Q4 2023 Kilroy Realty Corp Earnings Call

Okay.

Emily: Hello everyone, and welcome to the KRC 4Q23 Earnings Conference Call. My name is Emily, and I'll be facilitating this call. After the presentation, there will be the opportunity for any questions, which you can ask by pressing start followed by the number 1 on your telephone keypad.

Speaker Change: Hello, everyone and welcome to the Kelsey <unk> 23 earnings calls.

M&A: My name is M&A and I'll be facilitating you'll coat stay after the presentation there'll be the opportunity for any questions, which you can ask by pressing star followed by the number one on your telephone keypad I'll now turn the call over to Al hoist, So Hutchison senior Vice President Investor Relations and capital markets. Please go ahead.

Bill Hutchison: I will now turn the call over to our host, Bill Hutchison, Senior Vice President, Investor Relations and Capital Markets. Thank you, Emily. Good morning, everyone, and thank you for joining us.

Al Hoist: Thank you Emily and good morning, everyone and thank you for joining us on the call with me today are Angela Aman, our CEO, Justin Smart, our president Rob brought our chief leasing officer, and Eliott Trencher, our CIO and CFO.

Bill Hutchison: On the call with me today are Angela Ahman, our CEO; Justin Smart, our President; Rob Peratt, our Chief Leasing Officer; 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 included in this call and in the supplemental. This call is being webcast 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 Form 8K with the SEC, and both are also available on our website.

Al Hoist: At the outset I need to say that some of the information we will be discussing during this call is forward looking in nature. Please refer to our supplemental package for a statement regarding the forward looking information on this call and in the supplemental.

This call is being webcast 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 <unk>.

Angela M. Aman: Angela will start the call with a strategic overview and quarterly highlights. Justin will review our in-process development pipeline, and Elliot will discuss our financial results and provide our 2024 guidance. Then we'll be happy to take your questions.

Al Hoist: Angela who will start the call with a strategic overview and quarterly highlights Justin will review our in process development pipeline and Elliott will discuss our financial results and provide our 2024 guidance then we'll be happy to take your questions Angela.

Angela Aman: Thanks, Beth I'm happy to join you today on my first call as CEO of Kilroy I want to start by thanking John Kilroy on behalf of everyone. On this platform for his visionary leadership of this company over many years and various real estate cycles John.

Angela M. Aman: Thanks, Bill. I'm happy to join you today on my first meeting as CEO of Kilroy. I want to start by thanking John Kilroy on behalf of everyone on this platform for his visionary leadership of this company over many years and various real estate cycles. John has built a premier portfolio in the most dynamic, innovation-driven markets in the country, while also creating an organization capable of meeting and exceeding the high expectations of our diverse tenant base. I'm honored to be stepping into this role and excited about what the future holds for Kilroy. I've spent my first two weeks getting to know the team here at our Los Angeles headquarters while also getting out to see our assets and meet our regional teams, starting with Seattle and San Francisco.

John has built a premier portfolio in the most dynamic innovation driven markets in the country. While also creating an organization capable of capable of meeting and exceeding the high expectations of our diverse tenant base.

Speaker Change: I'm honored to be stepping into this role and excited about what the future holds for kilroy.

Speaker Change: I spent my first two weeks getting to know the team here in our Los Angeles headquarters, while also getting out to see our assets and meet our regional team, starting with Seattle, and San Francisco and I'd like to share a few takeaways from my first 11 days on the job.

Angela M. Aman: And I'd like to share a few takeaways from my first 11 days on the job. First, our West Coast geographic markets are feeling better, with more energy and vibrancy than has been seen in the post-pandemic period. The underlying data backs this up. Activity levels in our markets, as measured by foot traffic, public transit usage, and domestic travel and tourism, have all trended up significantly over the course of 2023. Second, while the office market is and will remain challenging in the near term, our portfolio is focused and well positioned to respond to tenant needs that continue to change and evolve. Employees are back in the office, but their expectations have changed. Offices need to be more than efficient; they need to be effective at enhancing productivity and driving collaboration and results.

Speaker Change: First our west Coast geographic markets are feeling better with more energy and vibrancy than has been seen in the post pandemic period, the underlying data access up activity levels in our markets as measured by foot traffic public transit usage and domestic travel and tourism have all trended up significantly over the course of 2023.

Speaker Change: Second while the office market is and will remain challenging in the near term our portfolio is focused and well positioned to respond to tenant needs that continue to change and evolve.

Speaker Change: Toys are back in the office, but they are expectations have changed offices need to be more than efficient they need to be effective at enhancing productivity and driving collaboration and results Kilroy.

Angela M. Aman: Kilroy's well-located, high-quality, amenitized portfolio can meet these demands and, in the process, capture outsized market share throughout what is likely to be an extended recovery in this space. Third, Kilroy has made the strength of tenant relationships a key priority, and it's abundantly clear that the trust that has been built by this team over time has tangible economic value, particularly at this point in the cycle. I have been extraordinarily impressed by the talent embedded in every function across this organization, which has only been confirmed by the tenants I have had an opportunity to interact with over the last two weeks, who have each described our external facing teams in leasing, development, and construction, and asset and property management as proactive, responsive, flexible, and creative.

Speaker Change: <unk> well located high quality are monetized portfolio can meet these demands and in the process capture outsized market share throughout what is likely to be an extended recovery in this space.

Speaker Change: Third Kilroy has made the strength of tenant relationships, a key priority and it's abundantly clear that the trust that has been built by this team overtime has tangible economic value, particularly at this point in the cycle.

Speaker Change: Extraordinarily impressed by the talent embedded in every function across this organization, which has only been confirmed by the tenants I have had an opportunity to interact with over the last two weeks with each described our external facing teams and leasing development and construction and asset and property management as proactive responsive flexible.

Speaker Change: <unk> and creative.

Angela M. Aman: The team's reputation in the industry is unmatched, and they are and will continue to be a key contributor to our ability to outperform going forward. All of these key takeaways are underscored by the company's fourth quarter leasing activity, where we signed approximately 590,000 square feet of leases, which represents the company's highest quarterly leasing volume since 2019. Notable fourth quarter highlights include two Bay Area leases signed for a combined 210,000 square feet to a Fortune 500 technology company and a highly regarded international law firm. For the full year 2023, we leased approximately 1.3 million square feet, with an average lease term of approximately six years.

Speaker Change: The teams reputation in the industry is unmatched and they are and will continue to be a key contributor to our ability to outperform going forward.

Speaker Change: All of these key takeaways are underscored by the Companys fourth quarter leasing activity where.

Speaker Change: Where we signed approximately 590000 square feet of leases, which represents the company's highest quarterly leasing volume since 2019.

Speaker Change: Notable fourth quarter highlights include two bay area leases signed for a combined 210000 square feet to a fortune 500 technology company and a highly regarded international law firm.

Speaker Change: For the full year 2023, we leased approximately one 3 million square feet with an average lease term of approximately six years.

Angela M. Aman: This too represented the highest annual leasing volume since 2019. We are pleased to say this momentum has continued in early 2024 as we executed a 77,000 square foot lease extension with Riot Games in January for a portion of their space in West LA. Before I turn the call over to Justin and Elliot, I'd like to make a few comments on our strategy going forward. Kilroy has always defined its three core pillars as high-quality properties, strategic capital allocation, and a fortress balance.

Speaker Change: This two represented the highest annual leasing volume since 2019.

Speaker Change: We are pleased to say this momentum has continued in early 2024 as we executed a 77000 square foot lease extension with riot games in January for a portion of their space and West L. A.

Speaker Change: Before I turn the call over to Justin and Elliot.

Speaker Change: I'd like to make a few comments on our strategy going forward.

Speaker Change: <unk> has always defined its three core pillars of high quality properties strategic capital allocation and a fortress balance sheet.

Angela M. Aman: I can assure you that I am equally committed to each of these pillars, which represent the best path toward navigating challenging market environments and capturing outsized growth opportunities during more favorable market environments. Over the coming years, we will be focused on maintaining the quality of this portfolio by understanding and staying ahead of creeping functional obsolescence in this space while growing our exposure to premier office, life science, and mixed-use assets through our robust development platform or through strategic acquisitions when, and only if, they make sense. We will be prudent and thoughtful with every dollar of capital we are entrusted with, and we'll remain focused on driving appropriate and compelling risk-adjusted returns. The same core pillars that have guided Kilroy's strategy in the past will guide us going forward as we take a fresh look at external and internal opportunities to drive growth and create value for all stakeholders. Jocelyn

Speaker Change: Can assure you that I'm equally committed to each of these pillars, which represent the best path towards navigating challenging market environments, and capturing outsized growth opportunities during more favorable market environment.

Speaker Change: Over the coming years will be focused on maintaining the quality of this portfolio by understanding and staying ahead of creeping functional obsolescence in the space.

Speaker Change: Well growing our exposure to Premier office life science, and mixed use assets through our robust development platform or through strategic acquisitions, when and only if they make sense.

Speaker Change: We will be prudent and thoughtful with every dollar of capital we are entrusted with and we'll remain focused on driving appropriate and compelling risk adjusted return the.

Speaker Change: At the same core pillar setup guided kilroy strategy in the past will guide us going forward as we take a fresh look at external and internal opportunities to drive growth and create value for all stakeholders Justin.

Justin: Thank you, Angela. As of the end of the fourth quarter, our in-process development totaled approximately $1.1 billion, down from the third quarter due to the delivery of Indeed Tower in Austin. There's roughly $440 million left to fund in the development pipeline, most of which is related to the second phase of our Kilroy-Oyster Point life science development in South San Francisco. As you may have noticed, the stabilization date for the second phase of Kilroy-Oyster Point is now estimated to be the fourth quarter of 2025. The updated timeline is a result of scheduling revisions to the construction of the garage and the manor. In conjunction with the revised timeline, the anticipated cost for this project now reflects the additional carrying costs that will be incurred during the revised construction period.

Justin Smart: Thank you Angela.

Justin Smart: At the end of the fourth quarter, our in process development totaled approximately $1 1 billion down from the third quarter due to the delivery or indeed in Austin.

Justin Smart: It was roughly $440 million left to fund in the development pipeline most of which is related to the second phase of our Kilroy Oyster point life Science development in South San Francisco.

Justin Smart: As you may have noticed the stabilization date for the second phase of Kilroy Oyster point is now estimated to be the fourth quarter of 2025.

Justin Smart: The updated timeline as a result of schedule revisions to the construction of the garage and amenities.

Justin Smart: In conjunction with the revised timeline the anticipated cost for this project now reflects the additional carry costs will be incurred during the revised construction period.

Justin: We continue to be excited about the quality and the competitiveness of our Kilroy Oyster Point project, which we believe is one of the most compelling life science projects in the country. The physically attractive Waterside Campus setting, with unparalleled views and world-class amenities, differentiates the campus from others, and we are confident that many prospective tenants will find it every bit as appealing as Cytokinetics and Stripe did in Phase 1. On a related note, we are thrilled to see the recent progress cytokinetics has made with positive data from a phase 3 trial of its heart disease drug apicampin, which has resulted in a near doubling of their market cap. Cytokinetics has a 20-year history in public markets and a strong drug pipeline, and we look forward to a long relationship with them at Kilroy Oyster Point.

Justin Smart: We continue to be excited about the quality and the competitiveness of our Kilroy Oyster point project.

Justin Smart: We believe is one of the most compelling life science projects in the country.

Justin Smart: Physically attractive waterside campus setting with unparalleled views and world class amenities differentiates the campus from others and we are confident that many prospective tenants will find its every bit as appealing as sided kinetics and stripe did in phase one.

Justin Smart: On a related note we are thrilled to see the recent progress <unk> made with positive data from a phase III trial of its heart disease drug Camden.

Justin Smart: Camden.

Justin Smart: Which has resulted in a near doubling of the market cap side of kinetics has a 20 year history in public markets and a strong pipeline and we look forward to a long relationship with them at Kilroy Oyster point.

Justin: With respect to our future development pipeline, we do not anticipate starting any new developments in 2024. However, we intend to continue advancing entitlements and design on all pipeline projects in order to maximize future optionality. With that, I'll turn the call over to Elliot. Thank you, Justin.

