 50 per share to.

To provide further clarity annualizing, our fourth quarter number translates to $4 60 per share to get to our $4 50 midpoint, we subtract the net <unk> per share due to the lower 2023 occupancy which factors in our move out move ins and development contributions. We then subtract <unk> <unk> for various.

Other items, most notably higher interest expense from our term loan and the planned dispositions.

In terms of sequencing throughout the year. The second half of 2023 is expected to be lower than the first half due to the west deep move out at the beginning of the second quarter and the full drawdown of the term loan by the end of the third quarter.

That completes my remarks, now we will be happy to take your questions to me.

Absolutely we will now begin the question and answer session. If you would like to ask a question. Please press star followed by one on your telephone keypad. If for any reason at all you would like to move that question. Please press star followed by two again to ask a question. Please press star one as a reminder, if you are using it.

Speaker phone, please remember to pick up your handset before asking your question. We ask that you limit yourself to asking one question and one follow up question.

The first question comes from Nick <unk> with Scotiabank you May proceed.

Thanks, Hi, everyone. So maybe first question is on the <unk>.

The occupancy guidance I know Ali.

You did.

Provide some color around that on the move outs, but.

Can you maybe give us a feel for what is well youre thinking about what that factors in on our retention ratio and as we're thinking about new leasing volume this year maybe.

Maybe in perspective too.

Recent years.

Yes.

Yeah sure. So the retention is obviously going to be on the low end relative to our history. Historically, we are plus or minus in the 50% range, we're going to be quite a bit below that and it gets skewed because we have a.

A few of the large move outs that we referenced as far as new leasing we do expect some but as far as the translation to occupancy, it's not going to be that meaningful because when you just think about the sequencing of it all.

The timing for new leasing to happen in occupancy to actually take effect.

Going to be weighted towards the back half of the year.

Okay. Thanks, and then I guess second question is.

As we think about big Tech and the impact on the West coast or.

Hitting the leasing market right now not as much activity I guess, what do you think changes that because.

It does feel like there is in some ways a slow return to the office happening.

Creasing Lee out there yet it's not really translating into leasing activity. So any any thoughts on that would be helpful and congrats on the promotion to everyone as well.

You wanted to analytics Nick.

Yes sure. This is this is rob.

Let me make five points that I think address your comment we could get more specific if you want but the first one I'd make is as you've heard John say frequently in the past there is a time to act and a time to pause and tenants are basically in a pause mode right now and as a result that's.

Affected demand.

The second point I'd make is that demand today is primarily driven by lease expirations.

And also the flight to quality, which you've all read about.

Another point I'd make is that the great resignation that everyone was talking about after the pandemic kind of during the pandemic has now given way to great rebalancing layoffs or changing the dynamic between employer and employee with leverage moving in favor of the landlord and we are seeing I think tangible.

Evidence of that as national occupancy of office continues to increase.

Hybrid work is clearly the dominant model.

Any forward most employers today are now requiring three to four days back to the office and some are even mandating four days to the office. So we expect that trend to continue.

And the last point I'd make and this goes to some John's comments, there's haves and have nots in every market.

And with respect to obsolete office product, it's going to struggle in the leasing environment, whether it's tech or or fire category tenants. The bottom line is right now we're in an amenities arms race and as tenants seek the best space as they can in order to lower their employees back to work and also retain the employees they want to keep.

They are making investments in their suites themselves.

With different design elements and that sort of thing and landlords are also making investments in amenities and I think that last point really plays well into the kilroy hand, because of our young portfolio and the passion, we have had for over a decade of really highly of monetizing our buildings with.

Nicer lobbies hospitality type feel outdoor terraces and that sort of thing does.

Does that answer I hope that answers your question.

Yeah. That's helpful. Thanks, Rob.

Thank you. Our next question comes from Neil <unk> with Bank of America. You May proceed.

Hi.

Following up on the previous occupancy question.

Thank you mentioned you leasing would be more meaningful towards the back half of the year. So can you speak to.

The occupancy trend over the next few quarters are you expecting it to improve in the back half.

So the way to think about it is we're going to see occupancy dip in the first half of the year, because thats, where the majority of the large move outs happen and then we think it will stabilize towards the back half of the year.

And then the other piece to remember when thinking about the sequencing of occupancy is that R&D tower project starts coming into the numbers in the fourth quarter of 2023, as we mentioned so that is factored into our occupancy projection.

Also can you speak a bit more about what youre seeing in the financing environment and what further financing activity if any.

