Q1 2024 Kilroy Realty Corporation Earnings Call
Angie: Good morning everyone, and welcome to the KRC 1Q24 earnings conference call. My name is Angie, and I'll be coordinating your call today.
Good morning, everyone and welcome to the <unk> 24 earnings Conference call. My name is Angie and there'll be coordinating your call today.
Angie: During the presentation, you can register to ask a question by pressing star followed by 1 on your telephone keypad. If you change your mind, please press star followed by 2. Please be reminded to limit your time to one question and one follow-up only. I will now hand you over to your host, Bill Hutcheson, Senior Vice President of Investment Relations and Capital Markets.
Angie: During the presentation you can register to ask a question by pressing star followed by one on your telephone keypad.
Angie: Have you changed your mind, Please press star followed by T.
Angie: Please be reminded to limit your time to one question and one follow up on me.
I'll now hand, you over to your host Bill Hutchison Senior Vice President of Investor Relations and capital markets. Please go ahead.
William E. Hutcheson: Thank you, Angie. Good morning, everyone. Thank you for joining us.
William E. Hutcheson: Thank you Angie good morning, everyone. Thank you for joining us on the call with me today are Angela Aman, our CEO, Jonathan Smart President, Rob <unk>, our Chief leasing Officer, Elliott Trencher, our CIO and CFO at.
William E. Hutcheson: On the call with me today are Angela Aman, our CEO; Justin Smart, our president; Rob Paratte, our chief leasing officer; and Eliott 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.
William E. Hutcheson: At the outset I need to say that some of the information we will be discussing during this call is forward looking in nature.
William E. Hutcheson: Please refer to our supplemental package for a statement regarding the forward looking information on this call and in the supplemental.
William E. Hutcheson: 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 available on our website.
William E. Hutcheson: Our earnings release and supplemental package have been filed on a Form 8K with the SEC, and both are available on our website. Angela will start the call with the strategic overview and quarterly highlights, and Eliott will discuss our financial results and provide our updated 24 guidance. Then we'll be happy to take your questions.
William E. Hutcheson: Angela will start the call with a strategic overview and quarterly highlights and Elliott will discuss our financial results and provide our updated 24 guidance.
And then we'll be happy to take your questions Angela.
Angela M. Aman: Thanks, Bill, and good morning. On our last earnings call, I summarized some initial takeaways from my first couple of weeks as CEO, including Kilroy's strong portfolio positioning, the underlying strength of our talented team, and the quality of their relationships with our tenants and a clear trend of improving fundamentals within our market. As I have settled in over the last three months, my initial takeaways continue to be reinforced. The quality of our portfolio and platform uniquely positions us to benefit from the recovery we are beginning to see take hold in our market. I'm happy to report a very active first quarter for Kilroy.
Angela M. Aman: Thanks, Bill and good morning on our last earnings call I summarized from initial takeaways from my first couple of weeks as CEO.
Angela M. Aman: And kilroy strong portfolio positioning.
Angela M. Aman: Underlying strength of our talented team and the quality of the relationships with our tenants and a clear trend of improving fundamentals within our market.
Angela M. Aman: As I settle down over the last three months. My initial takeaway has continued to be reinforced the quality of our portfolio and platform uniquely positions us to benefit from the recovery. We are beginning to see take hold in our market.
Angela M. Aman: I'm happy to report on a very active first quarter for Kilroy leasing volumes were strong we enhanced our liquidity profile and extended debt maturity and last night, we raised both same property NOI growth and <unk> guidance.
Angela M. Aman: Leasing volumes were strong. We enhanced our liquidity profile and extended debt maturity. And last night, we raised both same property NOI growth and FFO guidance. During the first quarter, we signed approximately 400,000 square feet of leases, which represents Kilroy's highest first quarter leasing volume since 2017, and a 40% increase relative to the first quarter of 2023. We saw strength in our Southern California markets and across multiple industries, including gaming, professional services, finance, and technology.
Angela M. Aman: During the first quarter, we signed approximately 400000 square feet of leases, which represents kilroy its highest first quarter leasing volume since 2017, and a 40% increase relative to the first quarter of 2023, we.
Angela M. Aman: We saw strength in our southern California markets and across multiple industries, including gaming professional services finance and technology.
Angela M. Aman: Some specific leasing highlights include: First, as previously discussed, we signed a 77,000 square foot renewal with Riot Games for Riot's Arena, a unique event space in the heart of their West L.A. campus. Second, we signed 70,000 square feet of new and renewal leases across our Del Mar portfolio in San Diego, resulting in a 98% lease rate in that sub-market. The San Diego market, in general, and Del Mar specifically, has been the strongest region in our portfolio, with physical occupancy approaching 90%.
Angela M. Aman: Some specific leasing highlights include.
Angela M. Aman: First as previously discussed we signed a 77000 square foot renewal with riot games for riots Arena, a unique event space in the heart of their west L. A campus.
Angela M. Aman: Second we signed 70000 square foot square feet of new and renewal leases across our del Mar portfolio in San Diego, resulting in a 98% lease rate in that Submarket, the San Diego market in general and del Mar specifically has been the strongest region in our portfolio with physical occupancy approaching 90%.
Angela M. Aman: High fiscal occupancy rates have given companies certainty around their space needs and confidence to make real estate decisions, which has translated into strong results for our portfolio. And finally, we signed our first new lease at West 8th Street in Seattle, where an AI company took a partial floor. AI demand is notable in both San Francisco and Seattle, where the aggregation of top tech talent is most pronounced. We fully expect that the growth in AI over the next several years will lead to accelerating demand in our markets from both big tech platforms and startup companies alike. Our forward leasing pipeline also remains strong. In particular, at Kilroy Oyster Point Phase 2, tour activity has meaningfully accelerated in 2024, with several large format user tours occurring over the last six weeks.
Angela M. Aman: Hi, physical occupancy rates of giving companies certainty around their space needs and confidence to make real estate decisions, which has translated into strong results for our portfolio.
Angela M. Aman: And finally, we signed our first new lease at Westgate Street in Seattle, where an AI company took a partial floor AIG.
Angela M. Aman: <unk> demand is notable in both San Francisco, and Seattle, where the aggregation of top Tech talent is most pronounced we fully expect that the growth in the AI over the next several years will lead to accelerating demand in our markets from both big Tech platforms and startup companies alike.
Angela M. Aman: Our forward leasing pipeline also remained strong in particular at Kilroy Oyster point Phase two tour activity has meaningfully accelerated during 2024 with several large format user tours occurring over the last six weeks.