Justin Smart: With respect to our future development pipeline, we do not anticipate starting any new developments in 2024.

Justin Smart: Intend to continue advancing entitlement and design on oil project when oil pipeline projects in order to maximize future optionality.

Justin Smart: With that I will turn the call over to Elliot.

Elliot: Thank you Justin.

Elliot: I'm pleased to report that the fourth quarter was a very strong conclusion to the year. Fourth quarter FFO was $1.08 per share and included roughly five cents of rental income reversals, the majority of which was tied to one tenant in the Bay Area. Adjusting for this, FFO was roughly flat from last quarter. For the full year, FFO was $4.62 per share, which was the second best year in the history of the company and more than 5% better than our original guidance after adjusting for the previously disclosed CEO transition cost. On a same store basis, fourth quarter cash NOI was down about 1% due to lower occupancy year over year.

Elliot: I am pleased to report that the fourth quarter was a very strong conclusion to the year fourth quarter <unk> was $1 <unk> per share and included roughly <unk> of rental income reversals. The majority of which was tied to one tenant in the bay area adjusting for this <unk> was roughly flat from last quarter.

Elliot: For the full year <unk> was $4 62 per share, which was the second best year in the history of the company and more than 5% better than our original guidance. After adjusting for the previously disclosed CEO transition costs.

Elliot: On a same store basis fourth quarter cash NOI was down about 1% due to lower occupancy year over year GAAP same store NOI was down roughly 10, 5% due to the previously mentioned rental income reversals for.

Elliot: Gap seems to RNOI was down roughly 10.5% due to the previously mentioned rental income reversal. For the full year, cash same-store NOI was up roughly 4.5%, or approximately 350 basis points better than our original guide. At the end of the quarter, our stabilized portfolio was 85% occupied and 86.4% lost. The decrease from the prior quarter was due to a lease expiration in Los Angeles, as well as the inclusion of Indeed Tower in the stabilized portfolio. As a reminder, Indeed Tower entered the Stabilized Portfolio in December, which included approximately 265,000 square feet of unoccupied space. As a result, we are no longer capitalizing any interest, operating expense, or real estate tax costs for the property. Turning to the balance sheet, net debt for the fourth quarter annualized DBDOT was approximately 6.4 times.

Elliot: For the full year cash same store NOI was up roughly four 5% or approximately 350 basis points better than our original guidance at.

Elliot: At the end of the quarter, our stabilized portfolio was 85% occupied and 86, 4% leased.

Elliot: The decrease from the prior quarter was due to a lease exploration in Los Angeles as well as the inclusion of Endy tower in the stabilized portfolio.

Elliot: As a reminder, in detail were entered the stabilized portfolio in December which included approximately 265000 square feet of unoccupied space.

As a result, we are no longer capitalizing any interest operating expense real estate tax cost for the property.

Elliot: Turning to the balance sheet net debt to fourth quarter annualized EBITDA was approximately six four times.

Elliot: During the quarter, we repurchased roughly $7 million of our December 2024 bonds at a discounted price, which, when added to our debt repurchases in the third quarter, brings the total amount repurchased to roughly $20 million. As a result, our remaining 2024 December maturity is now approximately $405 million. Subsequent to quarter end, we raised $400 million of 12 year unsecured bonds at a coupon of 6.25%, representing our first bond deal since late 2021. We've been patiently monitoring conditions in the fixed income market, and as benchmark rates and spreads tightened in late 2023, we decided to opportunistically accelerate our capital raising plan. We were thrilled by the outcome and the support we received from our fixed income investors. We intend to use the proceeds to proactively pay down a portion of our term loan, fund our 2024 development needs, and bolster our liquidity to be ready for compelling opportunities should they arise. We currently have $2.2 billion of available liquidity, comprised of $1.1 billion of cash and marketable securities and $1.1 billion available on our line of credit.

Elliot: During the quarter, we repurchased roughly $7 million of our December 2024 bonds at a discount.

Elliot: Which when added to our debt repurchases in the third quarter brings the total amount repurchased to roughly $20 million.

Elliot: As a result, our remaining 2024 December maturity is now approximately $405 million.

Elliot: Subsequent to quarter end, we raised $400 million of 12 year unsecured bonds at a coupon of 625% representing our first bond deal since late 2021.

Elliot: We have been patiently monitoring conditions in the fixed income market and its benchmark rates and spreads tightened in late 2023, we decided to opportunistically accelerate our capital raising plans were.

Elliot: We were thrilled by the outcome and the support we received from our fixed income investors, we intend to use the proceeds to proactively pay down a portion of our term loan fund, our 2024 development needs and bolster our liquidity to be ready for compelling opportunities should they arise.

Elliot: We currently have $2 2 billion of available liquidity comprised of $1 1 billion of cash and marketable securities and $1 1 billion available on our line of credit.

Elliot: Our projected uses of capital for the year are between $800 and $900 million, broken down as follows: $600 million of debt paydowns, and $200 to $300 million of development spending. Now let's discuss 2024 guidance. No acquisitions or dispositions are forecast, though we will remain opportunistic on both fronts. As Justin mentioned, no new development starts are projected for 2024, and as previously highlighted, total development spend during the year is anticipated to be $200 to $300 million, a reduction of over $100 million at the midpoint compared to 2023 levels. G&A is expected to be between $72 and $80 million. Straight-line rent is anticipated to be approximately zero for the full year, a decline from roughly $8.5 million in 2023.

Elliot: Our projected uses of capital for the year are between 8% to $900 million broken down as follows $600 million of debt paydown in $2 million to $300 million of development spend.

Speaker Change: Now lets discuss 2024 guidance.

Speaker Change: No acquisitions or dispositions or forecast that we will remain opportunistic on both fronts.

Speaker Change: As Justin mentioned no new development starts are projected for 2024 and as previously highlighted total development spend during the year is anticipated to be $2 million to $300 million.

Speaker Change: A reduction of over $100 million at the midpoint compared to 2023 levels.

Speaker Change: G&A is expected to be between 72% and $80 million.

Speaker Change: Straight line rent is anticipated to be approximately zero for the full year, a decline from roughly $8 $5 million in 2023.

Elliot: Average occupancy is expected to be 82.5% to 84%, a 175 basis point decrease at the midpoint from the fourth quarter. As previously discussed, in 2024, we have two expirations over 100,000 square feet that total approximately 290,000 square feet. We anticipate both tenants moving out and getting the majority of that space back. Cash same-store NOI is projected to be between negative 4 and 6 percent.

Speaker Change: Average occupancy is expected to be 82, 5% to 84% a 175 basis point decrease at the midpoint from the fourth quarter.

Speaker Change: As previously discussed in 2024, we have two explorations over 100000 square feet that total approximately 290000 square feet, we anticipate both tenants moving out and getting the majority of that space back.

Speaker Change: Cash same store NOI is projected to be between negative, 4% and 6%. The decrease from 2023 is due to lower occupancy year over year and the impact of approximately $12 million of restoration income we received in the first half of 2023.

Elliot: The decrease from 2023 is due to lower occupancy year over year and the impact of approximately $12 million of restoration income we received in the first half of 2023. In summary, our 2024 FFO guidance is projected to range between $4.10 and $4.25, with a midpoint of approximately $4.18, or a quarterly average of $1.04, which is $0.04 below the $1.08 we achieved this quarter. The SFO bridge from the fourth quarter of 2023 to the 2024 quarterly average can be broken down as follows. Add five cents to adjust for the reserves in the fourth quarter of 2023.

Speaker Change: In summary, our 2024 <unk> guidance is projected to range between $4 10, and $4 25 with.

Speaker Change: With the mid point of approximately $4 18.

Speaker Change: Quarterly average of $1, four which is <unk> <unk> below the $1 eight we achieved this quarter.

Speaker Change: The <unk> bridge from the fourth quarter of 2023 to the 2024 quarterly average can be broken down as follows.

Speaker Change: Add <unk> to adjust for the reserves in the fourth quarter of 2023.

Speaker Change: Subtract two five pennies for lower occupancy, which includes the impact of move ins and move outs in both the fourth quarter of 2023 and those anticipated in 2024.

Elliot: Subtract 2.5 pennies for lower occupancy, which includes the impact of move-ins and move-outs in both the fourth quarter of 2023 and those anticipated in 2024. Subtract 3 cents for higher interest and operating expenses associated with Indeed Tower, which, as discussed, came into the Stabilized portfolio in December. Subtract four pennies from a combination of higher interest expense, predominantly due to the January bond deal, and lower interest income related to lower projected reinvestment rates on our significant cash balance.

Speaker Change: Subtract <unk> <unk> for higher interest and operating expenses associated with indeed tower, which as discussed came into the stabilized portfolio in December.

Speaker Change: <unk> <unk> from a combination of higher interest expense predominantly due to the January bond deal and lower interest income related to lower projected reinvestment rates on a significant cash balance subtract one penny due to an increase in the expected share count related to the previously disclosed CEO transition and.

Speaker Change: And add back two pennies from lower G&A.

Speaker Change: To conclude we are pleased we were able to outperform our expectations in 2023, while also finding ways to further enhance our balance sheet and liquidity profile. None of this could be done without the excellent team we have at kilroy as.

Elliot: Subtract one penny due to an increase in the expected share count related to the previously disclosed CEO transition, and add back two pennies from lower GNA. To conclude, we are pleased we were able to outperform our expectations in 2023, while also finding ways to further enhance our balance sheet and liquidity profile. None of this could be done without the excellent team we have at Kilroy.

Speaker Change: As we start 2024, we believe we are well positioned to build on this momentum and continue to execute at the highest standard our stakeholders have come to expect.

Speaker Change: That completes my remarks, now we will be happy to take your questions Emily.

Elliot: As we start 2024, we believe we are well positioned to build on this momentum and continue to execute at the high standard our stakeholders have come to expect. That completes my remarks. Now we will be happy to take your questions. Emily?

Speaker Change: As a reminder, if you would like to ask a question today you may now by pressing Star then the number one on your telephone keypad. If you change your mind I would like to be removed from the key lifestyle and then case.

Speaker Change: A question that you please limit yourself to one question and one follow up.

The first question today comes from <unk> <unk> with Bank of America Merrill Lynch. Please go ahead. Your line is open.

Emily: Thank you. As a reminder, if you would like to ask a question today, you may do so now by pressing start, then the number one on your telephone. If you change your mind and would like to be removed from the queue, that is to start and then... We request that you please limit yourselves to one question and one phone. Our first question today comes from Camille Bonnel with Bank of America. Please go ahead, Camille.

<unk> <unk>: Hello can we start with any new themes that youre seeing in the leasing pipeline since the start of the year, whether it be size requirements types of tenants are market.

<unk> <unk>: Sure Hi, <unk> this is Rob let.

So let me let me give you a backdrop of what's happening in our regions.

Rob Brought: What I'm going to talk about is also happening nationally in select markets.

Rob Brought: Although we all know the macroeconomic trends for office continue to be challenging there are some really positive things that happened in Q4 and that are leading into Q1 of 'twenty four for.

Rob Peratt: You're live. Hello. Could we start with any new themes that you're seeing in the leasing pipeline since the start of the year, whether it be size requirements, types of tenants, or markets? Sure. Hi, Camille.

Rob Brought: For example, Walmart signed a 720000 square foot lease.

Rob Brought: In Silicon Valley as Angela mentioned, our two leases totaling 210000 square feet in Silicon Valley and one of those leases was the fifth largest in.

Rob Peratt: This is Rob Peratt. Let me give you a backdrop of what's happening in our regions. What I'm going to talk about is also happening nationally in select markets. Although we all know the macroeconomic trends for office continue to be challenging, there are some really positive things that happened in Q4 and that are leading into Q1 of 24. For example, Walmart signed a 720,000 square foot lease in Silicon Valley.

Rob Brought: 2023.

Rob Brought: In San Francisco, Anthropic open AI and hive OLED to record leasing in San Francisco at one 6 million square feet for the quarter, which is above the pre pandemic 2019 average of about $1 2 million and.

