Q2 2023 Kilroy Realty Corporation Earnings Call
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Yeah.
Hello, and welcome to the Kilroy Realty Corporation Q1 earnings Conference call.
Name is Alex and I'll be coordinating the call today.
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SVP of Investor Relations and capital markets are closed.
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Good morning, everyone. Thank you for joining us on the call with me today are John Kilroy, Chairman and CEO , Justin Smart, our President Rob brought Chief leasing officer, and senior adviser to the chairman and Elliott Trencher, our CIO and CFO at the outset I need to say that some of the information.
We will be discussing during this call is forward looking in nature.
Please refer to our supplemental package for a statement regarding the forward looking information on this call and in the supplemental.
Our 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 our form 8-K with the SEC and both are also available on our website.
John will start the call with our second quarter highlights Justin will review our in process. This process development pipeline and Elliott will discuss our financial results and provide you with our updated guidance then we will be happy to take your questions John .
Thank you Bill and Hello, everybody, thanks for joining us today.
As you saw on the press release, we issued last night, we recently closed on a $375 million secured financing on a portion of our one Paseo campus in the del Mar Submarket of San Diego.
The loan has an 11 year term and bears interest at five 9% on a fixed rate interest only basis.
We ran a competitive process it had a multitude of premier life insurance companies interested in providing the debt and we're fortunate to execute with a terrific partner in New York life that originated the entire alone.
One can say who is a world class mixed use campus. It spans across 36 acres as a reminder, the portion of one paseo debt refinances on 23 acres delivered in phases from 2019 to 2021 and is comprised of roughly 290000 square feet of office 95000 square feet.
With high end retail and over 600 luxury apartments.
On prior calls we've talked about the flight to quality dynamic occurring in the leasing market.
It is increasingly evident that the theme is also prevalent across the capital markets and a play to our favor and I want to say Oh transaction.
Excuse me lenders are still open for business on competitive terms for the highest quality properties and want to say Oh, it's certainly fits that description.
Occupancy is approximately 95% across the entire project with market, leading rents on the office residential and retail.
Consistent with our strategy Kilroy places a premium on optionality, while our existing liquidity position is strong we decided that being opportunistic in raising incremental capital today would result in better risk adjusted execution as we pre fund future needs and position for future opportunities.
The additional liquidity, we secured at attractive rate bolsters, our ability to play defense and a soft softer environment, while affording us the option to go on offense when market conditions improve.
Elliot will go through what this means for our sources and uses in his remarks.
Shifting to the economy, we are increasingly seeing more green shoots inflations cooling in the labor market appears to be healthy near term recession probabilities have been reduced and the idea of a soft landing is becoming more plausible.
Strategic deal flow is accelerating and while not at the pricing we like it is encouraging to see more transactions getting done.
On the leasing front, while deals are taking longer there is increased tour activity amongst tenants large cap tech companies, which have been laying off employees are showing signs of stabilizing as stock prices have meaningfully outperformed it job postings are starting to slowly increase lastly, innovation is alive and well in <unk>.
<unk> to flourish in markets like ours, with the right talent base and infrastructure.
While markets change based on where we are in the cycle. The three pillars of our strategy of state constant high quality properties strategic capital allocation and a fortress balance sheet. This simple approach allows us to play offense in the good times in defense in the challenging times, we believe there will be opportunities in the future.
And we are taking steps to ensure that we are ready when the time comes our goal remains the same owned and operate the highest quality port portfolio of mixed used office and life science properties clustered and innovative supply constrained markets.
Turning to office fundamentals in person work continues to pick up momentum as major.
Employers require other people to return to office recent announcements from meta Google and ATT amongst many others demonstrate that management teams see the benefit the office has on productivity collaboration and culture building.
The data is backing up the narrative as the percent of job postings that are remote has declined 900 basis points since 2022.
As we've been saying the key is getting employees back to the office with more commuters.
In foot traffic or cities are starting to come back to life.
<unk> is a Prime example is Amazon employees have been crowding the streets in South Lake Union in the Denny re grade since may.
Looking at our recent study Amazon Commission for these two Submarkets, which is where most of our Seattle properties are located foot traffic is up 82% restaurant activity is up 86% hotel demand from Amazon alone was 26500 room nights in May 2023, 130 <unk>.
<unk> increase over the prior two years this activity not only brings vibrancy to the neighborhood. We're also enhances safety.
Physical occupancy and Kilroy portfolio was up 800 basis points from the beginning of the year and over 500 basis points from just last quarter. Our parking income is also a beneficiary with NOI up approximately 20% compared to the first half of last year.
Yes.
Turning to second quarter results, we signed a total of 285000 square feet of leases similar to last quarter with cash leasing spreads up roughly two 5%.