Standing term loan is reflected in your guidance just given your capital needs. This year.

So there is nothing else factored into our guidance.

On the financing side other than what we've laid out so the term loan and then the dispositions.

As far as the sources and uses go we don't need to.

Sell those assets in order to fulfill our funding plan, we can do all of that with the cash on hand, and the proceeds from our term loan.

And as far as the financing environment.

We have thought the most effective source of capital has been the term loan market, which is why we pursued that and to be able to get that silver plus 95, we think is pretty attractive.

Others may take a different approach and everyone's got to do what works best for them. It does seem like the markets are opening up the financing markets at least early this year have opened up a little bit more relative to last year, but we're pretty comfortable where we sit.

Thank you for taking my questions and congrats on the promotions.

Thank you. The next question comes from Blaine Heck with Wells Fargo. Your line is open.

Great. Thanks, Good morning out there John there is a slide on capital allocation and your typical investor presentation deck that goes through your net investment decisions during economic contractions and expansions and really shows that you guys had been countercyclical investing and contractions in selling into strength.

Like you said 2022 was a relatively light year for acquisitions dispositions and development starts, but as you look into 2023 and even into 2024. How do you think you guys are kind of positioned to take advantage of the weak market from a capital allocation perspective.

Okay.

Well, it's a good question and it's one that will play out over time that slide that you mentioned I think everybody on this call has seen it knows it's one of my favorites because.

It does show there are times when you want to buy aggressively times. When you won several times, we want to develop in times. When you want to just prepare for what's next we're prepared.

We're starting to see some assets that are coming to market are rumored to be coming to market I don't know whether they'll transact.

The other is still price exploration, there's so few data points Duane.

For quality assets.

That it's a little hard to know.

When it's going to open up I think the comment that.

<unk> just made that the financing markets are beginning to open up for quality deals and quality borrowers.

That will help stabilize things with the fed backing off.

Reducing the rate of increase.

That's a positive sign so at some point, we will get to a more stabilized market, where there are more buyers that are able to transact and probably more sellers that are willing to transact, but that's a ways off.

So we're prepared we're very active in knowing what's coming to market as people start thinking about it.

But we don't have any specific asset that we're looking at buying right now.

We're looking.

Okay. Great. That's helpful. Second question can you just talk about leasing progress at indeed tower you guys increased the lease rate there to 71%, but you are facing some additional competitive space being delivered are sub leased in the market in the near term.

Is there any sense of urgency to get leases done there before some of that new space is delivered.

Hi, Blayne this is Rob.

First of all as you said were 71% today, and indeed, and we have a robust pipeline.

I don't want to predict when things will sign, but we expect that percentage leased to increase and.

Yes, Austin in general is still a pretty active market more so than most of the country.

As companies continue to seek space in Austin, and the employees and talent that are there.

One comment I'd make on the.

Whether theyre not rumors that whether or not sublease space that comes on the market is that oftentimes, especially if it's larger space. It takes the sublease or quite a bit of time to really understand the metrics and how to make that sublease space viable.

It's not their primary business I guess is a simple way to say it whereas.

Owner developers like US do this every day, so I guess, what I'm, saying is I don't although there has been press about sublease space coming on the market.

See it is particularly eminent because.

A lot of those companies have other bigger fish to Fry.

That's helpful. Thanks, guys.

Thank you. The next question comes from Michael <unk> with Citi. You May proceed.

Great. Thanks, John I think you started off in your prepared remarks talking about a more concerted effort from business leaders to bring their employees back and I'm just curious in your conversations that youre, having how much could we really expect this utilization rate to increase is there a chance that it ever at some point gets back to that.

Pre COVID-19 utilization rate are we going to be stuck in this call. It low to mid 50% range any any additional color there would be great.

Yes.

I have I happened to be in San Diego today in San Diego at least in our properties. The utilization rate is back up in most cases to what it was pre pandemic.

We're seeing that in Austin as well we've seen.

Good comments back at our.

Our Investor day in November a preceding NAREIT.

<unk>.

In San Francisco alone is more than doubled since labor day and it has increased since then.

Similarly in Seattle.

We are seeing.

We're seeing more and more people back to work Rob can give you of what the numbers are there we've had some vacancy in Hollywood El Centro building.

I don't know 70, or so thousand feet don't hold me to that number but Rob can give you the exact.

And we have quite a bit of interest from a multitude of companies. So.

It's happening, it's not uniformly happening in each and every market, but it is happening.

<unk> and.