In Bellevue, Washington, This past week at 450000 square foot lease was signed with Pokemon, a gaming company and another 120000 square feet in with Tic Toc.

Rob Peratt: As Angela mentioned, our two leases totaling 210,000 square feet in Silicon Valley, and one of those leases was the fifth largest in 2023. In San Francisco, Anthropic, OpenAI, and Hive all led to record leasing in San Francisco at 1.6 million square feet for the quarter, which is above the pre-pandemic 2019 average of about 1.2 million. In Bellevue, Washington, this past week, a 450,000-square-foot lease was signed with Pokemon, a gaming company, and another 120,000 square feet with TikTok.

Rob Brought: So.

Rob Brought: I think that gives you a good perspective on what's happening in our markets, what we're seeing in <unk>.

Rob Brought: Our spillover into Q1 excuse me for stumbling is that we have good activity at West States. For example, where were exchanging paper with two different prospects we're seeing.

Rob Brought: Continued activity at Kilroy Oyster point, I would say my comments about oyster point arent much different than last quarter. However tour activity has maintained steady and there appears to be a more positive view on the VC funding.

Rob Peratt: So, I think that gives you a good perspective on what's happening in our markets. What we're seeing in our spillover into Q1, excuse me for stumbling, is that we have good activity at West 8th, for example, where we're exchanging paper with two different prospects. We're seeing continued activity at Kilroy-Oyster Point. I would say my comments about Oyster Point aren't much different than last quarter

Rob Brought: World.

Rob Brought: And that will spill into demand eventually there's usually about a six to nine months.

GAAP between VC funding and tenants meeting.

Rob Brought: Space Lastly, I'd say that.

Rob Peratt: However, tour activity has maintained steady, and there appears to be a more positive view of the BC funding world, and that will spill into demand eventually. There's usually about a six to nine month gap between VC funding and tenants needing space. Lastly, I'd say that in Austin, we continue to attract some of the best law firms and financial services firms in the country.

Rob Brought: Austin, we have we continue to attract some of the best law firms and financial services firms in the country. We recently signed a lease with Orrick Herrington and Sutcliffe with San Francisco based law firm and we are seeing.

Rob Brought: Some more activity from firms like that which I can't go into.

Rob Brought: I think the last data point I'd give you is that in San Diego, we're talking to three different tenants that have expansionary plans in our project. So overall it feels better I'm still cautiously optimistic because this won't be a straight line.

Rob Peratt: We recently signed a lease with Orrick Harrington and Sutcliffe, a San Francisco-based law firm, and we're seeing some more activity from firms like that, which I can't go into. I think the last data point I'd give you is that in San Diego, we're talking to three different tenants that have expansionary plans for our project. So, overall, it feels better. I'm still cautiously optimistic because this won't be a straight line and, you know, it'll ebb and flow, but things feel much better than they did, you know, in Q1 of last year. I could just kind of summarize, you know, pull some of that together.

Rob Brought: Evan flow things feel much better than they did.

Rob Brought: Q1 of last year.

Rob Brought: Just.

Rob Brought: Kind of summarized pulled some of that together I would just say as you heard in my prepared remarks, we had a very strong fourth quarter from our leasing activity perspective, which certainly carried over into Q1, which we're very encouraged by as Elliot highlighted we're obviously facing some significant move out in 2024, that's going to weigh on occupancy.

Elliot: I would just say, as you heard in my prepared remarks, we had a very strong fourth quarter from a leasing activity perspective, which certainly carried over into Q1, which we're very encouraged by. As Elliot highlighted, we're obviously facing some significant move-outs in 2024. That's going to weigh on occupancy, but I think the trajectory we've got on leasing feels really good, and we're hopeful we can meet, if not exceed, the expectations we laid out last night. And so, just expanding on the leasing pace for the year, are you expecting it to be at a similar run rate as what you've seen in the fourth quarter in terms of what's based on guidance? Because your implied occupancy outlook does seem to indicate a weaker retention than the 50% average you've been achieving. So, Camille, this is Elliot.

Rob Brought: I think the trajectory you've got on leasing feels really good and we're hopeful we can meet if not exceed the expectations, we laid out last night.

Rob Brought: And so.

Rob Brought: Expanding on the leasing pace for the year.

Rob Brought: Are you expecting it to be at a similar.

Rob Brought: Run rate as what <unk> seen in fourth quarter in terms of what's baked into guidance because your implied occupancy outlook does seem to indicate a weaker retention than the 50% average you've been achieving.

Rob Brought: So camilo. This is Elliot we're not going to speak to what is in guidance in terms of leasing signed and that's generally because if you think about the timing of when leases are signed and how they impact the average occupancy it tends to be pretty back end weighted and so.

Elliot: We're not going to speak to what is in guidance in terms of leasing signed. And that's generally because if you think about the timing of when leases are signed and how they impact the average occupancy, it tends to be pretty back-end weighted. And so it will have more of a 2025 impact on occupancy versus 2024. And in terms of color, Rob, if there's anything you want to add?

Rob Brought: So it will have more of a 2025 impact on occupancy versus 2024 and in terms of the color Rob If theres anything you want to add its just hard to predict Camille.

A large amount of leasing in San Francisco.

Rob Brought: It is hard to predict whether there's more of that there are some larger transactions in the pipeline I would just characterize it as.

Rob Peratt: It's just hard to predict, Camille. I mean, the large amount of leasing in San Francisco. It's hard to predict whether there will be more of that. There are some larger transactions in the pipeline. I would just characterize it as big tenants having been on the sidelines for quite a few, I would say, quarters. And now we're starting to see activity across our markets in the larger sizes.

Rob Brought: Big tenants had been on the sidelines for quite a few I would say quarters and now we're starting to see activity across our markets and the larger size ranges.

Rob Brought: Yes.

Speaker Change: I appreciate.

Speaker Change: It is a very challenging market.

Speaker Change: Just final question from my end.

Speaker Change: And shifting gears a bit you have substantial amount of liquidity, even accounting for the upcoming maturities and development spend.

Elliot: It is a very challenging market. Just a final question from my end, and shifting gears a bit, you have a substantial amount of liquidity, even accounting for the upcoming maturities and development spans. So when you look at the opportunities to allocate this capital today, where does the dividend fit in this context? Well, you can see from what we did this year that we've kept our dividend at the current levels. It's something that the board evaluates annually.

Speaker Change: So when you look towards the opportunities to allocate this capital today, where does the dividend fit in this context.

Speaker Change: Well you can see that from what we've done this year, we've kept our dividend at the current levels, it's something that the board evaluates annually right now, we're comfortable where those levels with where those levels are and as we get into 2024, we'll make a judgment at that time as to whether the dividend.

Elliot: Right now, we're comfortable with where those levels are. And as we get into 2024, we'll make a judgment at that time as to whether the current dividend level is appropriate or whether it needs to be adjusted up or down. Thank you for taking my question. Our next question comes from Danielle Tricario with Scotiabank. Danielle, please go ahead. Hi, it's Nick Yulico here.

Speaker Change: Whether the current dividend level is appropriate or whether it needs to be adjusted up or down.

Speaker Change: Thank you for taking my questions.

Speaker Change: Our next question comes from Danielle <unk> with Scotiabank Daniel Please go ahead.

If you look out here.

Elliot: Maybe the first question on the guidance. If you could just touch a little bit more on occupancy and how to think about, you know, the phasing of the occupancy through the year and then whether there's anything else that's, you know, a meaningful known expiration where there's you're not retaining a tenant or it's a downsizing like what happened with the right game. Yes, Nick, there are obviously a lot of moving pieces in terms of our occupancy, but the easiest way to think about it is starting at the fourth quarter and going to the midpoint of our range, that's about a 175 basis point decline on the 17 million square feet in our portfolio, which comes out to about 300,000 square feet. We outlined the two large move-outs, which total about 300,000 square feet.

Danielle: Maybe first question on the on the guidance.

Danielle: You just touched a little bit more on the occupancy and how to think about the phasing of the occupancy through the year and then whether there's anything else that's.

Danielle: Meaningful known exploration.

Danielle: Where theres youre, not retain a tenant or to downsizing like.

Danielle: What happened with the right games.

Speaker Change: Yes, Nick there, obviously a lot of moving pieces.

Speaker Change: In terms of our occupancy, but the easiest way to think about it is starting at the fourth quarter and going to the midpoint of our range Thats about 175 basis point decline.

Speaker Change: The 17 million square feet in our portfolio that comes out to about 300000 square feet. We outlined the two large move outs, which total about 300000 square feet there will be other moving pieces beyond that.

Elliot: There will be other moving pieces beyond that, nothing over 100,000 square feet. And as we think about the range, our ability to backfill some of those other smaller move-outs is what gives us confidence in the range. And the better we do, the higher in the range we end up. Okay, great. Thanks. And then Angela, congrats on the new role. Maybe just a question in terms of, you know, how you're viewing, you know, the company and, and, you know, what, what your approach is going to be, you know, you talked about some of the strategies staying the same, but I guess I'm wondering, you know, early thoughts on how you're thinking about balancing future investments, whether it's starting a new development, or if there's an acquisition that pops up that's attractive, and, you know, versus a leasing focus for the portfolio, given there's so much leasing still to do to get back to a more stabilized occupancy, just any early thoughts on how you're thinking about, you know, balancing those two items. Mark.

Speaker Change: Nothing over 100000 square feet and as we think about the range our ability to backfill some of those other smaller.

Speaker Change: Move outs is what gives us confidence in the range and the better we do the higher than the range we ended up.

Speaker Change: Okay, great. Thanks, and then Angela congrats on the new role.

Speaker Change: Maybe just a question in terms of.

Angela Aman: How you are viewing the company and what your approach is going to be you talked about some of the strategy staying the same but I guess I'm wondering.

Early thoughts on how youre thinking about.

Angela Aman: Balancing future investments, whether it's starting a new development or if there is an acquisition that pops up that is attractive versus our leasing focus for the portfolio. Given there is still much leasing still to do to get back to a more stabilized occupancy just any early thoughts on how you're thinking about balancing.

Angela Aman: Those two items.

Speaker Change: Yes, thanks, Nick.

Angela M. Aman: Yeah, thanks, Nick. I would just say, you know, I'm incredibly excited about the opportunity in front of us. There are obviously challenges in the sector and the space, but I'm very convinced that this platform, given we have a premier portfolio, an impeccable reputation in the industry, an incredibly talented team of people, and a really excellent track record of capital allocation, we'll be able to not only sort of weather through some of these challenges but really outperform and take advantage of the opportunities that some of this disruption creates. Which really gets to kind of the heart of You know, I don't think, obviously, we have a big development pipeline in front of us now, as we complete Kilroy Oyster Point 2. We have a lot of opportunities embedded in the future development pipeline.

Speaker Change: I would just say.

Incredibly excited about the opportunity in front of us.

Speaker Change: There are obviously challenges in the sector in the space, but I am very convicted that this platform given we have a premier portfolio and impeccable reputation in the industry and incredibly talented team of people and a really excellent track record of capital allocation that we'll be able to not only sort of whether through some of these challenges, but really outperform and take advantage.

Speaker Change: Of the opportunities that some of this disruption creates.

Speaker Change: I want to really get this kind of the heart of your question about capital allocation and how we should think about that going forward.

Speaker Change: Don't think obviously, we have a we have a big development pipeline in front of US now as we complete Kilroy Oyster point too we have a lot of opportunities embedded in the future development pipeline and I'm going to be spending a lot of time with Justin and Elliott and the rest of the team to really understand what those opportunities look like and.

Speaker Change: And where we have the most outsized opportunities to create value for shareholders already embedded within what the company owns in control as it relates to transaction activity in the market and how we might evaluate that we're at a point right now whether it just hasn't been much activity and many data points to sort of key in queue, we're going to continue to watch.

Angela M. Aman: And I'm going to be spending a lot of time with Justin and Elliot and the rest of the team to really understand what those opportunities look like and where we have, you know, sort of the most outsized opportunities to create value for shareholders already embedded within what the company owns and controls. As it relates to transaction activity in the market and, you know, how we might evaluate that, we're at a point right now where there just hasn't been much activity and many data points to sort of, you know, key into.