Angela M. Aman: We also remain on track to deliver our spec suites in one of the three phase two buildings in October, and we'll be ready to capture demand from smaller users with requirements for move-in ready space as we approach delivery. We remain excited by the uniqueness and quality of this project and its long-term competitiveness within the South San Francisco sub-market. Shifting to the fundraising environment, we are starting to see some green shoots, suggesting capital flows are improving in the technology sector.
Angela M. Aman: We also remain on track to deliver our spec suites and one of the three phase II buildings in October and will be ready to capture demand from smaller users with requirements for move in ready space as we approach delivery.
Angela M. Aman: We remain excited by the uniqueness and quality of this project and its long term competitiveness within the South San Francisco Submarket.
Angela M. Aman: Shifting to the fund raising environment, we are starting to see some green shoots suggesting capital flows are improving in the technology sector during the quarter stripe or tenant at K O P. Phase one raised a round of private funding at a $65 billion valuation representing a 30% increase in valuation from just a year ago.
Angela M. Aman: During the quarter, Stripe, our tenant at KOP Phase 1, raised a round of private funding at a $65 billion valuation, representing a 30% increase in valuation from just a year ago. Additionally, Reddit, our tenant at 303 2nd Street in San Francisco, successfully completed its IPO at a $6.5 billion valuation, the high end of its indicated range.
Angela M. Aman: Additionally, read it or tenant at 303 second Street in San Francisco successfully completed their IPO at a $6 5 billion dollar valuation the high end of its indicated range flu.
Angela M. Aman: Flu Chip tech companies are demonstrating access to capital, which bodes well for the broader tech ecosystem and ultimately for real estate requirements. As it relates to life science, after record years of venture capital deployment during the height of the pandemic, the pace has decelerated to a more normalized level. That said, 2023 saw over $30 billion of activity, significantly higher than any standalone pre-pandemic year, and 2024 appears to be on pace for similar levels.
Angela M. Aman: Blue Chip Tech companies are demonstrating access to capital, which bodes well for the broader tech ecosystem and ultimately for real estate requirements.
Angela M. Aman: As it relates to the life science after record years of venture capital deployment during the height of the pandemic the pace has decelerated to more normalized levels.
Angela M. Aman: 2023, so over $30 billion of activity significantly higher than any stand alone pre pandemic year and 2024 appears to be on pace for similar level.
Angela M. Aman: As the population continues to age, health care costs continue to increase, and novel drug approvals continue to proceed at an accelerated pace, the stage is set for continued growth in the life science sector, and we believe that our portfolio is extremely well positioned to benefit from these long-term trends. Turning to the transaction market, we are starting to see some signs of life. Sellers for quality properties are beginning to softly test the market. However, the wide bid-ask spread that has been observed over the last several quarters persists, and debt financing is challenging to secure. Overall transaction volumes remain low.
Angela M. Aman: As the population continues to age health care cost continue to increase and novel drug approvals continue to proceed at an accelerated pace. The stage is set for continued growth in the life science sector, and we believe that our portfolio is extremely well positioned to benefit from these long term trends.
Angela M. Aman: Turning to the transaction market, we're starting to see some signs of life.
Angela M. Aman: For quality properties are beginning to softly test the market the wide bid ask spread that has been observed over the last several quarters persists and that financing is challenging to secure the overall transaction volumes remain low we are hopeful that will begin to change over the coming quarters as.
Angela M. Aman: We are hopeful that will begin to change over the coming quarters. As we navigate this environment, we will be patient and continue to adhere to our three core pillars, high-quality properties, strategic capital allocation, and a fortress balance sheet. Ultimately, we expect to be both an opportunistic buyer and a strategic seller when market conditions permit, making decisions based on real estate fundamentals and risk-adjusted returns, not based on capital needs, as we have maintained exceptional liquidity and financial flexibility.
Angela M. Aman: As we navigate this environment, we will be patient and continue to adhere to our three core pillars high quality properties strategic capital allocation and a fortress balance sheet ultimately.
Angela M. Aman: We expect to be both an opportunistic buyer and a strategic seller when market conditions permit making decisions based on real estate fundamentals and risk adjusted returns.
Angela M. Aman: Not based on capital needs, because we have maintained exceptional liquidity and financial flexibility.
Angela M. Aman: We are proud of the company's capital allocation track record and are confident that we will identify meaningful opportunities to create value for shareholders moving forward. Before turning the call over to Eliott, on behalf of the entire management team, I want to thank our Kilroy colleagues who have continued to execute so effectively across all disciplines. I've been extraordinarily impressed with the quality and commitment of this team, specifically their motivation, creativity, and collaboration. And I look forward to what we can deliver together over the coming year.
Angela M. Aman: We are proud of the company's capital allocation track record and are confident that we will identify meaningful opportunities to create value for shareholders moving forward.
Angela M. Aman: Before turning the call over to Elliot on behalf of the entire management team I want to thank our kilroy colleagues. We've continued to execute so effectively across all disciplines I've been extraordinarily impressed with the quality and commitment of this team specifically their motivation creativity and collaboration and I look forward to what we can deliver together over the coming year.
Eliott Trencher: Thank you, Angela. The first quarter represented a good start to the year, with FFO of $1.11, or three pennies above the fourth quarter. The increase was predominantly due to lower straight-line rent reserves and lower G&A, partially offset by lower occupancy and higher net interest expense from our recent bonding. On a same store basis, first quarter cash NOI was down roughly 7%.
Angela M. Aman: Elliot.
Elliot: Thank you Angela.
Elliot: First quarter represented a good start to the year with <unk> of $1 11, or three pennies above the fourth quarter. The increase was predominantly due to lower straight line rent reserves and lower G&A, partially offset by lower occupancy and higher net interest expense from our recent bond deal.
Elliot: On a same store basis first quarter cash NOI was down roughly 7%.
Eliott Trencher: As previously noted, the prior period included $12 million of restoration payments, making the first quarter of 2023 a difficult comparison. At the end of the quarter, our stabilized portfolio was 84.2% occupied and 85.7% leased. The decrease from the prior quarter was due to some move-outs, mainly in Los Angeles, partially offset by a move-in at Indeed Tower in Austin.
Elliot: As previously noted the prior period included $12 million of restoration payments, making the first quarter of 2023, a difficult comparison.
Elliot: At the end of the quarter, our stabilized portfolio was 84, 2% occupied and 85, 7% leased the decrease from the prior quarter was due to some move outs, mainly in Los Angeles, partially offset by a move in at India Tower in Austin.