Activity was robust in Los Angeles in our Los Angeles portfolio, where we transacted 160000 square feet of leases headlined by 50000 square foot renewal and expansion with O'brian, James as media company uninterrupted at our Columbia Square project in Hollywood.
We also signed a 25000 square foot new lease with element of World renowned public relations company at the same project our Hollywood portfolio is now 91% leased.
Many of you have toured our mixed use project at Columbia Square and understand the World class quality of the project, which has led to our recent success.
And in long Beach, we continue to make progress our recently renovated Arrow project during the second quarter of major financial service firm committed to take 25000 square feet of the campus, bringing 289% leased.
Arrow has taken a slightly different path to ultimately achieve similar results. The seven building campus developed by Joy in phases, beginning in the late eighties through the early two thousands was redeveloped in 2020 after the move out of a major tenant we spent roughly $20 per square foot, improving and updating the lobbies and outdoor amenities.
Since we commenced the improvement project, we have leased over 450000 square feet and have achieved rents roughly $7 higher.
Per square foot than pre renovation to remind everyone. We are in the process of rolling out a similar plan at our West <unk> project in Seattle and the early market feedback is encouraging with tour activity up significantly in.
In summary, both Columbia square the narrow are examples of best in class projects. They are achieving solid capture rates and attracting world class tenants across various sectors.
The life science business remains well positioned with health healthy secular tailwind.
Population continues to age new drugs continue to get improved with 2023 on track to exceed last year's levels and total funding during the second quarter approach 40 billion, increasing 15% from the first quarter during.
During the second quarter, we signed a 25000 square foot extension with Neurocrine Biosciences, a life science tenant in del Mar and we continue to have several prospects during the second phase of Kilroy Oyster point in South San Francisco as a reminder, our kilroy Oyster point project.
Not projected to stabilize until 2025 or about two years from today we.
We are pleased with our second quarter operating results and believe we are well positioned for continuing success as we think about the future Kilroy is focused on the things, we can control and well positioned to be opportunistic when the time comes our primary focus for the balance of the year is leasing.
The current environment, we will separate winners and losers through a combination of patience and strategically positioning our assets to be top tier choices for tenants. We believe the kilroy platform is well positioned to create alpha as we lease up the portfolio and.
In addition.
We are committed to maintaining our top notch balance sheet and robust liquidity profile as we demonstrated with the once a sale alone as a reminder, over the last year inclusive of the one for sale financing.
<unk> has secured approximately $900 million of fresh capital at a blended rate in the high 5% range.
So I would like to acknowledge that none of what we do would be possible without our best in class team, we have a deep and talented group of professionals that has been critical to our success.
To continue to invest in our human capital, while also striving for ways to get better always trying to get better I want to personally. Thank all of my teammates that go right for their hard work and dedication to wrap up my remarks, we are encouraged by the green shoots we are seeing there continues to be more activity across leasing investment.
And finance for the best in class product that Kilroy has known for whether it's new tenants entering the market existing tenants looking to renew and expand our strategic transactions being made the common theme is preferential demand for well located high quality assets fundamentally we expect this trend to continue.
And the Kilroy platform could not be better positioned at some point there'll be a time to play offense. When that time comes kilroy will adhere to its core principles, we will allocate capital into acquiring developing and redeveloped and premier assets in the right markets that will outperform well into the future.
While always maintaining a strong balance sheet.
That completes my remarks, now I'll turn the call over to Justin.
Thank you John as of the end of the second quarter, our in process development totaled approximately $1 8 billion.
With about $590 million left to fund.
The majority of which is for the second phase of our Kilroy Oyster point life Science development in South San Francisco.
In April the core and shell are fully leased development project 95, 2014 Towne Center drive in the UTC Submarket of San Diego.
The building is in the tenant improvement phase and we commence revenue recognition in July a few months earlier than anticipated.
As we have discussed on prior calls in the tower is also expected to enter the operating portfolio in the fourth quarter of 2023.
So as we enter 2024 are in process development pipeline is expected to be approximately $1 billion.
The smallest it has been since 2016.
All three pipeline projects are life science.
Supply remains something of a bright spot for the market nationally there have been roughly 5 million square feet of new office starts year to date, which represents a roughly 75% decline from the two year trailing average.
In addition, roughly 15 million square feet of office has been converted or demolished year to date.
Are these two has reduced the national office stock by 10 million square feet said, another way as demand for high quality space surges.
Currently little new product in the pipeline to be delivered over the near term, creating a future shortage of high quality product that tenants want.
As many of you know our strategy has been focused on the high end of the market as John referenced it is increasingly clear that there is a significant bifurcation between high and low quality office buildings.
And we expect more of the low quality and obsolete properties to be converted or repurposed where possible.