Speaker Change: How that evolves over time, and I do believe and I would underscore that as again I said earlier in my prepared remarks that there will be real opportunities that come out of this disruption, but not everything that trades is going to be an opportunity for <unk> I already talked a lot about sort of the idea of creeping functional obsolescence in the space and how we really need to be keyed in.

Angela M. Aman: We're going to continue to watch how that evolves over time. And I do believe, and I would underscore this again, as I said earlier, and I said it in my prepared remarks, that there will be real opportunities that come out of this disruption, but not everything that trades is going to be an opportunity for Kilroy. I've already talked a lot about sort of the idea of creeping functional obsolescence in the space and how we really need to be keyed in on maintaining the quality of this portfolio. And so there are going to be things that trade, you know, that have distressed pricing slapped on them, and not all of, not everything that trades that has some sort of distressed pricing is going to be compelling for this company, given the focus on quality. And so, you know, we'll wait and see how things play out. As Camille sort of noted earlier, we have a tremendous amount of liquidity, and we're in a really good place from a balance sheet perspective. So I think we need to be patient.

Speaker Change: On maintaining the quality of this portfolio and so theyre going to be things that trade that have.

Speaker Change: Distressed sort of slapped on them and.

Speaker Change: Not all of them not everything that trades to add sort of distressed pricing is going to be compelling for this company given the focus on quality and so we'll wait and see how things play out as.

Speaker Change: It can be all sort of noted earlier, we have a tremendous amount of liquidity and we're in a really good place from a balance sheet perspective. So I think we need to be patient and we continue need to continue to evaluate the market and how things are trending, but I think theyre going to be some really interesting and exciting opportunities on the other side of that.

Speaker Change: Thank you.

Speaker Change: Uh huh.

Speaker Change: Yeah.

Speaker Change: Our next question comes from Steve <unk> with Evercore ISI. Please go ahead.

Steve: Thanks, Good morning out there welcome Angela.

Steve: I know youre not going to go through.

Steve: Elliot I know you sort of gave you a few pieces.

Steve: The occupancy it just seems to us as we kind of try to look at the ranges, it's very difficult for us at least to get to the very low end of the range unless you have really got almost no new leasing commencing or you have an exceptionally low retention rate on the space, that's not a known move out so.

Angela M. Aman: We continue to need to continue to evaluate the market and how things are trending, but I think there are going to be some really interesting and exciting opportunities on the other side of this. Thank you. Our next question comes from Steve Sackler with Evercore IS. Please, please go ahead. Thanks. Good morning out there.

You could assume it's kind of close to zero, which seems abnormally low where you could put a new no new leasing, which again would seem abnormally low just I guess can you just help us sort of understand what are the really big swing factors to get the kind of the low end of the occupancy in.

Elliot: Welcome, Angela. I know you're not going to go through this... Yeah. Elliot, I know you sort of gave us a few pieces on the occupancy. It just seems to us, as we kind of try to look at the ranges, it's very difficult for us, at least to get to the very low end of the range unless you've really got almost no new leasing commencing, or you have an exceptionally low retention rate on the space that's not a known move out. So you could assume it's kind of close to zero, which seems abnormally low, or you could put in no new leasing, which again would seem abnormally low. I guess, can you just help us sort of understand what are the really big swing factors to get to kind of the low end of the occupancy? And I guess some of the better drivers or some kind of retention rate or new leasing that might get you to the high end. Yeah, Steve, I think you hit the nail on the head, right? The two swing factors are: what is the retention on some of the balance of the portfolio?

And I guess some of the better drivers or what kind of retention rate of new leasing that might get you to the high end.

Speaker Change: Yes, Steve I think you hit it on the head right. The two swing factors are what is the retention on some of the the balance of the portfolio and then how well do we do and back filling that and.

And how timely are we I think that's the other the other factor to consider.

Speaker Change: To the extent that we have a lot of leasing success in the back half of the year as I mentioned earlier that helps in 2025, but as we think about the 2024 average it's not all that meaningful so if we're at the lower end of the range you can assume that.

Elliot: And then how well do we do in backfilling that? And how timely are we? I think that's the other factor to consider. So to the extent that we have a lot of leasing success in the back half of the year, as I mentioned earlier, that helps in 2025. But as we think about the 2024 average, it's not all that meaningful.

Speaker Change: New leasing is pretty light.

Speaker Change: And the retention is pretty low I think thats fair, yes look we're going to be hyper focused this year on making sure that we are doing everything we possibly can from a leasing perspective to not just get our share of the market, but really to get an outsized share of activity that's happening across all of our markets and that's true across the stabilized portfolio. It is also very true in the development pipeline as well.

Angela M. Aman: So if we're at the lower end of the range, you can assume that new leasing is pretty light, and retention is pretty low. I think that's fair. Yeah, like we're going to be hyper-focused this year on making sure that we are doing everything we possibly can from a leasing perspective to not just get our share of the market but really, you know, to get an outside share of activity that's happening across all of our markets. And that's true across the stabilized portfolio. It's also very true in the development pipeline as well.

Speaker Change: So retention is lower this year as Elliot sort of heightened highlighted in his remarks about the two large move outs. That's just naturally going to bring retention down a little bit and we need to make that up with leasing.

Speaker Change: Yes.

Speaker Change: Okay, and maybe on the G&A front realized with John's retirement, and Angela coming in China.

Speaker Change: It's not a one for one on the dollar side. So there is cost savings I think it was a bit more than may.

Speaker Change: Maybe we had envisioned so can you maybe just walk through some of the moving pieces on G&A and are there other things to possibly still look at on a go forward basis with kind of the run rate.

Elliot: So retention is lower this year, as Elliot sort of highlighted in his remarks about the two large move outs, that's just naturally going to bring retention down a little bit, and we need to make that up with leasing. Okay, and maybe on the GNA front, you know, realize with John's retirement and Angela coming in, it's not a one for one on the dollar side. So there are cost savings, I think it was a bit more than, you know, maybe we had envisioned. So can you maybe just walk through some of the moving pieces on GNA?

Speaker Change: Yes, so I think the easiest way to think about it is when you think about our 2023 number and take out all of the nonrecurring items tied to some of the transition costs you get to kind of the high $70 million range. So.

Speaker Change: So the midpoint of our guidance in 2024 is a few million dollars below that.

Speaker Change: So we continue to look for efficiencies in all parts of the organization that really isn't one area in particular that is getting outsized impact from this.

Elliot: And are there other things to possibly still look at on a go forward basis with kind of the run rate? Yeah, so I think the easiest way to think about it is when you think about our 2023 number and take out all of the non-recurring items tied to some of the transition costs, you get to kind of the high $70 million range. So the midpoint of our guidance for 2024 is a few million dollars below that. So we continue to look for efficiencies in all parts of the organization.

Speaker Change: And it's just us trying to be efficient.

Speaker Change: Where we think that's the appropriate thing to do just that.

Speaker Change: Add to that obviously I'm only two weeks in and I'm really still getting my arms around the organization and how it's structured and how workflows across across different departments and different disciplines. So I still have a lot of work to do to get up to speed, but I will say, we are going to be as Elliot just highlighted as efficient as they possibly can be from a G&A perspective, it's not just about the <unk>.

Elliot: There really isn't one area in particular that is getting an outsized impact from this. And it's just us, you know, trying to be efficient in a time when we think that's the appropriate thing to do. Yeah, I mean, I'll just add to that.

Speaker Change: Absolute number and G&A, though it's also about how every dollar in G&A. We have is being allocated within the company and we really need to make sure to all of the earlier questions about sort of what our primary objectives are for this year that we're making sure that we have all the resources, we need in leasing and development in those functions that the company to meet or exceed the goals, we have laid out for the year.

Angela M. Aman: Obviously, I'm only two weeks in, and I'm really still getting my arms around the organization and how it's structured and how workflows across different departments and different disciplines. So, I still have a lot of work to do to get up to speed, but I will say we are going to be, as Elliot just highlighted, as efficient as we possibly can be from a GNA perspective. It's not just about the absolute number in GNA, though.

Speaker Change: Great that's it for me thanks.

Speaker Change: Okay.

Speaker Change: Our next question comes from Michael Griffin with Citigroup, Michael. Please go ahead.

Michael Griffin: Great. Thanks, maybe just touching back on the leasing environment for a minute and realize youre not going to give formal guidance kind of around the number but do you think that the sustained recovery and leasing activity has lagged as was this more of a one off quarter. I know you noted in the release it was larger.

Elliot: It's also about how every dollar of GNA we have is being allocated within the company. And we really need to make sure, in response to all of the earlier questions about sort of what our primary objectives are for this year, that we have all the resources we need, leasing and development, and those functions of the company to meet or exceed the goals we've laid out for the year. Great, that's it for me, thanks.

Michael Griffin: Leasing velocity since I think 2019, but how should we view it in terms of more sustainable from a from a leasing perspective.

Elliot: Our next question comes from Michael Griffin with... Michael, please go ahead. Great, thanks. Maybe just touching back on the leasing environment for a minute and realize you're not going to give, you know, formal guidance kind of around the number. But do you think that the, you know, sustained recovery in leasing activity has legs? Or was this more of a one-off quarter?

Michael Griffin: Hi, Michael This is Rob I.

Rob Brought: I think again you have to look at it as I said earlier, it's not it's not going to be a linear progression or straight line.

Rob Brought: What I would say that's changed from the pandemic because during the pandemic companies were thinking they may not need office space and we saw some of that today companies are resolved to the fact that a need office space and so now the question is how much and so what youre seeing is the same thing we saw in 'twenty shorter term lease extensions while companies.

Rob Peratt: I know you noted in the release that it was the largest leasing velocity since, I think 2019, 2019. But how should we view it in terms of more sustainable from a leasing perspective? Hi Michael, this is Rob. I think, again, you have to look at it, as I said earlier, it's not, it's not going to be a linear progression or straight line.

Rob Brought: Really rationalize the return to office.

With their employees and the mandates that they've put in place. So I think that it does have legs I just I'm cautiously optimistic that it's.

Rob Brought: I don't feel that it's going to be quarter to quarter at the same magnitude that I highlighted earlier.

Rob Peratt: What I would say that's changed from the pandemic is that during the pandemic, companies were thinking they may not need office space, and we saw some of that. Today, companies are resolved to the fact that they need office space. And so now the question is, how much? And so what you're seeing is the same thing we saw on 20, shorter-term lease extensions while companies really rationalize the return to office with their employees and the mandates that they put in place. So I think that it really does have legs.

Rob Brought: Gotcha.

Rob Brought: Paul.

Speaker Change: Oh, sorry go ahead.

Speaker Change: I just said the year it could end up.

Speaker Change: Good year, just like <unk> does just.

Paul: It's early in the quarter.

Paul: Okay.

Speaker Change: Got you that's helpful. And then maybe just sticking on demand that you're seeing you know Rob you talked about some of the legal demand that's really driving leasing I think particularly in Austin for the more tech focused markets I mean, how much do those traditional sectors have to sort of step into to fill the void of tech leasing.

Rob Peratt: I just am cautiously optimistic that it's, you know, I don't feel that it's going to be, quarter to quarter, the same magnitude that I highlighted. Gotcha, that's helpful.

Rob Peratt: I just said the year could end up being, you know, a good year just like 23 did. It's just, it's early in the quarter. Gotcha. That's helpful. And then maybe just sticking with the on demand that you're seeing, you know, Rob, he talked about some of the legal demand that's really driving leasing, I think, particularly in Austin, for the more tech-focused markets. I mean, how much do those traditional sectors have to sort of step in to fill the void of tech leasing? Or do you see some of those bigger tech firms coming back into the market and taking up space? So we'll use San Francisco and, I think, Seattle as examples.

Speaker Change: Or do you see some of those bigger tech firms coming back to the market and taking up space.

Speaker Change: So.

Speaker Change: We will use San Francisco I think Seattle as examples.

Speaker Change: 35% of the leasing that I mentioned.