Eliott Trencher: Of note, one of the move-outs during the quarter was Box, who gave back roughly 50,000 square feet in Redwood City. However, this space is already back-filled with a long-term lease to a best-in-class law firm who we expect to move in by year-end. Turning to the balance sheet, net debt to trailing 12-month EBITDA was in the mid-six times. As you may have noted, we are now disclosing this information on pages 3 and 29 of our Supplement.
Elliot: Of note one of the move outs during the quarter was box, who gave back roughly 50000 square feet in Redwood City. However, this space is already back filled with a long term lease to a best in class law firm, who we expect to move in by year end.
Elliot: Turning to the balance sheet net debt to trailing 12 month EBITDA was in the mid six times as you May have noted we are now disclosing this information on pages, three and 29 of our supplemental.
Eliott Trencher: As Angela referenced, on the capital market side of the productive quarter, in January, we raised $400 million of 12-year unsecured bonds at a coupon of 6.25%, an opportunistic transaction we feel even better about today, given the changes in the interest rate environment over the past several months. We elected to use a portion of the proceeds to pay down $200 million of our $520 million term loan and simultaneously execute a 12-month extension for a $200 million tranche of the remaining $320 million, bringing the maturity date for that portion to 2027, including extension options.
Elliot: As Angelo referenced on the capital market side. It was a productive quarter in January we raised $400 million of 12 year unsecured bonds at a coupon of six 5% and opportunistic transaction, we feel even better about today given the changes in the interest rate environment over the past several months we elected to.
Elliot: Use a portion of the proceeds to pay down $200 million of our $520 million term loan and simultaneously executed a 12 month extension for a $200 million tranche of the remaining $320 million, bringing the maturity date for that portion to 2027, including extension options.
Eliott Trencher: In March, we were thrilled to announce the recast of our line of credit, extending the maturity date by three years to 2028, while maintaining total capacity at 1.1 billion. We are appreciative of the partnership and support demonstrated by our bank syndicate and believe that these two transactions highlight that lenders and fixed income investors continue to support the credit of best-in-class sponsors across the office and life science sectors. Finally, in March, we announced the refreshment of our stock buyback and ATM programs.
In March we were thrilled to announce the recast of our line of credit extending the maturity date by three years to 2028, while maintaining total capacity at $1 1 billion.
Elliot: We are appreciative of the partnership and support demonstrated by our bank Syndicate and believe that these two transactions highlight that lenders and fixed income investors continued to support the credit best in class sponsors across the office and life science sectors.
Elliot: Finally in March we announced the refreshment of our stock buyback and ATM programs, while we have not been active on either front. We believe it is important to have all tools available to the company, particularly in light of the current volatility in the marketplace.
Eliott Trencher: While we have not been active on either front, we believe it is important to have all tools available to the company, particularly in light of the current volatility in the market. As a result of these transactions, our liquidity remains robust.
Elliot: As a result of these transactions our liquidity remains robust as of quarter end, we had over 2 billion of available liquidity comprised of $950 million of cash and marketable securities and $1 1 billion available on our line of credit.
Eliott Trencher: As of quarter end, we had over $2 billion of available liquidity, comprised of $950 million of cash and marketable securities and $1.1 billion available on our line of credit. Our projected uses of capital for the remainder of the year are between $550 million and $650 million, broken down as follows. Roughly $400 million of debt maturities and $150 to $250 million of development spend. Before we get to guidance, we wanted to point out some enhancements we made to the Supplement this quarter. Some of these changes include, on pages 20 and 21, we expanded our list of top tenants from 15 to 20 and added information around tenant industry classification.
Elliot: Our projected uses of capital for the remainder of the year are between 550 and $650 million broken down as follows roughly $400 million of debt maturities and $150 million to $250 million of development spend.
Eliott Trencher: On pages 27 and 28, we added more disclosure around our debt capitalization stack and annual debt maturity. Finally, on page 17, we bifurcated our first generation CapEx into two buckets, one for development and redevelopment projects that have been moved to the stabilized portfolio, and the second one for major repositionings, which consists of projects undergoing value-accretive material renovation. For the reported period, the only meaningful project in this bucket is West 8th Street in Seattle, which, as many of you know, is undergoing a sizable renovation after Amazon vacated early last year. We hope these additional disclosures are beneficial and demonstrate our desire to proactively provide enhanced transparency to the investment community.
Speaker Change: Before we get the guidance, we wanted to point out some enhancements we made to the supplemental this quarter some.
Speaker Change: Some of these changes included on pages 20, and 21, we expanded our list of top tenants from 15 to 20 and added information around tenant industry classifications.
Speaker Change: On pages 27, and 28, we added more disclosure around our debt capitalization stack in annual debt maturities.
Speaker Change: Finally on page 17, we bifurcated, our first generation capex into two buckets, one for development and redevelopment projects that had been moved to the stabilized portfolio and the second one for major repositioning which consists of projects undergoing value accretive material renovation.
Speaker Change: The reported period, the only meaningful project in this bucket as West <unk> Street in Seattle, which as many of you know is undergoing a sizeable renovation after Amazon vacated early last year.
Speaker Change: We hope these additional disclosures are beneficial and demonstrate our desire to proactively provide enhanced transparency to the investment community.
Eliott Trencher: Now let's discuss our updated 2024 guidance. No acquisitions or dispositions are forecast, though, as Angela discussed, we will remain opportunistic on both fronts. As previously mentioned, the remaining development spend for the year is anticipated to be between $150 to $250 million, which when combined with the first quarter spend represents no change to our original full-year guidance of $200 to $300 million. G&A is still expected to be between $72 and $80 million.
Speaker Change: Now, let's discuss our updated 2020 for guidance.
Speaker Change: No acquisitions or dispositions or forecast, though as Angela discussed we will remain opportunistic on both fronts.
Speaker Change: As previously mentioned the remaining development spend for the year is anticipated to be between $150 million to $250 million.
Speaker Change: Which when combined with the first quarter spend represents no change to our original full year guidance of $2 million to $300 million.
G&A is still expected to be between 72% and $80 million.
Eliott Trencher: G&A in the first quarter was low due to the timing of when we incurred certain costs. Straight line rent is projected to range between negative five and six million dollars. Our average occupancy estimate of 82.5% to 84% has not changed. Cash same-store NOI is projected to be between negative three and a half and negative five and a half percent, a 50 basis point increase at the midpoint mainly due to better parking income and fee income in the first quarter. In summary, our updated 2024 guidance is projected to range between $4.15 and $4.30, with a midpoint of approximately $4.23, or a 5 cent increase at the midpoint.