To that end according to J L. L. 17% of total U S. Vacancy is derived from approximately 1% of office buildings, highlighting the outsized challenges for owners of commodity product.
Outperformance of high end product is not unique to the office sector luxury hotels have generated better revpar growth than the overall market since 2020 and class a apartments had better absorption than the overall market every year for the past decade.
Focusing on premium product has been a pillar of our strategy for many years and it has proven to be to generate better results over the long term.
That said, we are excited about our future land bank comprised of eight development projects totaling 8 million square feet across our five markets.
From a product type perspective, these products will be approximately 30% life science, 20% residential and 50% office with.
We continue to advance design and entitlements on these future projects. So that we are prepared to be first movers when market conditions warrant.
With that I will turn the call over to Elliot.
Thank you Justin <unk> was $1 19 per share in the second quarter, a 3% decline from the first quarter, mainly due to Amazon's move out in Seattle. This was partially offset by higher interest income the.
<unk> results also include roughly <unk>, a positive nonrecurring items tied to 10 termination fees and restoration payments.
On a same store basis second quarter cash NOI was up roughly 3% driven by free rent burn off at the first phase of Kilroy Oyster point in South San Francisco.
GAAP same store NOI was down roughly 2%.
At the end of the quarter, our stabilized portfolio was approximately 87% occupied and 89% leased the decrease from the prior quarter was due to previously disclosed move outs.
Net debt to second quarter annualized EBITDA was about six times.
Our liquidity remains robust and after accounting for the proceeds from the one Paseo financing we have roughly $1 9 billion in total capacity comprised of $1 $1 billion on our line of credit and $830 million of cash and marketable securities, which includes $170 million available under our term loan facility.
<unk>.
In total our available cash is sufficient to cover the majority of our near term development spend and addressed our next bond maturity in December 2024.
In addition, our dividend is incredibly well covered with a payout ratio of approximately 50% of fad through the first half of the year.
Furthermore, by putting in place an 11 year mortgage we maintain a well ladder maturity schedule with an average duration of six years.
Now that proceeds for the December 2024 bond maturity have been identified our next maturity is not until October of 2025.
We are focused on keeping liquidity high and leverage low.
And are thrilled we could boost our liquidity on efficient terms via the one for sale loans.
Now, let's discuss our 2023 guidance.
As always no acquisitions are forecasted and we continue to expect dispositions to be between zero and $200 million.
We anticipate drawing down the remaining $170 million from our term loan during the third quarter.
The loan for one Paseo closed in late July and we expect to keep most of the cash available on the balance sheet.
<unk> perspective, the interest income we generate from the cash will mitigate much of the incremental interest expense.
As Justin mentioned $95 14, Towne Centre drive stabilized in the third quarter of this year, one quarter earlier than anticipated and 46 90 executive Jive is expected to stabilize in the fourth quarter of next year one quarter later than previously estimated.
In the tower is still projected to enter the stabilized pool in the fourth quarter of this year.
Development spend for the remainder of the year is expected to be $250 million to $300 million.
When factoring in the roughly $175 million of spend in the first half of the year. The full year estimate is now $425 million to $475 million.
With the midpoint unchanged from last quarter.
Capitalized interest for the next two quarters is expected to remain around the second quarter run rate.
No change to our G&A estimate we.
We are tightening the range for full year average occupancy to $86 75 to 80, 775% with no change to the $87 two 5% midpoint.
Cash same store NOI is now projected to be one five to two 5% a 100 basis point increase at the midpoint due to better than anticipated parking revenue and some nonrecurring income.
In summary, our prior 2023 <unk> guidance was $4 30 to $4 50.
With the mid point of $4 40 per share.
Based on our performance to date, we are adjusting and tightening the range to between $4 43.
$4 53.
The new midpoint of $4 48 represents a roughly 2% increase from the prior guidance.
The biggest drivers behind the increase are higher interest income better parking revenue and earlier revenue recognition for our $95 14 Towne Centre drive development.
Partially offset by additional interest expense from the one paseo financing.
To provide further clarity our updated midpoint implies average quarterly <unk> of roughly $1 <unk> per share for the back half of the year, which is 15 cents lower than the second quarter to bridge the gap on the 15th.
Subtract <unk> <unk> for the nonrecurring items I mentioned earlier.
Next we back out a net five pennies due to lower occupancy, which factors in our move outs and move in.
Finally, we subtract seven for various other items, most notably the dispositions and additional interest expense.
That completes my remarks, now we will be happy to take your questions Elliot.
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Ask your question. Please enjoy devices on recent locally.
Today, we ask you limit yourself to one question and one follow up.
First question comes from Nick <unk>.
Your bank your line is open.