Speaker Change: 35% roughly of the demand.

Speaker Change: That we see coming up is related to AI and there is a higher proportion of that of executed leases. Its around 40% that are a combination of AI and different tech.

Speaker Change: So we see that as a trend that's really escalated because the average for example, the average size of a tech tenant in San Francisco or AI Tena was 5000 feet in the beginning of Q1 'twenty three it's now up to 15000 feet and that is taking out those large AI leases that I mentioned so.

Rob Peratt: 35% of the leasing that I mentioned and 35%, roughly, of the demand that we see coming up is related to AI. And there's a higher proportion of that, of executed leases. It's around 40% that are a combination of AI and different tech.

Speaker Change: I think that.

Speaker Change: You have about 35% of the transaction volume happening in San Francisco and roughly in Seattle being from Tech another $35 from financial services law firms et cetera professional services.

Rob Peratt: So, we see that as a trend that's really escalated because the average, for example, the average size of a tech tenant in San Francisco, or AI tenant, was 5,000 feet at the beginning of Q1. It's now up to 15,000 feet, and that is taking out those large AI leases that I mentioned. So, I think that you have about 35% of the transaction volume happening in San Francisco and roughly in Seattle being from tech. Another 35% is from financial services, law firms, etc. Professionals. Great. That's it for me.

Speaker Change: Great. That's it for me thanks for the time.

Speaker Change: Thanks.

Speaker Change: <unk>.

Speaker Change: Our next question comes from Blaine Heck with Wells Fargo. Please go ahead.

Blaine Heck: Great. Thanks, Good morning, I was.

Blaine Heck: Hoping you guys could give us an update on the mark to market in each of your markets and whether you've seen any change in that metric recently, especially in Los Angeles, where you guys have a pretty large proportion of your exploration this year.

Blaine Heck: Okay.

Speaker Change: So plus or minus across the portfolio were about 5% below market.

Speaker Change: And the only region that is sort of outsized relative to the others as Austin, where we are in the double digits call. It twentyish percent below market.

Rob Peratt: Thanks for your time. Thanks. Ahem. Our next question comes from Blaine Heck with Wells Fargo. Please go ahead. Great, thanks. Good morning.

Speaker Change: The others are kind of around that plus or minus 5%.

Elliot: I was hoping you guys could give us an update on the mark to market in each of your markets and whether you've seen any change in that metric recently, especially in Los Angeles, where you guys have a pretty large proportion of your expirations this year. So, plus or minus across the portfolio, we're about 5% below market, and the only region that is sort of outsized relative to the others is Austin, where we're in the double digits, call it 20-ish percent below market. The others are kind of around that plus or minus 5%. L.A. specifically, it's about flying.

Speaker Change: La specifically, it's about flat.

Speaker Change: Great. Thanks.

Speaker Change: Second question can you talk about the tenant or tenants that were moved to cash accounting just a little bit more color on those specific situations and what drove that shift and maybe the outlook for that tenant or those tenants.

Speaker Change: Yes. So it was as we said predominantly one tenant in the Bay area, we do an analysis and evaluation every single quarter on the Collectability of future rents and in this instance, we deemed it was appropriate to convert them to a cash basis I will say they are current on their rent.

Elliot: Great, thanks. Second question, can you talk about the tenant or tenants that were moved to cash accounting and give a little bit more color on those specific situations and what drove that shift and maybe the outlook for that tenant or those tenants? Yeah, so it was, as we said, predominantly one tenant in the Bay Area. We do an analysis and evaluation every single quarter on the collectability of future rents.

Speaker Change: And so that's how we kind of came to the conclusion that we came to.

Speaker Change: Okay and prospects for retaining them any any color you can get there.

Speaker Change: Our expectation is that they're going to continue to pay rent in 2024.

Speaker Change: Alright Thats helpful. Last question for me can you guys just give an update and maybe Angela can chime in on your thoughts on share repurchases, just given where the stock's trading and whether this might be an attractive alternative use of funds as you guys remain on the sidelines with respect to acquisitions and additional development.

Elliot: And in this instance, we deemed it was appropriate to convert them to a cash basis. I will say they are current on their rent. And so that's how we kind of came to the conclusion that we came to. Okay, and prospects for retaining them? Any color you can give there?

Angela Aman: Yeah, Thanks, I'll take a crack at it and Elliot can certainly jump in here.

Rob Peratt: Our expectation is that they're going to continue to pay rent in 2020. All right, that's helpful. Last question for me. Can you guys just give an update?

Angela Aman: But we're going to look at everything and default sort of menu of opportunities available to us from a capital allocation capital allocation perspective buybacks are certainly one of those.

Angela M. Aman: And maybe Angela can chime in on your thoughts on share repurchases, just given where the stock is trading and whether those might be an attractive alternative use of funds as you guys remain on the sidelines with respect to, you know, acquisitions and additional development? Yeah, thanks. I'll take a crack at it.

Speaker Change: Turn it over.

Angela Aman: But buybacks will have to compete for capital with all of the other investment opportunities. We have today either embedded in the portfolio or the opportunities. We think are going to emerge over the next couple of years.

Speaker Change: I would also just underscore obviously, we've got tremendous liquidity like we've hit on a few times that we've got lots of capacity to be able to allocate capital over the next few years I think in a smart way, but we're also always going to do that whether it's buybacks or whether it's development or whether it's acquisitions, we see in the market in a way that protects the balance sheet.

Angela M. Aman: And Elliot can certainly jump in here. But, you know, we're going to look at everything and the full sort of menu of opportunities available to us from a capital allocation perspective. Buybacks are certainly one of those alternatives, but buybacks will have to compete for capital with all of the other investment opportunities we have today, either embedded in the portfolio or the opportunities we think are going to emerge over the next couple of years.

Speaker Change: Great. Thank you guys.

Speaker Change: Okay.

Speaker Change: Okay.

Speaker Change: Our next question comes from John Kim with BMO. Please go ahead.

Angela M. Aman: You know, I'd also just underscore, obviously, we've got tremendous liquidity, as we've hit on a few times. So we've got lots of capacity to be able to allocate capital over the next few years, I think, in a smart way. But we're also always going to do that, whether it's buybacks or whether it's development or whether it's acquisitions we see in the market, in a way that protects the balance. Thank you, guys. Our next question comes from John Kim with BMI. Please go ahead.

John P. Kim: Great. Thank you congratulations Angela my firm.

John P. Kim: Question is on <unk> any commentary you could provide on the additional amenities and parking space.

John P. Kim: That youre, adding to the property.

John P. Kim: And also just the impact of higher cost and I guess, maybe on the softer market new supply.

John P. Kim: What that will have on your development yields.

John P. Kim: Yes, Hi, John this is Justin.

John P. Kim: Great, thank you. Congratulations, Angela. My first question is on KOP2.

Justin Smart: The <unk>.

Justin Smart: The schedule for the project was affected by.

John P. Kim: Any commentary you could provide on the additional amenities and parking space that you're adding to the property? And also just the impact of higher costs and, I guess, you know, the softer market, new supply, what that will have on your development yield? Yeah, hi John, this is Johnston.

Justin Smart: Utilities that ran through the center of the project. If you can imagine pipes and conduits full of gas electric power and telephone.

Justin: The schedule for the project was affected by utilities that ran through the center of the project. If you can imagine, pipes and conduits full of gas, electric, power, and telephone. They all had to be relocated, including the reconstruction of the street, before we could get to the project, and the utility companies are notoriously slow at the best of times. And despite scheduling for their work plus contingency, they took far longer.

They all had to be relocated including the reconstruction of the street before we could get to the project.

Speaker Change: And the utility companies and the tourists we slow at the best of times.

Speaker Change: Despite scheduling for that.

Speaker Change: Their work plus contingency they took far longer so what the net effect is is that the work that went on top or was scheduled to go on top of the utilities had to be delayed.

Justin: So what the net effect is that the work that went on top of or was scheduled to go on top of the utilities had to be delayed. So it meant the corner of the parking structure couldn't start exactly as we had scheduled. And the amenities took longer, so the net effect is another six months. Right. I'll just jump in here. I'd say I toured the project last week with Justin and Rob and the rest of the team.

Speaker Change: It meant the corner the parking structure Couldnt start exactly as we had scheduled.

Speaker Change: And the amenities took longer.

Speaker Change: So the net effect is.

Speaker Change: Yes.

Speaker Change: The six months right and I'll just jump in here I would say I toured the project last week with Justin and Rob and the rest of the team and I just want to Echo everything Johnson said in his prepared remarks I really think this is an outstanding product with an unparalleled amenity and I am really excited about the long term prospects not only for phase two but for potential future phases at KFC.

Angela M. Aman: And I just want to echo everything Justin said in his prepared remarks. I really think this is an outstanding product with unparalleled amenities. And I am really excited about the long-term prospects, not only for phase two but for potential future phases at KOP as well. From a leasing standpoint, we obviously have work to do there. But I would just underscore, I think the biggest piece of feedback we've received from tenants that have requirements in the market today is just that our project isn't ready yet, and many of the tenants looking for and taking space right now are looking to take space in the very near term. So I think our product is responding to the demand that's in the market. We just need to finish construction.

Speaker Change: As well from a leasing standpoint, we obviously have work to do there.

Speaker Change: I would just underscore I think the biggest piece of feedback we've received from tenants that have requirements in the market today, It's just that our project isn't ready yet and many of the tenants looking and taking space right now are looking to take space in the very near term. So I think our product is resonating.

Speaker Change: With the demand that's in the market.

Speaker Change: Just we just need to finish finished construction, but I'm hopeful we'll have leasing progress on <unk> as we move through this year.

Angela M. Aman: But I'm hopeful we'll have leasing progress on KOP too as we move through this year. Timing wise, do you think the leasing will be something that will be announced this year? We're going to work really hard.

Speaker Change: Yes.

Speaker Change: Timing wise do you think the leasing will be.

Speaker Change: Something can be announced this year.

Speaker Change: We're going to work really hard yeah everybody's focused on it.

Angela M. Aman: Yeah, everybody's focused on it. Okay, my second question is how we should think about NOI margins going forward. In the fourth quarter, it ended at 68.2%.

Speaker Change: Okay.

Speaker Change: My second question is how we should think about NOI margins going forward.

Speaker Change: In the fourth quarter ended at 68, 2%.

Speaker Change: There was what we thought was an unexpected decline in property taxes I'm not sure. If that's recurring but also with your guidance of 400 basis point decline in occupancy how should we think about margins.

Elliot: There was what we thought was an unexpected decline in property taxes. I'm not sure if that's recurring, but also, with your guidance, a 400 basis point decline in occupancy. How should we think about margins in 2024? Yeah, so the two parts. This is Elliot John.

Speaker Change: In 2024.

Speaker Change: Yes.

Speaker Change: Two parts. This is John so the property tax that you referenced was a.

Elliot: So the property tax that you referenced was a reimbursement on a refund that we got on real estate taxes, most of which gets passed through. So the net impact to us was not meaningful in the quarter, which is why we did not call it out. It obviously does impact the margins, as you mentioned. I think the right way to think about our margins going forward is if you look at the 2023 margins and then adjust for the fact that we're going to have lower occupancy. As our occupancy gets lower, that negatively impacts our margins. Thanks, Elliot. You got it. The next question comes from Dylan Bozinski with Green Street Advisors. Please go ahead, Dylan.

Speaker Change: Reimbursement.

John: On a refund that we got on real estate taxes, which most of which gets passed through so the net impact to us was not meaningful in the quarter, which is why we did not call. It out. It obviously does impact the margins as you mentioned I think the right way to think about our margins going forward is if you.

John: Look at the 2023 margins.

John: And then adjust for the fact that we're going to have lower occupancy at their occupancy gets lower that negatively impacts our margins.

Speaker Change: Okay, great. Thanks Alan.

Got it.

Speaker Change: Okay.

Speaker Change: Yes.

Speaker Change: The next question comes from John <unk> with Green Street Advisors. Please go ahead Devin.

Speaker Change: Okay.

John: Hi, guys. Thanks for taking the question I guess, just wanted to touch on sort of expectations for net effective rent growth or potential further decline in net effective rents as we think about 2024.