I'm optimistic that we're going to see some big improvements over the course of this year like anything nothing nothing ever happens.

Good stuff generally takes longer.

Stuff.

Generally.

As everybody thinks about more quickly it's more present in our mind, but.

I'm optimistic.

Based upon what we're seeing and we see it in our garage revenue we've talked about that prior calls.

Way up over.

Over the last couple of years.

So more of the scene, but and doesn't get to your point as you get back to pre pandemic.

The new occupancy is going to be a little bit different there is a lot more.

Open space and common area space, and so forth a lot less in the way of that.

The work tables and whatnot. So the actual occupancy in the same square footage of people, even when fully occupied is likely to be fewer people per square foot that makes any sense.

That's kind of the trends we're seeing.

Great that is.

Some helpful color and then maybe real quickly on life science, particularly to redevelopment announced at Menlo Park I guess why does this make sense now and then could you give us a sense of you've identified any other buildings that could be candidates for possible redevelopment like this.

Yes.

Thanks.

Yes, let me start with just the candidates.

We always look at our buildings whether.

Whether they should be converted whether they should be renovated whether they should be some homeaway reposition.

That's a normal course of our business.

In.

2021, we announced three.

Renovations.

Two our conversions and life science down San Diego that were all leased.

Mineral Park is a building is a complex where we have a lot of life science. So we know what the demand is there.

And Rob if you want to give a little bit more detail go right ahead.

Sure.

The way I would look at it as that.

Bye Bye doing this life science conversion, where effectively doubling the number of prospects that we can engage with theirs.

A number of office tenants that are in the market, but there is also pretty much an equal number of life science tenants in and around Menlo Park Redwood shores and.

In Redwood city, and so we looked at the overall market.

Demand from both office and life Science, and this project given its design and being multiple buildings we can.

Answer to both needs and we already have life science.

In the project. So it just made a lot of sense.

Great. That's it for me thanks for the time.

Thank you. The following question comes from Steve Farquhar with Evercore you May proceed.

Yeah. Thanks Elliot I appreciate all the detail you went through on the occupancy I guess I'm, just a little bit confused.

In the sense that youre, saying, indeed towers paying rent.

Yet the building in the occupancy stats don't kind of fully flow into your numbers until the end of the year.

Hearing you correctly or am I missing something.

No.

Hearing us correctly, I think typically and we've done this in other instances, most notably with <unk> III Dexter right. There is a difference between when revenue commences on a portion of the building and when that building has qualified for going into service and so in the case of indeed, indeed tower, but we are starting to get.

Rent from indeed that starts the 12 month clock by which we can complete the lease up and after the 12 month clock. It has fully finished being a development project and it goes into service for occupancy calculation. So that's something that we've done.

And many other projects.

Okay. So if I take kind of the move outs that you described.

Directv and <unk>.

Some other move outs in January callosity.

Amazon move out that's coming in April if I do my math right.

Kind of gets you to around the high end of your occupancy about 88% and youre sort of talking about a low end to being 86 and a half is that.

Year to anything specific or is that just sort of cautiousness or just uncertainty in the marketplace and giving yourself some wiggle room on retention and slow new leasing.

I think that there are a lot of puts and takes when we think about how to get to a number and we tried to highlight the major factors I think in <unk>.

Two quarters ago, we referenced that the Pac 12 move out.

Which happens in 2023 as well.

So there are obviously a lot of moving pieces there, but we got a rain, we think we're pretty comfortable between $86 588.

Okay, and then John just on.

The K L. P leasing I mean, it sounds like the last couple of quarters, you felt like there's been good demand, but you haven't been able to kind of get anybody to the finish line I'm just wondering.

The rally in the biotech stocks and.

Pickup in pharma.

As sort of accelerated those discussions or you feel like youre getting closer with certain tenants or what do you think it takes to get things over the finish line here is it stock prices or just getting the building closer to finish.

Well, Rob can give you specifics on the market.

What we've got going there, but I always go back to this Steve that.

All of these companies have a lot of new products. They are dealing with they've got to figure out where they are.

Where their energy is going to be spent and whether its life science or others.

Everybody's trying to figure out what the footprint is going to be and with that Rob If you don't mind going through.

Drilling down to the disease.

Responses due soon.

I think a little more into what John was saying Steve is that life sciences traditionally been and continues to be a little more.

Thought I guess slower in their uptake of space given a lot of the factors John said, whether it's pending patents, whether it's other new innovations that we're working on and they just are slower.