Thanks, Hi, everyone. Just in terms of the second half of the year I want to make sure. We had some of the moving parts right in terms of occupancy impact. So I think you previously said Pac 12 was a move out in July and that was about 114000 square feet.
And then I wasn't sure if you have an update on <unk>.
Riot games, where I guess, there was a partial expiration in July and some additional.
Yeah.
Exploration in November any any update there.
Yeah, Hi, Nick This is Rob I hope Youre doing well.
It's hard to get very specific with riot games, where having a variety of discussions on different floors that they lease from us.
In 'twenty, three and 'twenty four.
And I just can't predict ultimately how much space they will take but we are in contact with them and continue to have.
Negotiations ongoing.
Okay. Thanks, and then I guess in terms of South San Francisco, maybe you could talk a little bit more.
Rob about demand youre seeing in that market I know you can turn one of the buildings into multi tenant for Caf phase two.
Maybe you could talk about leasing demand therefore smaller users versus.
Larger tenants, where it sounds like the larger tenant demand is a little bit slower maybe you're more active on the other tenant base.
Sure.
Theres not a lot of change between Q1 and Q2 in terms of just the number of tenants in the market and kind of the basic market fundamentals. There is about $2 5 million square feet of demand in the market.
Portion of that is on hold but is supposed to be coming back towards the later part of this year.
I think notably a handful of.
Younger companies are getting funding rounds.
We hadn't seen in Q1, so companies like stack site hexagon bio and <unk> have gotten funding rounds completed recently.
We did announce.
The multi tenant of our one of our three buildings our tour activity has picked up and interest.
Meaning people are wanting to see the space wanting to understand what's in it we're exchanging plans with a couple of companies right now in terms of the.
Technical capabilities of the space. So overall as I said in the first quarter. We're pleased given the overall environment with the activity, we have and we still as John said in his comments we had two.
Two years until we're actually complete.
Yes.
Alright, Thanks, Rob appreciate it.
Our next question comes from Steve <unk> with Evercore ISI. Your line is open.
Yes, Thanks, I don't know Elliott of Rob If you could maybe just talk about maybe the next 18 months in some of the I guess more pronounced maybe known move outs, just kind of remind us.
What what you know is to be vacating.
Over the next say through the end of 'twenty four.
Hey, Steve It's Elliot I'll start.
We've talked about the explorations over 100000 feet for the balance of this year. There are two there's Pac 12, which as everyone knows is moving out and Theres riot, which Rob just addressed next year. We also have two one in the Bay area, one in Seattle and those are both TBD and how they.
Out and in 2025, we do not have any explorations over 100000.
Okay, Thanks, and just to circle back on the G&A and I know you guys did better than we had expected in the quarter just kind of remind us what you are expecting overall for G&A in dollar terms and I guess, including the expenses for John's Rob.
Retirement.
And will that be equally weighted between Q3 and Q4 is that tilted the Q4.
Yes, so the overall number inclusive of the retirement charges will have a range from <unk> 90 on the low end to 104 on the high end, which is consistent with what we talked about last quarter in terms of the how it plays out through the balance of the year theres going to be a portion that continues.
To be amortized so we amortize the portion in actually a little bit of <unk>, but it jumped up meaningfully in <unk>. So we've taken.
Call. It about three of the 10, and then tied to the retirement charges so far.
That'll be similar in <unk> and then in <unk>, it will be a little bit higher depending on performance.
Thank you.
We now turn to Blaine Heck with wells sponsoring your line is open.
Yeah.
Great. Thanks, Good morning out there just to clarify on the occupancy guidance I'm, assuming current guidance assumes riot stays in place, but wanted to clarify that and then also what does guidance assume with respect to indeed tower. When it comes into the operating portfolio. Later. This year is that held at the current lease rate or is there additional leasing factored in there.
So Blaine we don't typically talk about assumptions for particular tenants and so I think on riot theres not much more we can say beyond what Rob mentioned four indeed, you are correct.
Is going to come in in the fourth quarter.
And we anticipate that it comes in at.
The current level, so that will weigh on the occupancy in the fourth quarter and that obviously also impacts the average number as well.
Okay. Thanks, Elliot and then second question, maybe a high level question for John There was a lot of optimism earlier earlier. This year. After the midterm elections, which were I think generally seen as a step in right direction for San Francisco can you just talk about any improvement you've seen or signs of.
With respect to crime homelessness, and just overall, creating a bit of a more hospitable business environment.
Well.
I always have to go a little story, so if you've ever been involved in a.
Intervention of somebody who is an alcoholic or a drug addict youre not going to get any place unless they are hit bottom and they wanted to change and that's the way I would characterize San Francisco, San Franciscans across most of the political spectrum in the economic spectrum.
The.
The demographics spectrum are fed up and they've taken action I think there's a real chance to replace and get a majority on the board of Supervisors next year and the elections.