Dylan: Hi guys, thanks for taking the question. I guess just wanted to touch on sort of expectations for net effective rent growth or potential further decline in net effective rents as we think about 2024. Dylan, are you talking about Kilroy specific or market specific?

John: Yeah.

John: Dylan are you talking about <unk> specific or market.

Devin: Specific because.

Rob Peratt: I think it's hard to tell every transaction to be different. Yeah, there's a market level broad, broad across the footprint, right? You still expect, given where market occupancies are, further degradation and either further pressure on concessions, or maybe we will start to see face rent finally start to trickle down. Yeah, I would say that, again, if you tier the market and really look at what the premium space is in almost every market, that space is what's commanding a premium. And so in San Francisco, for example, net effective rents are up substantially from where they were in 2019. Another way to look at it is by the 30% of the vacancy that's in the market, like Seattle. Over 35% of that is in buildings that are 20 years or older.

Devin: Think it's hard to nail every transit.

Devin: Different.

Devin: Yeah.

Dylan: Yes, maybe just market level broad broad across the footprint right.

Dylan: Are you expecting given where market occupancies are further degradation.

Dylan: Further pressure on concessions or maybe we start to see face rents finally start to trickle down.

Speaker Change: Yes, I would say that again, if you if you tier of the market and really look at what the premium spaces in almost every market that space with commanding a premium and so in San Francisco for example, net effective rents are up substantially from where they were in 2019.

Speaker Change: Another way to look at it as of the 30 of the vacancy thats in a market like Seattle.

Speaker Change: Over 35% of that is in buildings that are 20 years or older.

Rob Peratt: And so newer construction, including the Pokemon deal that I mentioned, is commanding premium rent. So it's just going to be a function of the transaction, the credit of the tenant, and it's also going to be a function of the market that it's in and where that market is at that given time. Yeah, I think Rob's really hitting on the right point here, which is, you know, I sort of referred to it as creeping functional obsolescence in my prepared remarks, but, you know, you've heard it referred to by this company and others over time as a flight to quality, winners and losers, the haves and have nots, you're really going to see that bifurcation continue in a pretty meaningful and And did I hear you right?

Speaker Change: And so newer construction, including the pokemon deal that I had.

Speaker Change: Mentioned are commanding premium rents.

Speaker Change: So it's just.

Speaker Change: It's just going to be a function of the transaction the credit of the tenant and it's also going to be a function of the markets its in and where that market is at that given time, yes, I think thats I think <unk> really hitting on the right point here, which is and I sort of referred to it as creeping functional obsolescence in my prepared remarks, but you've heard it referred to by the company and others.

Speaker Change: Over time as a flight to quality the winners and losers the haves and have nots, youre really going to see that bifurcation continue in a pretty meaningful and significant way. So I just caution against looking at the market overall data in any of these markets is a read through to the quality portfolios like kilroy.

Speaker Change: Yes.

Speaker Change: And did I hear you right you are saying that for Kilroy is quality portfolio net effective rents today are higher than they were pre COVID-19.

Angela M. Aman: You're saying that for Kilroy's quality portfolio, net effective rents today are higher than they were, even given the significant rise in concessions. No, I said that in a city like San Francisco, the premium tier of space that's left has a lower availability rate, but it's also commanding higher rents than pre-pandemic. Got it. That's helpful. And I guess it's just one.

Speaker Change: No even given the significant rise in concessions.

Speaker Change: No I said that the that in a city like San Francisco the premium tier.

Speaker Change: Space Thats left has a lower availability rate, but its also commanding higher rents than pre pandemic.

Speaker Change: Got it.

Speaker Change: So that's helpful and then I guess just one.

Rob Peratt: That's helpful. I guess just sort of pivoting over to comments regarding one of the earlier questions just on tenants realizing they need space but trying to figure out how much space they need. In your discussions with tenants as they're touring or signing leases, do you have any sense for sort of what density they're looking at today versus pre-COVID? Yeah, it's less dense than pre-COVID.

Speaker Change: Okay.

That's helpful. I guess, just sort of pivoting over to comments regarding one of the earlier questions just on tenants realizing they need space, but trying to figure out how much space they need.

Speaker Change: In your discussions with tenants out there touring or signing leases I mean any sense for sort of what density.

Speaker Change: Looking at today versus pre Covid.

Speaker Change: Yes, it's less less dense than pre COVID-19 I mean part of what employers are probably the most critical thing that employers are trying to do is create space thats really comfortable and attractive to people coming back to work so that.

Rob Peratt: I mean, part of what employers, probably the most critical thing that employers are trying to do is create space that's really comfortable and attractive to people coming back to work. So you're seeing a lot more collaborative space, open space, and that sort of thing. So we still use a threshold of about one to 200, one to 250. Getting significantly below that is pretty uncomfortable.

Speaker Change: Youre seeing a lot more additive space open space and that sort of thing. So we use we still use it.

Speaker Change: <unk> of about 1% to 201% to $2 50.

Speaker Change: Getting significantly below that as pretty uncomfortable.

Rob Peratt: And you're also seeing it sort of, you're spread out in more space. So it's sort of an interesting trend to watch. But as an example, you're not seeing hoteling being very well received in almost any industry. And that was always sort of seen as a way to, you know, use less space and put more people in space.

Speaker Change: And Youre also seeing it sort of spread out and more space. So it's sort of.

Speaker Change: Interesting trend to watch, but as an example, youre not seeing hotels being very well received in almost any industry.

Speaker Change: And that was always sort of seen as a way to use.

Speaker Change: Useless space and put more people in the space.

Rob Peratt: Yeah, and that's really what I was hitting on in some of my comments about how space doesn't just have to be efficient anymore. It really has to be effective at driving productivity. People need to be able to be as productive in the office as they are at home from a quiet perspective, being able to put their heads down and work, and so I think that's driving some of the trends that Rob really highlighted. I appreciate the color on that.

Speaker Change: And Thats really what I was hitting on and some of my comments about that space doesn't have to just the efficient anymore. It really has to be effective at driving productivity people need to be able to be as productive in the office that they are at home from a client perspective being able to put their head down and work and so I think thats driving some of the trends that Rob really highlight that.

Speaker Change: I appreciate the color on that thank you guys.

Angela M. Aman: Thank you, guys. The next question comes from Upaluwana with Kiki. Please go ahead.

Speaker Change: The next question comes from Paul <unk> with Keybanc. Please go ahead.

Angela M. Aman: Great, thank you. Congratulations on your new role. Congratulations on your role, Rangela.

Paul: Great. Thank you congrats on the new role congrats on your ROE range of law.

Elliot: Thanks. Elliot, thanks for providing all the color on the office trajectory for this year. Do you feel that occupancy could bottom out this year and begin to grow again in 25? You know, you only have about 4% of your expirations next year, and you don't have any of your top 10 and six expiring next year either.

Paul: Thanks.

Paul: Elliot Thanks for providing all the color on the on the office trajectory for this year do you feel that occupancy could bottom out this year and begin to grow again in 'twenty five.

Paul: You only have about 4% exploration next year.

Paul: Have any of your top tenants expiring next year, either so wanted to get a better sense on.

Elliot: So I want to get a better sense of that as well. Yeah, so I appreciate the question. And we are certainly not prepared to talk about 2025 guidance today.

Paul: On that as well.

Elliot: Yes. So appreciate the question and we're certainly not prepared to talk about 2025 guidance today.

Elliot: That said, I think that you hit on a good point that the backdrop is better in 2025 than it is in 2024. And as Angela mentioned, this is a top priority for the company leasing space and doing everything we can to ensure that the trajectory is a good one. Okay.

That said I think that you hit on a good point that the backdrop is better in 2025 than it is in 2024 and as Angela mentioned this is top priority for the company leasing space and doing everything we can to ensure that the trajectory is a good one.

Okay got it and then I wanted to get a little update on indeed tower. It seems to be about 20% left to lease up there and I wanted to get a sense on.

Rob Peratt: And then I wanted to get a little update on Indeed Tower. There seems to be about 20% left to lease up there, and I wanted to get a sense of what the leasing pipeline looks like for that process. Sure.

Elliot: What the leasing pipeline looks like.

Elliot: For that for that project.

Elliot: Sure.

Rob Peratt: You know, in Q3 and Q4, we talked about how the summer, particularly when we were hitting temperatures of 115 or so on a daily basis, really curtailed touring activity, and it's really picked up a lot since the holidays. So we have a pipeline we feel good about, and as I mentioned earlier in response to one of the questions, we're seeing sort of the same tenant mix we've seen before, which are really high-end professional services law firms. Financial Services: we're seeing some tech, so the market has really... Thank you for watching. Go back to the flight.

Elliot: In Q3, and Q4, we talked about how the summer, particularly when we were hitting temperatures of 115 or so on a daily basis really curtailed touring activity.

Elliot: Really picked up a lot since the holidays. So we have a pipeline we feel good about and as I mentioned earlier to one of the questions. We're seeing sort of the same tenant mix, we've seen before which are really high end professional services law firms.

Elliot: Financial services, we're seeing some tech.

Elliot: So the market has really.

Elliot: Sort of turned the corner in terms of at least our activity.

Angela M. Aman: Okay, got it. http://TheBusinessProfessor.com. Alright, thank you. That was helpful. Our next question comes from Caitlin Burrows with Goldman. Caitlin, please go ahead. Hi, good morning, everyone.

Elliot: And people see it as sort of a dwindling asset, meaning we don't have space, but ultimately we don't have a lot of space left.

Speaker Change: So back to flight, Okay got it.

Speaker Change: Alright, Thank you that was helpful.

Speaker Change: Thanks.

Speaker Change: Our next question comes from Caitlin Burrows with Goldman Sachs.

Rob Peratt: And congrats again, Angela, on the new role at the new company. Maybe just to follow up, maybe just to follow up on the earlier comments that the West 8th activity was moving forward. Could you talk about leasing activity more broadly in Seattle? And then specifically how tenant interest has trended at West 8th and kind of whether the improvements you planned for the property are completed by now and how they're being received? Sure, Caitlin. This is Rob again.

Speaker Change: Please go ahead.

Caitlin Burrows: Hi, good morning, everyone and congrats again on the new role at <unk> <unk> company.

Maybe just to follow up.

Caitlin Burrows: Maybe just to follow up on the earlier comments that the <unk>.

Caitlin Burrows: West eighth activity was moving forward could you talk about leasing activity more broadly in Seattle, and then specifically how tenant interest has trended at west eight then kind of weather. The improvements you planned at the property are completed by now and how they're being received.

Caitlin Burrows: Sure Caitlin this is Rob again.

Rob Peratt: Let me just talk about our two markets. So Bellevue activity for us is quite strong. Net rents have held very well in that market despite sublease space from some large tech users. And as I mentioned, these Pokemon and TikTok deals are meaningful for that market. The central CBD of Seattle is a little bit slower.

Speaker Change: Just talk about a split.

Rob Brought: Split our two markets so bellevue activity for us is quite strong.

Rob Brought: Net rents held very well in that market. Despite sublease space from some large tech users and as I mentioned this pokemon and Tic Toc deals are are meaningful for that market.

Rob Brought: The central CBD of Seattle is a little bit slower.

Rob Peratt: We don't have any assets in that submarket. In South Lake Union, where we do have assets, and Fremont, specifically, we have fairly decent activity. So, and we're seeing a mix, but I'd say predominantly it's tech, but they're also professional services looking in the market. West 8th has just commanded a lot of attention based on the amenities and the mix of amenities that we're refreshing and upgrading in the facility. And as you know, and you've heard us talk about, it's all about flight quality and amenities for tenants. And so we have childcare on site, we're doing a tenant lounge, and we have an outdoor deck that's one of the largest in the city. And all of this, all of the amenities there are really thought through from a tenant perspective. They're not leftover space somewhere in the building that we put a gym in, for example.

Rob Brought: We don't have any assets in that Submarket.

Rob Brought: South Lake Union, where we do have assets in Fremont, specifically, we have fairly decent activity, so and we're seeing a mix, but I would say predominantly it's tech.