Speaker Change: In the first quarter was low due to timing of when we incurred certain costs.
Speaker Change: Straight line rent is projected to range between negative $5 6 million.
Speaker Change: Our average occupancy estimate of 82, 5% to 84% has not changed.
Speaker Change: Cash same store NOI is projected to be between negative three five and negative five 5% a 50 basis point increase at the midpoint, mainly due to better parking income and fee income in the first quarter.
Speaker Change: In summary, our updated 2024 guidance is projected to range between $4 15, and $4 30.
Speaker Change: With the mid point of approximately $4 23.
Speaker Change: Or <unk> increase at the midpoint.
Eliott Trencher: This increase is due to better NOI from recurring and non-recurring items and slightly lower net interest expense due to lower-than-anticipated deferred financing costs and higher interest income. On a quarterly basis, guidance implies FFO for the balance of the year will be about $1.04, or $0.07, lower than the first quarter. The bridge to get there can be broken down as follows.
Speaker Change: This increase is due to better NOI from recurring and nonrecurring items and slightly lower net interest expense due to lower than anticipated deferred financing costs and higher interest income.
Speaker Change: On a quarterly basis guidance implies <unk> for the balance of the year will be about $1 <unk> or <unk> <unk> lower than the first quarter. The bridge to get there can be broken down as follows subtract two pennies for lower occupancy, which factors in our move ins and move outs subtract <unk> <unk> for lower interest income as our cash balance declines.
Speaker Change: Over the course of the year.
<unk>, one penny due to timing of G&A spend.
Eliott Trencher: Subtract two pennies for lower occupancy, which factors in our move-ins and move-outs. Subtract four pennies for lower interest income as our cash balance declines over the course of the year. Subtract one penny due to the timing of G&A. To conclude, we are pleased with the results from the quarter and believe the increase in guidance correlates with the improvements we are seeing in the portfolio. We have set up the balance sheet to be flexible and resilient and believe our robust liquidity sets us up to have multiple avenues to create and enhance shareholder value in the coming years. With that, we're happy to take your questions. Angie?
Speaker Change: To conclude we are pleased with the results from the quarter and believe the increase in guidance correlates with the improvements we are seeing in the portfolio.
Speaker Change: We've set up the balance sheet to be flexible and resilient and believe our robust liquidity sets us up to have multiple avenues to create and enhance shareholder value in the coming years with that we're happy to take your questions Angie.
Yes.
Angie: Thank you. Hello everyone.
Angie: Thank you Hello, everyone. If you would like to ask a question. Please press star followed by one on your telephone keypad.
Angie: Have you changed your mind. Please press star followed by T. As a reminder, please limit your time to one question and one follow up only.
Angie: We will pause briefly ask the question the register.
Angie: If you would like to ask a question, please press star followed by 1 on your telephone keypad now. If you change your mind, please press star followed by 2. As a reminder, please limit your time to one question and one follow-up only. We'll pause here briefly and sequester the register. The first question is from Blaine M. Heck with Wells Fargo. Your line is open.
Angie: The first question is from Blaine Heck.
Blaine Matthew Heck: <unk> with Wells Fargo. Your line is open.
Blaine Matthew Heck: Okay.
Blaine Matthew Heck: Great, thanks. Good morning.
Blaine Matthew Heck: Great. Thanks, Good morning, just.
Blaine Matthew Heck: Wanted to touch on the 116000 square feet of short term leases signed this quarter can you just talk in general about those situations are these tenants that are just unsure of their business and don't want to commit to longer terms or should we think of this as more of kind of swing space, while other spaces being built out and then.
Blaine Matthew Heck: How do you feel about your ability to turn any of those into longer term deals.
Angela M. Aman: Just wanted to touch on the 116,000 square feet of short-term leases signed this quarter. Can you just talk in general about those situations? Are these tenants that are just unsure of their business and don't want to commit to longer terms? Or should we think of this as more of a kind of swing space while other space is being built out? And then how do you feel about your ability to turn any of those into longer ones?
Speaker Change: Yeah, Thanks, Brian Good morning.
Speaker Change: I'll go ahead and take it and Rob can jump in if there's anything he wants to add here.
Speaker Change: I'd just say we did some short term leasing last quarter, which was predominantly renewals and I would say those renewals kind of fall into the two buckets, you mentioned right, it's people sort of delaying making decisions or needing the space a little bit longer temporarily and.
Speaker Change: In advance of whatever their longer term plan really is.
Speaker Change: This quarter as you know, we signed about 116000 square feet of short term leases about 30000 square feet of that with short term renewals. So a relatively immaterial amount and again on the short term renewal side, we're not putting any capital in good deals just to preserve occupancy a little bit longer and get some additional revenue in the door.
Angela M. Aman: Yeah, thanks, Blaine, good morning. I'll go ahead and take it, and Rob can jump in if there's anything he wants to add. I would just say, you know, we did some short-term leasing last quarter, which was predominantly renewal. And I would say those renewals kind of fall into the two buckets you mentioned, right? It's people, you know, sort of delaying making decisions or, you know, needing the space a little bit longer temporarily and in advance of whatever their longer-term plan really is.
Angela M. Aman: This quarter, as you know, we signed about 116,000 square feet of short-term leases, and about 30,000 square feet of that was short-term renewal. So a relatively immaterial amount. And again, on the short-term renewal side, we're not putting any capital in. Those are good deals just to preserve occupancy a little bit longer and get some additional revenue in the door. We also signed 86,000 square feet this quarter of short-term new leases. Excuse me, but the bulk of that was made up really by one tenant who took that space on an as-is basis. We put no capital into that deal either.
Speaker Change: We also signed 86000 square feet this quarter of short term new leases.
Speaker Change: Excuse me the bulk of that was made up really by one tenant who took that space on an as is basis. So we put no capital into that deal either and we are as you sort of indicated cautiously optimistic we may be able to convert that tenant to a long term tenant within our Los Angeles portfolio.
Angela M. Aman: And we are, as you sort of indicated, cautiously optimistic. We may be able to convert that tenant to a long-term tenant within our Los Angeles portfolio. You know, our view right now is all leasing is good leasing. Certainly, all positive net effective rent leasing is good leasing in this environment. And I'm actually really pleased by the efforts of the team here at Kilroy to be creative and to meet tenants sort of where they are in the market and to find ways to really prioritize occupancy stability and growth over the next several years. The only thing Blaine...