Tenant in terms of they're more like a fire category tenants honestly in terms of their uptake of space and you hit on the second part of your question was valid which is that the buildings right now have steel up were topped out.

There are more visible and we've noticed an increase in activity actually we still have large users looking but we have noticed a marked increase in single floor or double floor users. So as the buildings continue to progress, we expect that visibility to translate into more tours and demand. So.

We're kind of still in the early stages, but now that we have steel up.

Things are moving forward and I guess, the last thing I'd say is.

No industry is immune from the uncertainty in the economy. We're in so as I said earlier when I was answering Nick's question.

Tenants are moving slower due to uncertainty.

Okay.

Got it thanks.

Thank you.

Our next question comes from Tom Catherwood with BTG.

You May proceed.

Thanks, and good morning, everybody Elliott, sorry to keep drilling on occupancy here, but just something still not lining up for me I understand the move outs very helpful. But when we look at the difference between leased and occupancy right now it implies.

Maybe a little over 200000 square feet of leases that havent yet commenced.

Expectations that those take longer to come online Thats later in the year, which drags down the average occupancy or is it seems like that would push you up even above the top end of the range that you have now how are you factoring that into guidance.

Mainly a waiting thing I think that your <unk>.

The missing piece there the move outs that we talked about our January April kind of the first half of the year and the bulk of the move in or in the back half of the year. So you are right that square footage is coming in.

But in terms of the waiting for the total year. It doesn't have a full year impact, whereas the move outs have much more closer to a full year impact.

Got it got it thanks, and then Rob just wanted to loop back on your commentary about.

Sublease space I think you were referring primarily to.

To Austin, there, but in general we've seen an uptick across your markets.

In the fourth quarter it looks like some of it at least in your portfolio has been resolved recently.

But what are your thoughts on that competitive set in your market. How is it impacting kind of lease negotiations and do you expect any near term change on that.

Sure.

As we've said before.

There is different.

Different segments of sublease space or.

Increments of it some of it's just obsolete space is going to be very difficult to move I think what you're seeing particularly in San Francisco, but other markets also is that some sublease space is converting to direct space and again, you can't generalize about that some of it will be very good space class, a and some of it will be.

Not so good and so you have that kind of convergence there a sublease becoming direct.

Sublease space is always a factor in a negotiation or in a market, but again, if you're really looking at flight to quality sublease space that is available using San Francisco as an example.

More than half of that is space that we wouldnt consider.

Competitive to premium product.

Assets like we have another statistic kind of going off what John said in his remarks, 70% of the deals done in San Francisco in the fourth quarter of 'twenty two.

We're going to space that was basically 2010 or newer space.

And so whether that sublease or whether that's direct.

The rates are going to be.

Higher than they would be and just.

Kind of tier two space or a class b plus.

And Thats Universal I mean, thats going to be whether youre talking Manhattan or wherever that is.

Effect.

Got it that's it for me thanks, everyone.

Yes.

Thank you. The next question comes from Dave Rodgers with Baird. Your line is open.

Yeah, Hey, everyone Tyler congratulations on the retirement, it's been good to work with you all these years and congrats to everybody else.

John maybe on investments Blaine asked the question earlier, but with respect.

Spect to development versus acquisition I am kind of curious on your thoughts if we're talking only the top 10 or 15% of assets now in any particular market are super attractive from a tenant perspective, I mean, do you really anticipate to see a number of opportunities that come as distressed opportunities in that 10% to 15% subset.

Or are you really interested in those opportunities knowing that you are facing kind of a next generation rollout or would you rather just build I guess I'm curious about how much distress really is attractive for you and the reef overall versus wooing attendant away and deployment of a new building.

Yes, that's a really perceptive question.

And.

I don't recall, whether you were at our Investor day, but.

Comment on that then that the.

Target list of buildings that meet our locational and our.

Sort of.

The quality not only quality in terms of finishes and all that sort of stuff, but in full place et cetera.

That that are attractive would be attractive to us than have to be trading at a price that makes sense to us. So I think it's going to be harder to find.

Quality assets across our markets than it has been but having said that.

We're bringing innovative people if we find something that's in the right market that.

That can be made to be the kind of buildings that we know people want we have the skill set to accomplish that and there's a lot. There's been a lot of times of our buildings and so forth.

In periods, where we were less optimistic and we ended up that our actions dictated. So you just have to be out there. It's like efficiently and you have to be out there fishing and throw a lot of them back.

Maybe a bad analogy because I'm not even a fisherman.

But on the development side.