The numbers look really good on that.
I think there is a real opportunity to get rid of some of the bad judges that are up there.
And there's some other things in the political wins I won't talk about and that's all made possible by the fact that over the past couple of years.
Rod coalition of people have gotten together they represent people like myself that are Ceos of companies not just in real estate, but across the spectrum of different types of companies. They represent schoolteachers. They represent the broad spectrum of the demographic base.
The wins are definitely changing what has also happened is at the state level, we have the state.
Law enforcement in San Francisco that can take action that the locals can't we have the feds and they're taking action that the locals can't and that all sounds sort of ominous, but the fact is there are forces at work that I think are going to clean things up isn't going to be easy.
<unk>.
It isn't going to happen overnight, but I was at a meeting as an example, I think it was last week.
It was a big group it was a cross section of business leaders from everything from restaurant associations in the in the hotels to folks again like myself et cetera, and universally people are committed to funding and actively participating in changing what became.
<unk> a mess so I'm more optimistic to tell you the truth than I've been in the last two or three years.
By far but there is work to be done it's kind of like a war you can see that you are going to win it it could take longer than you think it's going to be bloody.
And I don't mean that bloody and sense of.
San Francisco, but I do think it's getting better and then you can see it on the streets as people come back to work the.
The streets are far more vibrant there is people in the lobbies of buildings. The restaurants are full certainly some restaurants have gone out of business and what not that we are dependent solely on the office community and whatnot as people were working from home, but there is generally an air of people see that there is a future thus far.
Rider, so sorry for the long winded answer, but I would just punctuate again that I'm more optimistic now that I've been in the last three years, because I see things really working in a positive way.
Very helpful. Thanks, John .
Youre welcome.
Our next question comes from Michael <unk> with Citi. Your line is open.
Great. Thanks, I wanted to touch on retention for a bit I know it was lower similar to last quarter as we look to the back half of the year is the expectation for this retention rate to stay lower John you were talking about some of those green shoots could we potentially see an uptick in needs and our retention levels.
Yes.
Mike some of these bigger tenants just don't know.
They're all trying to figure out what theyre doing I'm unwilling to predict retention levels.
Young Guy and I think you have kids.
I've got six most of them are grown but the game chutes and ladders.
Sure.
We're going to we're going to continue to see shoots.
But we're now seeing longer and more of ladders and so in that context, I think things get better over time, but theyre not going to get better instantly. There's no. There's nothing in my mind that says that we're back to 2019.
Certainly not in San Francisco, So we'll see.
It's interesting that some of the people that have moved out of buildings or buildings are talking to us about potentially moving back into buildings and im not speaking specifically to San Francisco, but across the platform. So theres just a lot of kind.
Kind of wait and see we're very busy dealing with people and they are the optionality there trying to structure and as I made comment to in my remarks.
In the case of like Columbia Square in Hollywood, We haven't seen any leasing there for two years now all of a sudden it's on fire what changed and its right during the middle of this big right during the middle of this big.
Industry Entertainment.
Entertainment industry strike.
If you talk to people, it's just that there is.
They are being more optimistic theyre getting people back to work they have plans to expand so those things can change pretty quickly I would make another comment just about I think I've said this before at various things, including your event in March.
I remember a couple of times in different downturns people talking about Silicon Valley as a case in point, having 20, some years of supply and within two years, there was nothing to be.
There was nothing of substance available I'm not predicting that will happen in the next year or two but I think it will happen over time, because people are starting to get back to work and innovation is alive and well there are a lot of new companies being formed.
If I could predict that I'd.
Wouldn't be in this business in the venture capital business.
Great. Thanks, maybe expanding on that green shoot opportunity you talked about I think we've heard more about AI driving space requirements, particularly in San Francisco I mean, how big can you quantify this as term a long term driver in the market and any color you have around that would be helpful.
Sorry, you cut out in the first part of that so can you just start with you early part of your yes, yes, yes just.
Hey, AI demand in San Francisco, and kind of the opportunity set that you see there I know the market's been kind of soft, but that seems like a potential green shoots for space requirements there.
Yes, there is a tenant in one of our buildings sit sublease 50000 feet to an AI company.
There's I know some things I can't talk about with regardless of folks that are going to be investing quite heavily in AI that haven't really announced yet and they are big big players I have no idea how big it's going to be if you talk to some of the folks.
That are in it and with well established companies they think it's going to be enormous.
And it's one of those things that.
With over it came out people thought well what is still the idea it's aren't going to happen and then either to put lift and everything else. The same thing with Airbnb came out or we've already thought what a stupid idea and we now know the biggest hotel company in the world. So I don't know.
With AI.
World as its market I mean, it literally could could be involved in everything and with that will come both good and bad things and I don't want to get into the.