Speaker Change: Our view right now is all leasing is good leasing certainly all positive net effect of friendly saying, it's good leasing in this environment and I'm actually really pleased by the efforts of the team here at kilroy to be creative and to meet tenants sort of where they are in the market and to find ways to really prioritize occupancy stability and growth over the next several years.
Robert Paratte: The only thing, Blaine, this is Rob Paratte. The only thing I'd add to what Angela said is that if you look at 2020, you know, at the start of the pandemic, you recall we did short-term leasing there, but that was largely because tenants were uncertain about the future. Today, it's a different sort of metric.
Speaker Change: The only thing Blayne. This is Rob the only thing I would add to what Angela.
Rob: Is that if you look at 2020 at the start of the pandemic you recall, we did short term leasing there, but that was largely because tenants were uncertain about the future today, it's a different sort of metric do you still have tenants that are uncertain about the future, but you have new company formations that are happening and so that ladder.
Robert Paratte: You still have tenants that are uncertain about the future, but you have new company formations that are happening. And so that latter component or segment of the market, and it's not just limited to San Francisco; it's also happening in Seattle and parts of L.A., those tenants want plug-and-play, immediate space, and they are, you know, taking short-term space because they intend to grow. And as Angela's point is, you know, we're not... We're here to make money. And we're being very selective about who we take.
Rob: Component for a segment of the market and it's not just limited to San Francisco, It's also happening in Seattle in parts of the law.
Rob: Those tenants want plug and play immediate space and they are taking short term space because they intend to grow in.
Rob: As Angela's point is we're not.
Angela M. Aman: And we're also being prudent about capital, and we are making bets on some of these companies that they will grow and become large tenants in the portfolio down the road. Great, that's really helpful, Keller. So I guess just to follow up, you know, are these short-term deals something you think could continue to be a relatively sizable part of your quarterly leasing in the near future? I think, you know, the perception is it brings volatility to the leasing rate and might be artificially inflating that number. But I guess if you're able to continue to bring in these short-term tenants, it could be a little bit safer.
Rob: We're here to make money and we're being very selective about who we take and we're also being vigilant about the capital and we are making bets on some of these companies that they will grow and become large tenants in the portfolio down the road.
Rob: Okay.
Speaker Change: Great. That's really helpful color I guess just a follow up are these short term deals something you think could continue to be.
Speaker Change: Relatively sizable part of your quarterly leasing in the near future I think the perception is that brings volatility to the leasing grade and might be artificially inflating that number but I guess, if you were able to continue to bring in these short term tenants that could be a little bit more stable.
Angela M. Aman: Well, I mean, I would, it's hard to say sort of exactly where things go. I think the short-term leases you saw, particularly that one new lease this quarter, were a pretty unusual situation, a pretty special situation, which again, we hope ultimately doesn't lead to volatility in the leasing numbers because we're able to convert them to long-term tenants. But I would say that's more the focus, the conversion to long-term tenancy, as opposed to continually signing new short-term leases to prevent volatility in that short-term leasing number.
Angela M. Aman: Well, I mean, I I
Speaker Change: Well I mean, I would it's hard to say exactly where things Scott I think the short term leases you saw particularly that one new lease this quarter was a pretty unusual situation in a pretty special situation, which again, we hope ultimately it doesn't lead to volatility in the leasing number because we're able to convert them to a long term tenants, but I would say that's more of the <unk> the <unk>.
Speaker Change: <unk> long term tenancy as opposed to continually signing new short term leases to prevent volatility in that short term leasing number.
Camille Bonnel: Thank you. The next question is from Camille Bonnel with Bank of America, Merrill Lynch. Your line is open.
Speaker Change: Thank you.
Speaker Change: Next question is from Camille.
With Bank of America Merrill Lynch. Your line is open.
Speaker Change: Okay.
Camille Bonnel: Good morning, everyone. I wanted to start with better understanding the drivers behind the guidance race. First quarter looked like a good beat on core, but I can't seem to reconcile that with the full year breakdown you provided, Eliott. So can you clarify how much of the core versus non-core items drove the increase? Unknown Speaker Yeah, so
Camille: Good morning, everyone I wanted to start with.
Camille: But our understanding the drivers behind the guidance raise first quarter looked like a good beat on core, but I can't seem to reconcile that with the full year breakdown you.
Speaker Change: You provided Elliot so can you clarify how much of the core versus noncore items drove the increase.
Eliott Trencher: Yeah, so I touched on two components to the increase in my remarks, the core portfolio and then the interest expense slash interest income, roughly split 50-50 between those two buckets, and then within the core bucket, again, that piece was roughly split 50-50 between the parking, which I referenced, and then
Yes, so we I touched on two components to the increase in my remarks, the core portfolio and then the interest expense less interest income roughly split 50 50 between those two buckets and then within the core bucket again that piece roughly split 50 50 between the parking which I read.
<unk> and then the fee income.
Angela M. Aman: And as a follow-up, yesterday one of your public peers commented on looking at some strategic alternatives, including spinning off parts of its business. So question for Angela, would you consider or at what point might you consider pivoting the strategy given how challenged supply is in the office and life science for the medium term? Thank you.
Speaker Change: That's helpful.
Speaker Change: And as my follow up yesterday, one of your public peers commented on looking at some strategic alternatives with spinning off parts of its business.
Speaker Change: So question for Angela would you consider or at what point might you consider pivoting the strategy given how challenged supply is in the office and life science for the medium term.
Speaker Change: Thank you.
Angela M. Aman: Yeah, I mean, you know, I think we're being thoughtful and creative about everything. I think there are a lot of good synergies between our office portfolio and our life science portfolio. You see that in a project like Kilroy Oyster Point in phase one, where we have both a combination of life science tenants and office tenants. So I don't think, unlike certain other situations where there's, you know, clearly a business that's distinct and different from the core business or, you know, the primary business of the company, that's not really the situation we have here.
Angela M. Aman: Yes, I mean I.
Angela M. Aman: I think we're being thoughtful and creative about everything I think theres a lot of good synergies between our office portfolio and our life Science portfolio, you see that on a project like Kilroy Oyster point in phase, one where we have both a combination of life science tenants and office tenants.
Angela M. Aman: Don't think unlike certain other situations, where there is clearly a business that is distinct and different from from the core business are the primary business of the company. That's not really the situation. We have here I think there are a lot of good synergies and certainly a lot of platform synergies across our leasing and development teams as well, so while we'll consider everything and well.