Youre quite preservative again development youre not going to do it unless you're pretty confident you're going to get the kind of return that makes sense you got best in class product with long.

Life ahead of it and so forth.

And we of course are pretty good developers and have a good development pipeline. So we just we're going to keep loose.

We when we started buying in San Francisco in 2010, we caught the market by surprise, we bought aggressively good product.

The physicality, we wanted we positioned ourselves for development, we moved into that quickly.

Every cycle has a little bit different.

Execution.

But you got to be nimble and we are and you've got to have a great team and we do in the context of development sites. They are pretty difficult to find in our markets that we control the number of them that are entitled So.

Tom.

And then maybe just a follow up you've talked at NAREIT, John about potentially looking at other markets does this environment to these opportunities, making more or less interested in adding another dot on the map or does that not really matter.

We're not looking to use your terminology, we're not in serious pursuit of any other dot on the map at this point, we do have a strategy for the greater Austin area.

And we're excited about that we're not executing anymore. We don't have any land sites or anything that we're looking at buying at this point.

I think that may be an area, where we find some opportunity in due course, we again, we have nothing that we're looking at but.

There are some folks that have approached us where they thought they were going to.

I'll be able to entitle things and then move it into a sale category.

But obviously theres a lot less appetite for risk the interest rate.

And the economy and so forth has given a lot of people. So there may be some some opportunities.

Some point in that area.

We're not looking at seriously for any.

Near term execution.

Other markets.

Thanks, John .

Okay.

Thank you. Our next question comes from George <unk> with Mizuho. Please proceed.

Hi, Thank you for taking my question I know you just mentioned little bit on <unk>, but I'm just curious what would make the team's slow or accelerating investments into Austin and has your view of the Austin market changing anyway.

I didn't quite understand the first part of your question George Forgive me.

Yes, I was just curious what would make the deemed slow or accelerating investments into <unk> and has your view of the Austin market change in any way.

Yes, our view has not changed with regard to the long term our view in the short term is.

As always the case when you're in a downturn there are generally will be opportunities, we're not pursuing anything specifically at this point.

Also in downturns, you wanted to be more cautious with regard to what you do.

But theres nothing thats changed the long term.

And in terms of slowing down I mean, you saw last year.

We bought hardly anything and we bought one site.

And.

We haven't we're not in negotiations right now to buy anything building or land.

And.

<unk>.

Sort of a time to be a little bit more cautious.

It's tough for us to be compelling for us.

I'm thinking has to be terrific at this point.

Great. That's helpful and just my second question I guess why not even monitoring as you think about the timing of capital deployment.

Yes.

Yes.

Yeah, Yeah, I can handle that.

We're kind of looking at all the things we would typically look at which is.

What are the market conditions out there what are we seeing on the leasing side, what are our tenants, telling us and then where values and when we see an alignment of leasing conditions that we think are going to be strong and values that are attractive.

Then that is something that would cause us to.

Increase the amount of capital that we deploy and vice versa. So.

We're just going to be at a different point in the cycle, depending on the year, but the process is pretty similar.

Great. That's all for me. Thank you I appreciate I appreciate the color.

Thank you. Our next question comes from Tayo Okusanya with Credit Suisse. Please proceed.

Hi, Yes, good morning out there again, Thailand, all of the best Elliott and the rest of the crew congratulations.

A little bit of focus on Elliott I think your comment about the earnings cadence. This year was that first half was going to be stronger than the second half so you're going to see a gradual slowdown I'm. Just wondering if we should kind of think about second half really as the bottom of the inflection point earnings wise.

As we start to look kind of beyond 2023, or if theres still especially when again you have <unk> coming on board you have to.

Phase II coming on board or should we kind of has to be thinking about.

Things, a little bit differently about earnings cadence even beyond.

Back half of 'twenty three.

Hey, Tayo.

We obviously are talking about 2023 guidance, we don't have 2024 guidance, yet, which is I think sort of where you are going as you think about some of the drivers in those out years Youre right. We will have full years from indeed in 2024, we will have a full year from that.

The two San Diego projects that are coming in in 2023.

And then just the Big question is what is what happens to the core portfolio. In 2024. So I think those are some of the major drivers and as we kind of progress throughout the year, we'll have better clarity on how those are going to play out in 2024.

Got you. Thank you.

Thank you.

Following question comes from Dillon Brzezinski with Green Street, you May proceed.

Hey, guys. Thanks for taking the question I guess just curious how are you guys thinking about the portfolio in terms of market concentration from a longer term perspective.