To that.
But it could be really big.
I think a lot of people hope, it's going to be giant instantaneous or immediate I don't know how.
Normally these things grow and then they start getting bigger and bigger if you look at the pattern in most of these tech companies. They started with 5000 feet and they had an idea.
They lease 10000 feet then for 10 years, and then all of a sudden they needed at 30000 feet. Then they needed 100, then they needed 400 and so forth.
It doesn't take many of those two to change the market, but I don't know.
Got you that's it for me thanks for the time.
Thanks, a lot.
Now it sounds you Caitlin burrows with Goldman Sachs. Your line is open.
Hi, Good morning, there maybe a follow up question on the one Paseo del given that only 5% of your data that was secured at the <unk> can you just go through what drove the strategy for this property and under what situations going forward do you expect to use additional secured versus unsecured strategy.
I'll start and then Elliot and I wanted to give some comments KLM.
We are agnostic as you know we've been.
Haven't been big users of secured debt.
What drove this is if we take a look at bond debt it was considerably more expensive obviously.
Our goal was simply to take it to pre fund.
Any of the commitments that we have whether it's development or loans that come due and take that off the table. We had 18 months I think before.
The bond deal and next year it comes up now.
Now goes out to 25, so its 30 months or so for the next tranche. We had some development. We were already pre funded we think theres going to be an opportunity to play.
To play offense here, we're not exactly sure.
When and how that's going to play out, but our view is we just sort of pre positioning for success.
We've got best in class product, we are in a terrific financial position that where we can take care of whatever our obligations are as they come up and be very methodical about that we're in a terrific financial position to play offense and then we have the ability to start new product as it's needed and as Justin pointed out we think theres going to be.
A real shortage so that's what drove.
That transaction. It was just the most efficient way to go Elliot I don't know whether you have a further comment.
No I think thats all spot on in terms of do we do more of these I mean, who knows we certainly like the efficiency of the bond market, but there's a time and place where secured debt makes sense and we thought this was it but this is not an indication of a bigger shift in strategy.
Got it Okay and then maybe just on return to work in office utilization you gave some details on year to date improvement up 800 basis points and up 500 basis points from last quarter. I guess could you go through how you measure that and do you have any visibility to what could happen over the next say three to six months.
You want to deal with Allianz.
Yeah sure so Caitlin we have.
A process, where we go through each of our markets and do a combination of survey data with our tenants and.
Card reading data with our tenants, we sort of triangulate all of it to put it together and track this information.
<unk>.
So that's our process it generally.
<unk> tracked the capital data up until recently, where the castle data had sort of flatlined, but we continue to see increases in our portfolio.
So a little tough to predict exactly how it will pan out, but we think that all of the announcements that we've referenced earlier in particular in the Bay area and Seattle are good leading indicators that we should still continue to make progress on the physical occupancy.
Yes, I'd just add a little comment that's just.
I'd add a little comment that's just interesting.
As you can well imagine we deal with a number of architectural firms that not only deal with us to deal with other developers deal with particularly a lot of users and one of the things that they are saying is that theyre not real busy.
On new buildings, but they are very busy on reconfiguring space for tenants and I was talking with one a few weeks ago in Seattle.
Who's active all over the western United States and the comment that was made is that they are doing a third thing for the same tenant.
On a major.
On their utilization of a major campus and they keep trying to figure out how to add more capacity for more people because there are numbers keep changing so what sort of happened at least in some of these.
<unk> companies is they.
They were wondering whether what people were going to come back to work. They want people to come back to work and now Theyre coming back to work now theyre coming back to work more in there and theyre coming back at higher rates in some cases people have slowed down the back to work reentry in terms of making.
Giving time to to reconfigure their space to bring more people back to work. So those are just some anecdotal comments, but it's happening in real and real time.
Thanks.
Yeah.
We know Sanjay Vikram <unk> with Mizuho Your line is open.
Thanks, a lot, saying the question just going back to sort of the the <unk>.
<unk> should comment I guess.
Hurt from a couple of multifamily players.
There is a bit more.
I guess.
So seeing green shoots and more traffic.
We can talk a little bit about the AI.
To your potential I should say there, but could you maybe just elaborate a bit more on like say the office the pipeline you're looking at what sort of types of tenants the size requirements.
And if you could break that up sort of between strictly office and then life Sciences.
You want to take that Rob.
Sure.
Let me make a couple of just general comments about what we're seeing in terms of just and give you a sentiment in terms of the tenant markets.
Our real estate, we've said this before our real estate is a very local business and even though headlines nationally are that demand is often less than we'd like we're seeing positive absorption play out in our portfolio in cities like Seattle Hollywood in long Beach as John had mentioned.