Rob Brought: But theyre also professional services looking in the market West States, just commanded a lot of attention based on the amenities and the mix of amenities that we're refreshing and upgrading in the facility and as you know and you've heard us talk about it's all about quality and amenities for tenants.

Rob Brought: We have childcare on site.

Rob Brought: Doing a tenant lounge, we have an outdoor deck thats one of the largest in the city and all of this all of the amenities. There are really thought through from a tenant perspective, they're not leftover space somewhere in the building that we put a gym in for example, so that is translating into tour activity and paper.

Angela M. Aman: So that is translating into tour activity and paper being exchanged with tenants right now. Yeah, I toured West 8th my first week at the company, and I would say I'm just really excited about the plans that have been developed for that asset. We're not complete with the redevelopment work yet, there are still some upgrades, but I think it is certainly gonna resonate very, very well. And I look forward to walking through it with many of you once it's complete. Got it. Thanks.

Rob Brought: Papers being exchanged with tenants right now, yes, I toured West States My first week at the company and I would say I'm just really excited about the plans that have been developed for that asset we're not complete with the redevelopment work yet there are the upgrades, but I think it is certainly going to resonate very very well and I look forward to.

Rob Brought: Walking through with many of you once it's completed.

Speaker Change: Got it thanks, and then maybe Elliot you mentioned earlier, how the two large lease expirations for 2004 are now both expected to move out and kill where I get the majority of the space back.

Elliot: And then maybe, Elliot, you mentioned earlier how the two large lease expirations for 24 are now both expected to move out, and Kilroy will get the majority of the space back. So I was just wondering if you could clarify if you're getting all of the space back or not, and then any details you could share maybe for kind of why they're leaving, where they're going, or what you think those decisions could suggest for the bigger picture for office needs. Yeah, there's a small portion of the space where we've backfilled some of it with another tenant. So that's why it is not the entirety of the space. And then Rob.

Speaker Change: Just wondering if you could clarify if youre getting all of the space back or not and then any details you could share maybe for kind of why they're leaving where they're going or what you think those decisions could suggest bigger picture for office needs.

Elliot: Yes, there is a small portion of the space, where we bought back filled.

Elliot: We backfill some of it to another tenant and so thats why it is not the entirety of the space and then profit yeah.

Rob Peratt: Some of it's consolidation. And some of it is, you know, a lot of companies are trying to go through pretty massive cultural changes in terms of revamping themselves for going forward. And so sometimes, moving to a new location and starting fresh is easier than trying to do that in house. So, I got it.

Elliot: Some of it's <unk>.

Elliot: Consolidation and some of it is.

Elliot: Lot of companies are trying to go through pretty massive cultural change in terms of revamping themselves for the for going forward and so sometimes moving to a new location in starting fresh is easier than trying to do that in house. So.

Yeah.

Speaker Change: Got it okay. Thank you.

Elliot: Okay. Thank you. Our next question comes from Pete Abramowitz with Jeff. Please go ahead.

Speaker Change: Our next question comes from.

Speaker Change: Brian <unk> with Jefferies. Please go ahead Pete.

Elliot: Yes, thank you. Just one of the emerging themes from the industry and some of your peers this quarter is taking advantage of potentially partners or, or lenders that are kind of looking to trim office exposure right now. So could you talk about, generally, are you seeing any signs of that in your markets, in terms of deals that are being marketed or conversations you're having, and how that could potentially play into your plans for capital allocation? Yeah, sure. So, as we kind of surveyed the market, I think the two dynamics you touched on, the lender one, is what we've seen a little bit more of. We don't have a lot of partners.

Brian: Yes. Thank you.

Brian: One of the emerging themes from the industry and some of your peers this quarter.

Brian: <unk> is taking advantage of potentially partners or our wonders that kind of are looking to trim office exposure right. Now. So could you talk about generally what are you seeing any signs of that in your markets.

Brian: In terms of deals that are being marketed or conversations you are having and how that could potentially play into your plans for capital allocation.

Speaker Change: Yes, sure so as we kind of surveyed the market.

Speaker Change: I think the two dynamics you touched on the lender one is what we've seen a little bit more of we don't have a lot of partners. We have one we have two partners were very happy with our relationship with both of those partners. So on the lender side. There has been a few instances of lender facilitated sales.

Elliot: We have one, we have two partners. We're very happy with our relationship with both of those partners. So, on the lender side, there have been a few instances of lender-facilitated sales, but I'd say they're more the exception than the rule from what we've seen so far.

Speaker Change: I'd say theyre more of the exception than the rule from what we've seen so far and for us.

Elliot: And for us, as Angela mentioned, the focus on quality is of utmost importance. And in these types of situations, quality has not been something that has been, that warrants additional consideration for us. And so, we have not spent a material amount of time on those deals.

Speaker Change: As Angela mentioned the focus on quality is of utmost importance and in these types of situations. The quality has not been something that.

Speaker Change: Has been.

Speaker Change: That warrants additional consideration for us and so we have not spent.

Speaker Change: A material amount of time on those deals.

Elliot: Got it. Thanks, Elliot. And then, just on the tenant side, I think you have a lease with 23andMe at Oyster Point. They've been in the news for just some issues there and potentially pulling back on the drug development side of their business. Are they on your watch list?

Speaker Change: Got it thanks Elliot.

Speaker Change: And just on the tenant side.

Elliot: I think you have a lease with 23 and me.

Elliot: Oyster point, they've been in the news for.

Elliot: Just some sort of issues, there and potentially pulling back on the drug development side of their business.

Elliot: Are they on your watch list and I guess, just generally if you could talk about.

Elliot: And I guess just generally, could you talk about just potentially the tenant watch list for life science in general? Yeah, I'm sure you can appreciate we can't talk about what tenants are or are not on the watch list. So what we do is we continuously evaluate both tenants' credit history, how current they are on rent, what the trajectory of their business looks like, and make an assessment of what the appropriate accounting treatment is for every tenant. It's a very robust process, and we go through it every single quarter. We have seen the big picture. We've seen a slight tick up on the watch list. We're kind of in the low to mid single digits as a percentage of ABR.

Elliot: Potentially the tenant watch list for life Science in general.

Speaker Change: Yes, I'm sure you can appreciate we can't talk about what tenants are or are not on the watch list.

Speaker Change: So what we do is we continuously evaluate both tenants credit.

Speaker Change: History, how current they are on rents what the trajectory of their business looks like and make an assessment on what the appropriate accounting treatment is for every tenant it's a very robust process and we go through it every single quarter, we have seen a big picture, we've seen a slight tick up in the in the watch list we're kind of.

Speaker Change: In the low to mid single digits as a percentage of ABR.

Elliot: By and large, the quantity of tenants is more retail-related and makes up the majority of the watch list, but there are certainly some office and life science tenants on there as well. Got it, that's all for me, thank you. The next question comes from Michael Carroll with RBC. Michael, please go ahead.

Speaker Change: The by and large the quantity of tenants are more retail related.

Speaker Change: That make up the majority of the watch list, but there are certainly some some office and life science tenants on there as well.

Speaker Change: Got it that's all for me thank you.

Speaker Change: The next question comes from Michael Carroll with RBC, Michael. Please go ahead.

Justin: Yes, and I just wanted to congratulate Angela on the new job. And I believe that you answered this earlier, but the Kilroy-Oster Point construction delay, is that prohibiting tenants from wanting to take down space? Or can tenants still leave space in the property? It's just that they'll be without the parking garage and some of the amenities in the meantime. This is Justin.

Michael Carroll: Yes, and I just wanted to congratulate Angela on the new job.

Michael Carroll: And I believe that you answered this earlier, but the kilroy Oyster point construction delay is that prohibiting tenants from wanting to take down space or can tenants still lease space in the property is just that there'll be without the parking garage and some of the amenities in the meantime.

Michael Carroll: Yeah.

Justin Smart: This is Justin.

Justin: You can appreciate that Oyster Point is a big project. It's 900,000 square feet. There are a lot of details that need to come together before a building is ready, including the amenities of the garage and other site work that has been delayed. So, NetNet, we think, and we are very confident that we can deliver the project within the revised timeline. And the first building will be delivered in late 2024, stabilizing 20, Michael. The comment also is that, um... for demand that's in the market where a lease has expired or is expiring. That is an, you know, if somebody needs space right away, we're not ready; we're not able to have them physically occupy it.

Justin Smart: I appreciate that.

Justin Smart: Oyster point is a big project, it's 900000 square feet. There's a lot of details that need to come together before building is ready, including the <unk>.

Speaker Change: Amenities of the garage and auto side, where it is.

Speaker Change: Being delayed.

Speaker Change: So.

Speaker Change: Net.

Speaker Change: We think and we are very confident that we can deliver the project within the revised timeline.

Speaker Change: And the first building will be.

<unk> delivered.

Late 2020 full stabilizing at 25.

Speaker Change: Michael the comment also is that.

Speaker Change: For demand that's in the market where lease has expired or is expiring.

Speaker Change: That is.

Speaker Change: If somebody needs space right away, we're not ready, we're not able to have them physically occupied but that is changing rapidly. We're having our lab space that we're building and building F will be ready to spring and that has created quite a bit that's one of the reasons. Our activity has remained steady.

Justin: But that is changing rapidly. We're having our lab space that we're building in Building F ready this spring, and that has created quite a bit.

Justin: That's one of the reasons our activity has remained steady. So yes, we could sign leases and will sign leases. And that's a natural occurrence in development, and tenants and landlords work together in order to get the occupancy date pinned down. Okay, then that's helpful.

Speaker Change: So, yes, we could sign leases and will sign leases.

Speaker Change: And that's a natural with Justin is talking about is a natural occurrence in development and tenants and landlords work together in order to get the occupancy date pinned down.

Speaker Change: Okay.

Speaker Change: It's helpful. And then I guess what type of demand are you seeing I noticed your point I guess, what's the breakout between life science and potentially tech demand and are you seeing any AI type demand that possibly is viewing away from the city proper to south San Francisco or is that type of demand just kind of still seeing in the city.

Rob Peratt: And then, I guess, what type of demand are you seeing? I noticed your point. I guess what's the breakout between life science and potentially tech demand? And are you seeing any AI-type demand that possibly is veering away from the city proper to South San Francisco? Or is that type of demand kind of still concentrated in the city? So again, these buildings are purpose-built for life science. They do work for tech. We've seen a smattering of interest from tech since Stripe opened there. One thing I'd keep in mind is that AI and life science are actually coming together quite rapidly because AI is able to help life science producers process massive amounts of data and also simulate drug trials and speed things to market.

Speaker Change: So again these buildings were purpose built life science. They do work for Tech we've seen a smattering of interest from tech and stripe located there one thing I'd keep in mind is that AI and life science are actually coming together quite rapidly because AI is able to help life science producer.

Speaker Change: <unk>.

Speaker Change: Process massive amounts of data and also stimulate drug trials and speed things to market. So.

Rob Peratt: So we're fully expecting that there is going to be, from big pharma as well as startups, a lot of AI involved in the life science industry, but we haven't, you know, we haven't seen the people leaving San Francisco, for example, to come to Oyster Point. Okay, great. Thank you. Thank you. Our next question comes from Vikram Mulhotrao with Mizzou. Please go ahead.

Speaker Change: Fully expecting that there's going to be from big pharma as well as startups a lot of AI involved in the life science industry, but we're not we haven't seen the.

Speaker Change: People, leaving San Francisco for example to come to Oyster point.

Speaker Change: Okay, great. Thank you.

Speaker Change: Thanks.

Speaker Change: Our next question comes from Vikram Malhotra with Mizuho. Please go ahead.

Elliot: Thanks for the question. Just, I guess, Elliot, just to go back, I know you're not giving us kind of anticipated leasing volumes, you know, through the year, but I'm just trying to, you know, for both modeling and just to understand kind of the, you know, economics over, over, you know, 12, 18 month period, should we think about the gap between occupancy and the lease rate to be similar to sort of historical averages? Or perhaps what you see today is likely to be wider? Can you just give us a qualitative sense? Yeah, it's probably similar today. I think it sort of depends, certainly similar today as it has been the last few years. If we went back to 2018-2019, it was probably a little bit wider then.