Certain markets, where you see yourself expanding their contracts and more so than others.

Yes. This is John .

That's a good question so when we ask ourselves quite a bit.

Yes.

Three or four different products and.

With regard to life Science San Diego.

And San Francisco are two pretty key areas. We think will continue to grow in those markets. We don't have any plans at this point to be in any other markets with life science.

With regard to <unk>.

Office concentrations.

Over time and it takes a long long time.

We're likely to be more active on the buy or.

Bye.

The acquisition side.

In the Austin and beyond just because of the balance issue but.

Things never work out exactly as you might plan on the development side.

Some pretty big development opportunities within the markets we're in today.

Really in all four areas of five areas and those will play out over time will be add significant development again over time as it's appropriate.

The greater Austin market probably.

Yes.

It's a very intellectual question and I appreciate you asking it I wish I could be a little bit more intellectual and answering it because at the end of the day, we don't have some up some internal formula about half this much here that much there to me.

You got to keep your eye on a lot of different factors and the factor Thats first and foremost in my mind that should be in everybody's mind is where is.

Innovation growing.

And.

And what kind of what's the supply of variant barrier to entry.

Equation.

And the comments I made my earlier comments about artificial intelligence.

Think this is going to be the biggest thing.

In <unk>.

And check.

That's been I guess invented if you will.

In decades.

It has massive massive legs and we're right in.

Main and main on that.

I appreciate that thank you and then I guess, just one follow up it looked like riot games expanded their square footage in it as a portfolio and then there was a footnote added.

Some square footage.

Hiring in sometime this year I guess can you kind of update us on your renewal talks there or is it.

So I noticed kind of indicating that theyre likely to move out of that space.

Hi, This is Rob.

I really don't want to.

Yeah, I really don't want to comment on active discussions we're having.

Especially in an environment like this I just all I can say is we're we're engaged and more to come.

Okay appreciate that thanks, guys.

Thank you.

Next question comes from Peter Abramowitz with Jefferies. Your line is open.

Yes. Thank you I just want to.

As you have a sales force of the top 10, and I know your leases are mostly.

Average nine or 10 year term remaining but.

But just curious have you had any conversations with them.

Just given the restructuring plans announced in the possible.

Office footprint reduction as to kind of what their plans are.

It relates to any of the buildings you have them in.

John I can yes.

In markets like this we really stay in touch with all of our clients even more so now but as a regular practice do but now we doubled down on it so.

We talked a salesforce quite a bit.

They successfully sublet space and 350 mission, which is our building but.

We're not having any discussions with them.

In any way about any changes beyond that and Theyre happy in the building.

Some of the space they have on the market is building their own.

And much older product so.

Hard to say I think it's notable that Salesforce, which had there.

Many of our policy is one of the companies.

Come back pretty quickly too.

Three to four days of work in the office.

For most employees so.

I think I think a lot will change in the next year or so in terms of just again, how many people are back to work how companies are using space and.

Demand will eventually play out I mean, we're in a cycle right in certain cycles early 2019, where everything's great and other cycles, we've worked through I mean.

One of the best things about our management team and the basic team we have in every region is that.

Our cycle tested and have been through these before whether its dot com or.

The financial crisis or whatever so.

The best way I can answer it.

Got it thanks, that's all for me.

Thank you. Our following question comes from Jamie Feldman with Wells Fargo. Your line is open.

Great. Thank you and congratulations everyone on the promotions and good luck Tyler with your next chapter.

See you in REIT land that's for sure.

I guess, just kind of big picture here. So we've certainly seen layoff announcements in your markets.

Can you just give more color about what's happening on the ground. I know you had mentioned that jobs are still above the levels of the lack of kind of pre pandemic our last three years.

Just kind of what what is really shifting that's noticeable and maybe if you fast forward a year from now.

How do you think your markets look versus today and does that change at all the type of assets you'd want to own or maybe the size of the location or submarkets you want to be in.

Well, it's a that's a compound question Jamie good job, we'll take it one at a time, Rob you want to take the first part.

Sure Jamie good to hear your voice, it's been a while.

So with respect to layoffs and what we're seeing in our markets. There is the headlines that all of the.

Media publishes but then to your point you get into the specifics and when you look at some of the Big Tech lay off a lot of them have been in what I would call the softer side of the business, where they had multitude of event planners or.

Very robust HR departments, because they were ultimately doubling their workforce over a short period of time.

So that's where we're seeing a lot of the focus and thats not unusual right, it's usually things like whether it's marketing events.