Angela M. Aman: I think there are a lot of good synergies, and certainly a lot of platform synergies across the leasing and development teams as well. So, you know, while we'll consider everything, and we'll always be looking to maximize value for shareholders in any way that that makes sense, I do think there are good synergies within our business that prevent a spinoff from making a ton of sense.
Angela M. Aman: We'll always be looking to.
Angela M. Aman: Maximize value for shareholders in any way that that makes sense I do think there is good synergies within our business that prevent a spinoff from from making a ton of sense.
Michael Anderson Griffin: Thank you. The next question is from Michael Griffin with Citigroup. Your line is open.
Angela M. Aman: Thank you. The next question is from Michael Christie with Citigroup. Your line is open.
Robert Paratte: Great, thanks. I want to go back to the leasing outlook for a second. On the Riot renewal, you know, looking through this, it looked like it was about a three-year renewal to 2026. I think you've still got, you know, some leases that are expiring for them this year. I guess, how should we think about maybe locking a tenant down like that for a longer term lease? And I would also ask the same around LinkedIn, just given they have, you know, some space expiring this year, but the big chunk of that is in 2026. Hi Michael, it's Rob Paratte.
Michael Christie: Great. Thanks, I wanted to go back to kind of the leasing outlook for a second on the riot renewal looking into this up it looked like it was a about a three year renewal to 2026, I think you've still got some leases that are expiring for them. This year.
Michael Christie: I guess, how should we think about maybe locking down like that for a longer term lease and I would also ask probably the same around linked then just given they have some space expiring this year, but the big chunk of that is in 2026.
Robert Paratte: I can't get into a lot of detail about the conversations that we have had with either Riot or LinkedIn, but I think that it's safe to say again, as I said earlier to Blaine, we're being very strategic. And as these companies are looking at their strategic sort of, you know, layout for the firm, we're trying to accommodate that. And Riot, as you know, has a very critical infrastructure here with us with their arena.
Rob: Hi, Michael its Rob.
Michael Christie: I can't get into a lot of detail about the conversations that we have with either right or linked in but I think that.
Michael Christie: It's safe to say again as I said earlier to Blaine.
Michael Christie: Being very strategic and as these companies are looking at there are strategic.
Michael Christie: Sort of.
Michael Christie: Lay out for the firm we're trying to accommodate that in right. As you know has a very critical infrastructure here with us with their arena, but they also have.
Robert Paratte: But they also have, you know, other headquarters buildings here that they're using. So it remains to be seen. But we have active conversations going on. And with LinkedIn, you know, you recall, we did in Q4 on the campus a hundred, over 150,000 foot conversion of a subleased tenant to a direct tenant. And with 599 Matilda, which is where LinkedIn is, we're working on a renovation plan and marketing plan, and we'll be ready when that lease expires.
Michael Christie: Other headquarters buildings here that they are using so.
Michael Christie: It remains to be seen but we have active conversations going on and with Linkedin.
You recall, we did in Q4 in the campus 100 over 150000 foot conversion of the sublease tenant to a direct tenant.
Michael Christie: And with the 509, nine Matilda, which is where linked in as.
Michael Christie: We're working on a renovation plan and marketing plan and we'll be ready.
When that lease expires.
Michael Anderson Griffin: That's why I appreciate the color there, Rob.
Michael Christie: That's appreciate the color there Rob and then just on the development pipeline leasing demand can you give us any color, particularly on <unk> phase two what youre seeing there or are there any big tenants that you're seeing down in south San Francisco and then just maybe finishing.
Unknown Speaker: and then just on the development pipeline, you know, leasing demand, can you give us any kind of any kind of
Unknown Speaker: Transcripts provided by Transcription Outsourcing, LLC.
Michael Christie: Indeed, I realize it's stabilized now but still have some vacancy in there just how was how has demand tracking for that as well.
Angela M. Aman: Yeah, I mean, I think those are important questions. I mentioned in my prepared remarks that, you know, while there's no leasing activity to report at this point at KOP2, we have seen a material uptick in tour activity, certainly over the last two quarters, but even really over the last six weeks, and that has included several large user tours. You know, that doesn't mean you're going to see executions, you know, certainly in the very near term, but you certainly can't sign leases without tour activity accelerating, so we're really encouraged to see that.
Speaker Change: Yes, I mean, I think those are important questions I mentioned in my prepared remarks that while Theres no leasing.
Leasing activity to report at this point at <unk> that we have seen a material uptick in tour activity.
The last certainly over the last few quarters, but <unk> been really over the last six weeks and that has included several large user to us.
Angela M. Aman: The other thing I mentioned at KOP2, which I think is really important, is that we have taken one of those three buildings, as I think everybody is aware, and gone multi-tenant, and we're building out spec suites. And, you know, while there really haven't been any lease executions in that South San Francisco sub-market over the last quarter or so, where we do think we're going to see demand first is from smaller format So, when we deliver that space in one of those three buildings at KOP2 in the fourth quarter, as we approach that date, we'll be much more competitive for those smaller format users that are looking to take space, ready space.
Speaker Change: That doesn't mean, you're going to see executions.
Speaker Change: In the very near term, but you certainly cant find leases without tour activity accelerating so we're really encouraged to see that the other thing I mentioned that <unk>, which I think is really important is that we have taken one of those those three buildings.
Speaker Change: As I think everybody is aware.
And kind of multi tenant and we're building out spec suites, and while there really havent been any lease executions in south San Francisco sub market over the last quarter or so.
Speaker Change: Where we do think we're going to see demand first is in smaller format users that are looking for move in ready space and where we have lost deals over the last quarter or two it's really been because we can't meet that immediate need so when we deliver that space and that no one of those three buildings at <unk>.
Speaker Change: In the fourth quarter as we approach that date will be much more competitive for those smaller format users that are looking to take space ready space.
Angela M. Aman: You know, pre-built lab space immediately. So, I think we're well positioned there, working very hard to make sure we're, you know, capturing all the demand that is in the market, and very encouraged by the fact that, you know, at least at a preliminary level, tour activity is accelerating. At Indeed, I think we're around 78% leased at this point, and we continue to chip away at that as well. We're seeing good activity there, and I think we have, you know, more activity going on right now than we have remaining vacancy in the building. That's coming from new users, and interestingly, also one existing tenant in the building that's looking to expand. Um... the only thing I
Speaker Change: Prebuilt lab space immediately so I think we're well positioned there working very hard to make sure. We're on we're capturing all the demand that is in the market and very encouraged by the fact that at least at a preliminary level tour activity is accelerating.
Speaker Change: Indeed, I think we're around 78% leased at this point.