Another note I think I'd make is that while overall market experienced negative absorption the newest and best buildings, they actually experienced over 100 million square feet of positive absorption in the last two years.
Of note, that's really important about the bay areas VC funding overall is down everyone knows that and reads it but bay area companies took more than half of the funding nationally.
And that's about $20 million $20 billion. So we're expecting to see more demand come out of that sort of.
That's sort of.
Investment and the last point I'd make is the transaction pace remains somewhat slow, but it's picked up and tenants are really seeking flexibility in their lease terms and there.
Just how they utilize space not only their space, but our space, meaning our common areas our decks etcetera. The mix I'd say portfolio wide is somewhat balanced between technology and professional services and banking firms Thats, particularly true in San Francisco, where you have about a third of the demand.
Now there is about $4 5 million square feet of demand about a third of that is from technology. The other third of that is from professional services banking et cetera, everybody is talking about AI, you just mentioned that.
Right now in San Francisco, There is about 750000 square feet.
AI demand.
As tenants have started out probably in the fourth quarter of last year in the first quarter of this year and the 5000 foot range and they've now grown to about 10% to 15000 feet. So on the AI front as John said, it's very difficult to predict where that goes and these companies are in early stages, so more to come on that.
One of the things we track really closely are what the big Fang companies and the level below the Fang companies are doing with respect to AI because those companies will spawn a lot of either companies. If you will.
Over the over the next whatever you want to call it two years or so.
Okay.
And about the mix.
Any green fusion growth in terms of life science more specifically.
Yeah.
Yes, I mean as I mentioned.
The VC funding that the bay area commanded over 50% nationally and I mentioned earlier.
Several firms that we didn't see in Q1 got funding just recently in Q2.
And when you get that sort of investment then demand typically follows it doesn't follow immediately and boards of life science companies are still.
Trying to keep people or companies within the space they have rather than taking new but that said as I as I said at Oyster point, we're seeing we're pleased with the activity we're seeing both in the larger tenant format as well as multi tenant meaning a floor 40000 foot to 80000 foot tenant range.
<unk>.
Great and then just one clarification on.
Maybe its sublet trend across San Francisco, maybe even for the Bay area.
Some of them had recent conversation suggested that.
That volumes are likely to.
Im seeing material, but we were at such high levels of moderate or come down and I'm wondering if you can.
Real time seen any trends that would indicate sublet spaces coming off the market more rapidly.
Yes, I hate I hate, making predictions because they'll do it and then something will be announced this afternoon.
It definitely see both in the Bay area, particularly that sublease space has plateaued in terms of big Tech, giving back space.
Theres actually been some talk and it's very again, who knows what it plays out too, but some tenants actually looking at perhaps taking some of the space back off the market and we saw that happen during the pandemic.
Tenant space on the sublease market because they werent using it are occupying it and then they subsequently took it off so we are seeing although the numbers ticked up this quarter in terms of available sublease space I do think it's plateaued and again you have to distinguish between the true class a really marketable.
<unk> sublease space and the what I would call second and third tier space, that's going to struggle mightily. During this time, it's just not going to have.
Activity.
Okay.
Thank you.
Our next question comes from Tom <unk> with Green Street. Your line is open.
Hi, guys. Thanks for taking the question just going back to your comments on being patient with regard to going on offense.
Looking at acquisitions.
Just help us give us a sense for some of the data points in things Youre looking at sort of start that at work.
Well.
It's kind of the obvious stuff, but.
As we look at based upon our.
What we all see what you all have available as information and more particularly what we have with regard to the relationships we have with tenants what their thinking is they can find with us on various comments.
How that sort of relates to kilroy position, and where we want to place our bets.
There isn't going to be a lot of confusion in my view with regard to.
What's transacting early on.
We are seeing right now properties that were properties, we never would have had an interest in.
Back in 2019, or 2018 or whatever that may have traded back then.
That are coming back into trade now where there is either failed.
That structure or ownership structure or wherever it might be.
Theres just a lot of product out there that is not quite the quality, that's going to be busted up and we're going to see that in all of our markets.
Whether it's a formal marketing process or a soft marketing process I think youre going to see some things trade at very low rates.
That are <unk>.
<unk> that require hundreds of dollars of Capex and if you buy it and you spend it youre going to end Youre still going to end up with a pig.
So it's going to be mix.
And what we look at is what we're in this business to make money. So.
You can buy a quality product.
At at a good rate that has super upside that's interesting.
But we want to know that there is a more functioning market. If you take a look at 2010, which is probably a pretty good thing for <unk> with regard to kilroy.
We moved into San Francisco and bought some properties at very low prices that were okay yields and we didn't predict the yields would go up to two greatly for a few years and then a skyrocket, they've really hockey stick and that ended up making it a lot of money in our shareholders a lot of money in may.