Some HR and basically sort of headquarters type functions.

What we are seeing and this is happening in the bay area quite a bit as there's a statistic out there that the typical tech worker thats been laid off whether it's from whatever company.

Think of basically has a new job in three to four months and that's that's from ZIP recruiter.

No.

I think it's a very dynamic situation in terms of layoffs, and where things go and the one thing that we've always loved about the west coast is the talent pool, that's here and the universities that keep graduating this.

Hi Tech talent.

Everybody wants so although we're in a lull now we will get through this in the cycle will turn.

I'd make the point Jamie.

Just sort of broadly speaking.

This flight to quality is massive and we think we're really well positioned and as Rob pointed out.

Earlier remarks.

A lot of what we are saying, although not entirely because it was quite a bit of.

Recently, we've done where there are new deals and where companies are expanding the fact is that the predominant thing we see right now is the flight to quality. So people are moving out of a building an older building into a newer building be it ours or somebody else's.

So thats not showing positive growth in most markets.

But when that coli.

With growth Youre going to have a flight to quality and growth and quality and then you look at the delivery of quality space its way off and I think theres going to be.

A lot less under construction this year and possibly next.

That dynamics can change for the premium space very very quickly.

And.

So I think that's a dynamic to be aware of and I think it will be an early recipient of that.

In terms of I think part of your question was.

What we might see in a year and how does that translate into our planning was that.

Couple of parts of your question.

Yes, I guess you guys are just you're obviously much closer to it than we are.

Yeah based on what you've seen just wanted to make sure I think layoffs and companies how.

Do you think it feels the FBI.

Yeah, I don't know I mean, there's so many factors you've heard me speak a lot.

We've talked a lot over the years that we can control the things that we can control we do a pretty good job on the things that we can't control the macro factors.

We have to adapt to react to and we always have.

I've talked about how we built the balance sheet and the team to be able.

Two charter withstand downturns and take advantage of the upturns.

<unk>.

As far as we adapted our product quality and so forth to that model as well.

I can't.

One of the things that.

I don't know that Im ultra optimistic.

But I'm optimistic about what I'm beginning to see and.

In here.

Interest rate.

Increase really slowing down some point, that's going to get stabilized.

When it does I think the debt market has stabilized and that not only affects real estate with regard to transactions dispositions acquisitions development et cetera.

But I think also just broad more broadly.

Amit clarity.

<unk> will give companies and decision makers and other industries, who are our tenants.

Up more.

Our ability to see the future and see the growth model, but theres a lot of forces around the world right now that everybody is getting pounded turn on the news and see and hear a lot of good things sometimes it's.

It's.

Sort of overblown.

It's just going to take a little bit of a dynamic change.

People are getting back.

Decision makers.

Being able to see a more stable environment and so I don't know when that happens I think it's starting to happen from what I.

When I talked with various tenants of ours at various friends that run different kinds of companies and so forth.

They've been in a reactive mode of.

How do you deal with what could be a more prolonged downturn wherever they've been in that mode and that obviously rattles in real estate.

In real estate decisions and slowdown in decisions, even when people want to move forward.

And generally.

As things improve.

It takes a little while to get going again.

I think I'm hearing more people feel like hey, maybe the maybe the downturn isn't going to be as bad as we thought but again.

If I knew the answer to your questions I'd be.

I'd be a wealthy person.

I'd be picking stocks, I guess I'd be Warren Buffett or junior Warren Buffett.

Not that.

Okay, that's a fair answer.

Our team came across that tweet today from the CEO of chat GPT about San Francisco.

Talking about the tug of war between negligence in San Francisco government and the power of being the center of the AI Revolution.

Francisco remains super relevant for the next decade.

When we saw you at NAREIT Blaine and I was just discussing.

There was some optimism about the direction of San Francisco on the political side.

So is there anything that you can refer to that gives you more optimism here makes you feel better about what's to come in.

And have has what's.

What's happened on the lab side motivated the government at all to make even more aggressive changes to the positive.

I think there's a number of things some of them are government some of them are.

Individual companies and so forth.

People have been frustrated rightfully so people of all walks of life all political spectrum companies.

Et cetera with the.

It's basically negligence.

To allow things to got deteriorated to the point they did and of course I recall the district attorney in and District Attorney Jenkins, who has been elected.

Recently, two a full term.

The scoreboard things that everybody is aware of it happen before that.

A bunch of organizations.

That have become an incubator for next generations of leaders.

And.

Or more.