Speaker Change: Continue to chip away at that as well, we're seeing good activity there and I think we have more activity working right now than we have remaining vacancy in the building that's coming from new users and interestingly also.
Speaker Change: One existing tenant in the building that is looking to expand.
Robert Paratte: The only thing I'd add to Angela's comments, Michael, is just some color on life science in the Bay Area and South San Francisco. Right now, we're tracking two and a half million square feet of demand. That's up 25% from Q4, so that's a good bump, and Q4 was pretty flat throughout the year in terms of demand being roughly around 1.8 to 1.9 million square feet. Bay Area VC funding in the first quarter was about $2 billion, or 2.5 billion dollars.
Speaker Change: The only thing I'd add on to Angeles comments, Michael or is it just some color on life science in the Bay area in South San Francisco.
Right now we're tracking two 5 million square feet of demand Thats up 25% from Q4. So that's a good bump in Q4 was pretty flat throughout the year in terms of demand being roughly around one eight to $1 9 million square feet.
Speaker Change: The area of VC funding in the first quarter was about $2 billion to $5 billion up to 30% increase over Q4.
Robert Paratte: That's a 30% increase over Q4 and when that funding starts increasing, you know, there's usually a six to nine month lag between the funding and then tenant requirements popping up. And then the last point I'd make is that three Bay Area companies had successful IPOs in Q1, so we think the fundamentals in the market are improving, and as Angela said in her remarks, our project is unlike any other in the South San Francisco market.
Speaker Change: And when that funding starts increasing.
Speaker Change: Theres, usually a six to nine month lag between.
Speaker Change: The funding and then tenant requirements popping up.
Speaker Change: And then the last point I'd make is that three barrier of companies had successful ipos in Q1, So we think the fundamentals.
Speaker Change: Fundamentals in the market are improving and as Angela said in her remarks, our project is unlike any other in the South San Francisco market. We've got the Bay. We've got the bike trails, we have the amenities that are really showing well now because tenants and prospects going to walk through pretty much every built space in the project and we are starting our land.
Robert Paratte: We've got the Bay, we've got the bike trails, we have the amenities that are really showing well now because tenants and prospects can walk through pretty much every built space in the project, and we're starting our landscaping now. So it's really, really turning the corner, and I agree with Angela and Austin. You see a lot of big numbers about Austin and sublease space, but you have to look at Indeed Tower.
Speaker Change: Skipping now so it's really really turning the corner and I agree with Angela in Austin.
Speaker Change: See a lot of big numbers about Austin, and sublease space, but you have to look at indeed tolerance. The best the best building in the CBD and we have a finite amount of space left in the professional services firms in Austin as well as firms outside of Boston are looking and giving us the foot traffic, we need to convert to lease.
Robert Paratte: It's the best mark, and the best building in the CBD, and we have a finite amount of space left, and the professional services firms in Austin, as well as firms outside of Austin, are looking and giving us the traffic we need to convert to lease space.
Speaker Change: <unk>.
Speaker Change: Yes.
Stephen Thomas Sakwa: Thank you. The next question is from Steve Sakwa with Epicor ISI.
Speaker Change: Thank you. The next question is from Steve <unk> with Evercore ISI.
Steve: Your line is open.
Angela M. Aman: Great, thanks. I know you're not budgeting for acquisitions or dispositions, Angela, and you're talking about being sort of opportunistic. I'm just wondering, A, what are you seeing out there, and kind of what are the hurdle rates for you in order to kind of pull the trigger on an acquisition today, given kind of where the stock trades? Yeah, thanks.
Steve: Great. Thanks, I know youre, not budgeting for acquisitions or dispositions, Angela and you were talking about being sort of opportunistic I'm. Just wondering what are you seeing out there and kind of where are the hurdle rates for you in order to kind of pull the trigger on an acquisition today, given kind of where the stock trades.
Angela M. Aman: Yeah, yeah, thanks, Dave. Those are good and important questions. I mean, the fact is, we're just not seeing much at this point that's really come to market that's of the quality that we're really looking for. So, it's been a bit of an academic exercise to date. As I mentioned in my prepared remarks, we do think there is more market testing going on and that that will ultimately lead to more transaction activity over the next 6 to 12 months.
Angela M. Aman: Yeah Yeah.
Angela M. Aman: Thanks, Dave those are good and important question I mean, the fact is we're just not seeing much at this point, that's really come to market that the quality that we're really looking for so it's been a bit of an academic exercise to date as I mentioned in my prepared remarks, we do think there is more market testing going on and that that ultimately will lead to more transaction activity.
Angela M. Aman: Over the next six to 12 months and so the team is certainly.
Angela M. Aman: And so, you know, the team is certainly ready and capable of underwriting a lot more transactions than we've seen over the last 12 months and trying to find interesting opportunities that we think we can really bring something special to the table and drive better outcomes in the market at large. You know, in terms of underwriting, which sort of gets to your question about hurdle rates and the cost of capital, I mean, one of the challenging things right now, particularly if you're looking at assets that we might view as high quality from a physicality perspective or a sub-market perspective, but have vacancy or need to be repositioned or something like that, you know, it's a question of really making sure we understand how much capital needs to be deployed into those transactions to reposition those assets.
Angela M. Aman: Ready and.
Angela M. Aman: Capable of underwriting a lot more transactions than we have seen over the last 12 months and trying to find interesting opportunities that we think we can really bring something special to the table and drive better outcomes in the market at large.
Angela M. Aman: In terms of underwriting, which sort of gets to your question about hurdle rates and the cost of capital I mean, one of the challenging things right now, particularly if youre looking at.
Angela M. Aman: Such that we might view as high quality from a physicality perspective, our submarket perspective, but have vacancy or need to be repositioned or something like that.
Angela M. Aman: And, importantly, the expected timeline in order to stabilize. And those are big variables, I think, as you think about expected IRRs in the current environment. You know, again, sort of, it's a little preliminary to talk about exactly what a hurdle rate is, you know, based on the fact that we just haven't seen much in terms of transaction activity to begin with, but we're very cognizant of where our cost of capital is.
Angela M. Aman: It's a question of really making sure we understand how much capital needs to be deployed into those transactions to reposition those assets and as importantly, the expected timeline in order to stabilize and those are those are big variables. I think as you think about expected IRR is in the current environment.
Angela M. Aman: Again sort of its a little preliminary to talk about exactly what our hurdle rate is.
Angela M. Aman: Based on the fact that we just haven't seen much in terms of transaction activity to begin with but we're very cognizant of where our cost of capital is and certainly think that on an IRR basis on an unlevered IRR basis, we would have to be kind of in the low double digit range to get really excited about the transaction based on realistic underwriting.