So some great growth.
We were able to do that because others were looking their wounds. They didnt have the capital structure and they didn't see the opportunity I think we're going to see some of that now the problem is.
Talk to just about everybody on this investor calls or the Navy.
Conferences that there is a lot of product that we're just not interested in either location only.
Or because of its physical bones, it's just obsolete or near obsolete, we do not want to touch that at any price unless it's unless you can buy it.
A covered land play and you have a really great development site, we might be interested in one off on that so we look at everything we'd like to see a little bit more stability in the capital markets, obviously, if youre going to buy stuff you want to have.
The capital to do it you don't want to be under stress or throw curve balls to the investor market, We think our position for as.
As I commented on in my formal remarks is very strong for us to play offense frankly as a company. We've never had the quality of development pipeline, that's ready to go and not even 10% of that in prior coming out of prior recessions that we have today. So we think for real.
Well positioned in that regard, we think we're really well positioned on the capital front with liquidity and so forth.
And we think we have the right kind of product so it's going to play out over time.
Don't know exactly how it's going to play out but.
But I think it will be opportunistic as we have in the past and we've come out of these things pretty well out of future downturns and so that's kind of way we are thinking I can't really be I can't.
If everybody had the rule book on exactly what to do exactly when there wouldn't be any opportunity because we'd all be doing it it's going to be a case of one offs.
I think it's going to be tough to buy big portfolios.
Because so much of the game has changed it used to be you could buy a lot of class b product.
You anticipated that those products those projects are buildings would be relevant and as I made comment on many times before I think a lot of the buildings that are out there today are no longer relevant so more to come.
I appreciate that thorough detail John I guess, just one more are you able to share the underwritten LTV and debt yield I won't detail.
We can't share that but what we can say is that given the nature of the partner you can assume that this was underwritten conservatively.
Awesome. Thank you.
We now turn to <unk> <unk> with Jefferies. Your line is open.
Yes. Thank you.
Modeling question I wanted to clarify so does the one for sale revealed the need for it.
Term loan proceeds off the table.
Sort of near and medium term at least for the rest of this year.
So the way the term loan was structured is that we have 12 months to pull down the cash.
And if we choose.
Choose not to then those proceeds go away.
But from what you can what we said in our formal remarks, we do anticipate pulling down the remaining $170 million of cash on the term loan by the end of the third quarter and then just as you think about modeling wise.
There, we have spread a sofa plus 100 relative to wherever we can reinvest it but certainly.
The rates on reinvesting capital have gone up in the last three months. So the dilution there is somewhat modest.
Got it. Thank you and then one more on life science.
So theres, a pretty meaningful amount of new supply coming to south San Francisco right now.
Maybe not as much San Diego could you just talk about what youre seeing on the ground in terms of.
In terms of how rents are moving and how the new supply.
Factoring in the conversation.
With potential tenants, particularly at Oyster point.
Rob do you want to cover that or this is Rob sure John .
Again, I guess, what I first of all I'd define let's define the market we're in.
And Oyster point, which is a very specific sub market in south San Francisco and it's I'd like to call. It the main and main of the life science market in the Bay area.
There is less product being delivered in that <unk>.
That particularly some particular sub market, we have about little over <unk> 5 million feet that we're competing with.
This new construction and rental rates and new construction have not declined materially.
There is other space in South San Francisco, However, as I, just said different submarkets. So there is a.
Sub market north of us called Sierra point, which has different fundamentals.
Just to market.
We actually prefer oyster point.
Most of the large tenants do as well.
Got it that's helpful. Thank you.
Our final question comes from Neil O'connell with Bank of America. Your line is open.
Hi, Neil Your line is now open.
Okay.
Can you hear me.
Hello Hello.
Hi, Okay, Alright, the name was wrong, let's can be opened now from bank of America.
Many of my questions have been already addressed.
Just one from me.
Our update around parking revenues, adding positively to core operating outlet does that only reflect the utilization that youre seeing today.
Even that a number of larger companies are starting to implement that return to work over the summer and into the fall does it mean that if these trends continue to improve we'll see further upside to guidance in this income stream.
To the first part of your question. Yes. This reflects what we've seen to date.
To the extent that utilization continues to get better then we hope that that continues to translate to better parking revenue.
Okay perfect. Thank you.
This concludes our Q&A I'll now hand back to Bill Hutchinson SVP of Investor Relations untapped markets closing remarks.
Great Elliot. Thank you for coordinating the call. Thank you everyone for joining US today. We appreciate your continued interest in Kilroy have a good day.
Ladies and gentlemen, today's call is now concluded with Ontario participation. You may now disconnect one for joining US today. We appreciate your continued interest in Kilroy have a good day.
Ladies and gentlemen.