Responsible than some of the folks that were making decisions before.

There is some new board and supervisory people.

I think there is a trend that's positive but it took a long time.

To end up with some of the things that we've ended up with and it's going to take a long time to change it around what I think is really positive is now with companies beginning to really come back to work and Rob mentioned now.

Salesforce has had.

Had a work from anywhere.

Now, let's get back to the office is just one example of a company that has changed.

As more and more people come back.

There are more and more people that are more and more companies that are putting pressure on the city.

To make better decisions. So I think that's a really positive thing. We're obviously active in all of that.

And so I'm optimistic.

But I would say I am cautiously optimistic because these things do take time.

And we have a real issue that is a health crisis with people on the street that requires.

Full consideration of how we get them off the street and more and more people are dealing with that more and more organizations.

And.

There is a group down here in San Diego, where they don't have anywhere near the level of homelessness that they had in San Francisco, because it's not concentrated what area, but a group that's working with the federal government to make federal land available to create a.

Responsible healthy environment for.

Folks and get them off the streets. So you didn't hear any talk like that.

Six months or 12 months ago at least I didn't so I think there are a lot of positive forces. The fact is California is great schools.

It's been the cradle of innovations for the Western World if not the entire world, there's more innovation coming that's growing.

Hi.

<unk>.

Scott.

We're starting to.

Okay.

Much more seriously.

And become much more active as individuals and companies and putting pressure on government. There is a lot of before that hey, everything is going okay, Yes, I don't like this.

Like any kind of decay.

You need to remove it.

Because it's going to grow and for a long time that was allowed to grow unchecked.

Hope those comments help but.

As I say cautiously optimistic.

I think better much better days are ahead.

Alright, great well, we appreciate your thoughts and good luck. Thank you.

Thank you.

Yes.

Thank you. The next question comes from Derek Johnson with Deutsche Bank. Please proceed.

Hi, everyone Hi, John Thank you.

The opening remarks, you talked about 'twenty, two being a transition a transition year as we looked at the setup to 'twenty. Three we felt this would also be a continuation of that transition.

But I thought it was interesting that you talked about a potential shift to offense. So what would you need to see in order to be able to shift to offense.

And what would that shift to offense, John mean for Kilroy, what direction do you think you would if you had it your way what would you pursue.

Well.

Right.

Pretty specific in my opening comments that that we anticipated another challenging year for office.

And I think Thats I stand by that I think it will be challenging it will be different in each market. It always is.

To be to be offensive.

Hi.

It would require for us some obviously some confidence if we're buying buildings.

Obviously got to be the right.

Buildings from a.

The kinds of buildings and the like.

Locations, we like and so forth then they'd have to be buildings, we can make money on so theres going to be there's going to be need to be.

A real.

Value, creating proposition for us to be active in acquisitions.

Obviously, we worked really hard and.

And we will continue to work very hard on making sure that we have plenty of liquidity.

There's always that.

Consider what our needs are and we don't want to get to a point, where we're low on the liquidity side of things so that has to feel good.

And then with regard to development.

I don't see us starting any spec development until there's a real need but.

Point I made to some other person's questions earlier about.

The lack of new construction the flight to quality at some point.

There will be a pretty obvious inflection point of.

Of a shortage that's looming.

Based upon what is forecasted demand so.

When I say I'm optimistic I'm optimistic it's going to happen Im optimistic about some of the things that I'm hearing some of the changes I've seen like a locomotive if its going from right to left it's got to stop before it goes from left to right.

I haven't seen that.

Phenomenon happened, yet what I'm seeing now is it getting less worse in some cases and that generally is a foreshadow to getting better, but but no pretense about having some.

Magic insight obviously.

That's going to occur.

Yes, no. Thank you timing timing is always certainly tough.

And what's your hand up there that's it for me John Thanks, a lot guys and congrats on the promotion.

Thanks.

Thank you and our final question is a question from Tayo Okusanya with credit Suisse. Please proceed.

Hi, Yes, just a very quick follow up 23 guidance are there any term fees in that number.

There is a little bit in the first quarter.

A few million Bucks in the first quarter.

Okay, and nothing else for the rest of the year.

Not at this point.

Okay. Thank you.

Yeah.

Thank you there are no further questions at this time I will now pass it back to Bill Hutchison for closing remarks.

Great well, thank you to me.

Thank you everyone for joining us today, we appreciate your continued interest in kilowatts.

Have a great day.

Yes.

This concludes the conference call. Thank you for your participation you may now disconnect your line.