Vikram Malhotra: Hi, Thanks for taking the question.

Vikram Malhotra: I guess earlier just to go back I know youre not giving us.

Vikram Malhotra: Kind of anticipated leasing volumes.

Vikram Malhotra: Through the year, but I'm just trying to.

Vikram Malhotra: For both modeling and just to understand kind of the economic silver over a 12 to 18 month period should we think about the gap between.

Vikram Malhotra: <unk> been seeing the lease rates to be similar to sort of historical averages or perhaps what you see today is that is it likely to be wider.

Just give us a qualitative sense.

Vikram Malhotra: Yes, it's probably similar today I think it sort of depends certainly similar today as it has been the last few years. If we went back to 28 2019, it was probably a little bit wider than.

Elliot: But I think relative to the last few years, it's been similar. And generally, it will take, call it, you know, forward at six quarters for that to totally flow through occupancy. Got it.

Vikram Malhotra: But I think relative to the last few years, it's been similar.

Vikram Malhotra: Generally it will take call it.

Vikram Malhotra: Four to six quarters for that to totally flowed through occupancy.

Vikram Malhotra: Got it through the year, you expect the gap to be over the longer term I bridge that gap can be similar.

Elliot: So through the year, you expect a gap to be, you know, over a longer term average, that gap to be similar, like 2018, 2017, 2018. Okay, that makes sense. On Oyster Point, I just wanted to clarify one thing. You said there were higher costs. I think it was like 60, 70 million.

Speaker Change: Like 2018, 2017 2018, okay that makes sense.

Speaker Change: On an.

Speaker Change: On Oyster point I just wanted to clarify when you said there were higher costs I think it was $6 $70 million.

Elliot: I'm just, if you could, if you could just give us a bit more color, what are those costs related to? And then, on that point, any changes in expectations around the rent you might get at the property? So just to clarify, which Justin mentioned in his prepared remarks, the change in cost was tied to higher carry. So as we have a longer period until we deliver, we have to carry the property longer, interest, operating expenses, etc. And that is the entirety of the delta.

Speaker Change: If you could if you could just give us a bit more color on what are those costs really had to do.

Speaker Change: And then just on that point any changes in.

Speaker Change: Expectations around rents you might get at the property.

Speaker Change: So just to clarify which Justin mentioned in his prepared remarks, the change in cost was tied to higher carry so it.

Speaker Change: As we have a longer period until we deliver we have to carry the property longer interest operating expenses et cetera, and that is the entirety of the delta.

Speaker Change: And then in terms of rent rent this is Rob <unk>.

Elliot: And then in terms of rent, this is Rob. Rents have maintained very well year over year, both from our competitors, as well as asking rates, as well as our asking rates. So again, it's hard to pinpoint because each transaction is going to have a different set of components. Okay, great.

Rob Brought: Rents have maintained very well very well year over year, both from our competitors as well as asking rates as well as our asking rates. So again, it's hard to it's hard to pinpoint because each transaction is going to have a different set of components.

Rob Brought: Yes.

Speaker Change: Okay, Great and then just last one if I may and congrats on the role.

Rob Peratt: And then this last one, if I may, Angela, congrats on the role. A lot of exciting things going on in the office, but I'm just curious at the outset, you know, given your experience in retail, any broad similarities or strategies that, you know, lend themselves well to kind of the office space from your perspective? Yeah, I mean, thanks. Obviously, there are lots of similarities and lots of big differences.

Speaker Change: The other exciting thing clean on an office, but I'm just curious at the outset.

Speaker Change: Given your experience in retail any broad.

Speaker Change: Similar similarity those strategies that.

Speaker Change: Lend itself well to kind of be office space coming up for questions.

Speaker Change: Yeah I mean.

Speaker Change: Obviously, there are lots of similarities and lots of big differences.

Angela M. Aman: But just to call out a few things. I think I spent some time in my prepared remarks talking about, you know, the way this company has sort of institutionalized the tenant relationship piece of the business. And when you think about office, particularly in a portfolio like Kilroy's versus retail, the ability to work with, you know, the same tenants that are large space users across big portfolios in different markets and really sort of create a relationship where you can, you can make connections between that tenant and the landlord, not just in the leasing function and not just in property management, after they've taken occupancy, but in construction and in legal to make the lease execution process And I think I'm very pleased to see how well Kilroy has done this in the past.

Speaker Change: Just to call out a few things I think that's on some time in my prepared remarks talking about the way. This company has sort of institutionalized.

Speaker Change: The tenant relationship piece of the business and when you think about office.

Speaker Change: Particularly in our portfolio like Kilroy, it's versus versus retail the ability to work with the same tenants that are large space users over big portfolios in different markets and really sort of create a relationship where you can you can make connections between that tenant and the landlord not just in the leasing function in not just <unk>.

Speaker Change: Property management after they've taken occupancy, but in construction and legal to make the lease execution process move faster and all these things is very similar and I think on.

Speaker Change: I'm very pleased to see how well <unk> done that in the past I think that's a big similarity between types of office leasing and types of retail leasing.

Angela M. Aman: I think that's a big similarity between types of office leasing and types of retail leasing. You know, at the end of the day, I think whether it's retail or office, or really any sector, it really is all about capital allocation. And that's true, not just in acquisitions and dispositions and development and redevelopment but just with respect to sort of basic leasing and the types of capital we invest in these tenants, you know, whether they're tech tenants or whether they're retailers or whatever it is. And so the way you make those decisions is really pretty similar across different asset categories.

Speaker Change: At the end of the day, I think whether it's retail or office or really any sector. It really is all about capital allocation and that's true not just in acquisitions and dispositions and development and redevelopment, but just with respect to sort of basic leasing and the types of capital we invest in these in these tenants.

Speaker Change: Whether they are tech tenants or are the retailers or whatever it is and so the way you make those decisions, it's really pretty similar across across different.

Speaker Change: Asset category and then the only other last thing I would say is that retail landlords over the course of the last 15 or 20 years event, no stranger to flight to quality in and creeping functional obsolescence and so I think there are lots of lessons there in terms of how important it is to prioritize the quality of the portfolio and to be really any.

Angela M. Aman: And then the only other thing I would say is that, you know, retail landlords over the course of the last 15 or 20 years have been no stranger to, you know, the flight to quality and creeping functional obsolescence. And so I think there are lots of lessons there in terms of how important it is to prioritize the quality of the portfolio and to be really intellectually honest about sort of what the path and the growth trajectory looks like for specific assets or specific opportunities you're seeing in the market going forward. Thank you, Chart. The next question comes from Omo Okasanya with Deutsch...

Actually honest about sort of what the path and the growth trajectory looks like for specific assets or specific opportunities youre seeing in the market going forward.

Speaker Change: Thank you.

Speaker Change: Sure.

Speaker Change: The next question comes from Anna Okusanya with Deutsche Bank. Please go ahead.

Elliot: Yes, good afternoon, everyone. First of all, Angela, congratulations. We're very excited to see you upwards and onwards. Question just around guidance and FAD guidance in particular for anyone who wants to kind of help us think through what that could look like this year, specifically around things like second generation TI and just kind of how do we kind of think about, you know, you've laid a pretty good groundwork for FFO, but for FAD, how do we kind of think through some of that? Yeah, so, we touched on straight line rent in our prepared remarks, which will be a big delta from the prior year in terms of our FAS 141. I think the 4Q run rate is a good run rate to use, plus or minus. And then the, you know, the big question is CAPEX. I think that we've been sort of in the low double digits as a percentage of NOI for the last few years.

Anna Okusanya: Hi, yes, good afternoon, everyone.

Anna Okusanya: First of all Andrew luck congratulations.

Anna Okusanya: We're excited to see you.

Anna Okusanya: <unk> onwards.

Anna Okusanya: Question, just around guidance and <unk> guidance in particular for anyone who wants to see.

Anna Okusanya: Kind of help us think through what that could look like this year, specifically also around things.

Anna Okusanya: Things like second generation Ti and just kind of how do we kind of think about particularly groundwork for <unk>.

Anna Okusanya: How do we kind of think through some of that.

Speaker Change: Yes, so we touched on straight line rent in our prepared remarks, which will be a big delta from the prior year in terms of our Fas 141, I think the <unk> run rate is a good run rate to use plus or minus and then the big question is capex I think that we've been.

Speaker Change: Sort of in that low double digits as a percentage of NOI in the last few years.

Elliot: Our expectation is that we're higher than that this year, and we think that that's a function of the leasing that we did in the 4th quarter. And, you know, our anticipation that there'll be more leasing to come in 2024. Okay, that's helpful.

Speaker Change: Our expectation is that were higher than that this year.

Speaker Change: And we think that that's a function of the leasing that we have done in the fourth quarter and.

Speaker Change: Our anticipation that there'll be more leasing to come in 2024.

Speaker Change: Yes.

Speaker Change: Okay. That's helpful. And then one months you'd indulge me Angela you kind of mentioned again about this idea of.

Elliot: And then one more, if you will indulge me, Angela, you kind of mentioned again this idea of, you know, maintaining a high-quality portfolio, some of the lessons learned about flight to quality on the retail side, and while you do not have any dispositions in your guidance for 2024, should we think, should we be thinking about a world where there could be some additional dispositions in the Kilroy portfolio? Yeah, I mean, I think Elliot framed it right in his prepared remarks, which is that whether it's dispositions or acquisitions, we're going to be opportunistic on both fronts. The transaction market is very, very quiet right now, so I don't think it's prudent to bake anything into guidance, but we're going to, you know, I need to spend more time really evaluating the portfolio.

Speaker Change: Maintaining a high quality portfolio some of the lessons learned about flight to quality on the retail side why you do not have any dispositions in your guidance for 2024 should we think should we be thinking about a world where they could be kind of additional dispositions in the kilroy portfolio.

Speaker Change: Yeah, I mean, I think Elliot framed it up right in his prepared remarks, which is that whether its dispositions or acquisitions were going to be opportunistic on both fronts. The transaction market is very very quiet right now so I don't think its prudent.

Speaker Change: To bake anything into guidance, but we're going to need to spend more time really evaluating our portfolio I think theyre going to be assets, we choose to sell over time, because we do think.

Elliot: I think there are going to be assets, you know, we choose to sell over time because we do think that the forward growth prospects are not what we need them to be and not at the standard we'd like them to be. There are also, conversely, going to be opportunities to sell assets that have traded at amazing values, as the company has done in the past, that we really would look to trade because this platform, I think that's so robust, just can't add additional value to those assets. So I think those two things kind of balance each other out over time. But as it relates to 2024, there's just not enough activity in the transaction market for us to really, you know, sort of put a pin in specific guidance on either dispositions or acquisitions.

Speaker Change: The forward growth prospects are not what we need them to be in at the standard we'd like them to me. They're also conversely going to be opportunities to sell assets that trade at amazing values as the company has done in the past that.

Speaker Change: But we really would look to trade because of this platform I think that's so robust just can't add additional value to those assets. So I think those two things kind of balance each other out over time, but as it relates to 2024, there's just not enough activity on the transaction market for us to really sort of specific guidance on either dispositions or acquisitions.

Angela M. Aman: Gotcha. Thank you. With that, we have no further questions; I'll turn the call back to Bill for any closing remarks. All right, well, great. Thank you, Emily, and thank you, everyone, for joining us today. We appreciate your continued interest in Kilroy Realty Corporation. Thank you. Thank you everyone for joining us today. This concludes our call, and you may now disconnect your line. www.globalonenessproject.org. Thank you, everyone, for joining us today.

Speaker Change: Got you. Thank you.

Speaker Change: With that we have no further questions I'll turn the call back to bill for any closing remarks.

Bill: Alright, great. Thank you Emily and thank you everyone for joining US today. We appreciate your continued interest in Kilroy Realty Corporation. Thank you.

Speaker Change: Thank you everyone for joining us today. This concludes our call and you may now disconnect your lines.

Speaker Change: [music].

Speaker Change: Thank you everyone for joining us today.