Angela M. Aman: And certainly think that, you know, on an IRR basis, on an unlevered IRR basis, we'd have to be kind of in the low double digit range to get really excited about a transaction based on realistic underwriting.
Angela M. Aman: Yeah.
Angela M. Aman: Okay, and second question, which again, may be a little further out on your maybe to do list, but you guys obviously have a lot of land that, you know, was purchased over the last several years for projects that you may or may not get over the finish line. I guess, how much time have you spent? sort of evaluating those and, you know, thinking about kind of the value they're sitting on your books for today.
Speaker Change: Okay, and second question, which again may be a little further out on your maybe to do list, but you guys. Obviously have a lot of land that was purchased over the last several years for projects that may or may not get over the finish line I guess, how much time have you spent.
Speaker Change: Sort of evaluating those and thinking about kind of value they're sitting on your books for today and whether you need to think about taking any kind of impairment on those or just how do you think about that.
Speaker Change: And maybe shifting kind of where they are whether it's office or mixed use or even converted into residential.
Angela M. Aman: And, you know, whether, you know, you need to think about taking any kind of impairment on those, or just how do you think about that? And maybe shifting the kind of where they're, you know, whether it's office or mixed use, or, you know, even converted into residential.
Angela M. Aman: Yeah, we are spending a fair amount of time on that, right? We have a significant amount of capital, you know, tied up in that future development pipeline. And you know, thinking about and really evaluating where we are today from a market perspective, relative to where we were when some of those parcels were acquired, and stepping back and really thinking through what's the highest and best use for every parcel in the future land bank right now?
Speaker Change: Yes, we are spending a fair amount of time on that alright, we have a significant amount of capital tied up in that future development pipeline and thinking about and really evaluating where we are today from a market perspective relative to where we were when some of those parcels were acquired and and stepping back and really thinking through what's the high.
Speaker Change: First and best use for every parcel in the future land Bank right now and how do we how do we maximize that value.
Angela M. Aman: And how do we how do we maximize that value? So we are spending a lot of time on it. We're thinking about it. The team, I think, has such depth of experience in terms of exploring different alternatives and being creative to look at different outcomes in order to drive value. So our focus is really on, you know, just maximizing value on every single parcel in there. And, you know, it is it is top of mind for us just given given the capital commitment we have there today, but nothing to report at this point.
So we are spending a lot of time on that we're thinking about it.
Speaker Change: The team I think has has.
Speaker Change: Such depth of experience in terms of exploring different alternatives and being creative to look at different outcomes in order to drive value.
Speaker Change: So our focus is really on just maximizing value on every single parcel in there and.
Speaker Change: It is top of mind for us just given given the capital commitment we have there today, but nothing to report at this point.
John P. Kim: Thank you. The next question is from John P. Kim with BMO. Your line is open.
Speaker Change: Thank you. The next question is from John Kim with BMO.
John P. Kim: Your line is open.
John P. Kim: Thank you.
Angela M. Aman: Angela, you talked about green shoots, mostly on the tech and biotech side. I was wondering if you had seen anything similar in L.A., if there's any driver on demand on the horizon?
John P. Kim: And so when you talk about green shoots.
John P. Kim: Mostly on the biotech side.
John P. Kim: Was wondering if you had seen anything similar in L. A or just any driver.
Angela M. Aman: on the horizon. You've often seen the mid-70s in your portfolio, which is not unique, but I was wondering if there was anything that could turn it around.
John P. Kim: And then on the horizon.
John P. Kim: You have occupancy in the mid 70 in your portfolio, which is not unique but I was wondering if there's anything that could turn it around.
Robert Paratte: Yeah, I mean, I would say interestingly, our first quarter activity, and even into the fourth quarter, our April activity, we had lots of activity in the LA portfolio in a range of different sizes of uses. So we are seeing some momentum there. But, you know, to your point, we have a fair amount of vacancy that needs to be addressed. So we need to see that momentum pick up. But I'll let Rob talk a little more specifically about it. Hi John.
Speaker Change: Yes, I mean, I would say interestingly, our first quarter activity and even into the fourth quarter our April activity.
We had lots of activity in the la portfolio and a range of different sizes of uses so we are seeing some momentum there but to your point, we have a fair amount of vacancy that needs to be addressed that we need to see that momentum pick up but I'll, let Rob talk a little more specifically about it John.
Robert Paratte: So just to give you some color, year to date, we've done 20 deals that total just about 285,000 square feet in our LA portfolio. And another piece of color, we've, you know, had 40 tours that total over 320,000 square feet. So, you know, the way to fill the vacancy is by getting people through the buildings and starting to negotiate and talk. It's fairly dormant, and Long Beach has been very active as well. So again, you know, L.A. is a very broad, big market, and we have to really segment the sub-markets to really understand what's going on with demand and vacancy.
Rob: So just to give you some color year to date, we've done 20 deals that total just about 285000 square feet in our la portfolio.
Rob: Just another piece of color.
Rob: Year to date had 40 tours that total over 320000 square feet.
Rob: The way to fill the vacancies by getting people through the building and start negotiating and talking.
I think.
Rob: It's kind of segment the markets further Hollywood has been quite active after a long period of being fair.
Rob: Fairly dormant and long beach has been very active as well so again.
Rob: <unk> is a very broad big market and we have to really segment, the submarkets to really understand what's going on with.
Rob: Demand in vacancy.
Unknown Speaker: Can I just ask, um, on your leases executed during the quarter of two hundred...
Speaker Change: Can I just ask on your leases executed during the quarter, a 282000 square feet how much of that.
Unknown Speaker: 183,000 square feet. How much of that? How much of that?
Speaker Change: How much of that leasing.
Unknown Speaker: Leasing was done for addressing 24 expirations or
Speaker Change: Was done for addressing 24 explorations or existing vacant space and as Thats already.
Unknown Speaker: Existing Banking Space. And if that's already reflected in your Occupancy and Expiration Stats, and also if there's an update on
Speaker Change: That reflected in your and your.
Speaker Change: Occupancy and explorations debts and also if theres an update on your leasing pipeline.
Unknown Speaker: Update on your leasing plan.
Speaker Change: Okay. So I'll start with the first half, but in our press release, we really tried to break this out to be more explicit.
Robert Paratte: So I'll start with the first half, but in our press release, we really tried to break this out to be more explicit. So you can see we said 160,000 square feet of 161,000 square feet of leasing on previously vacant space, 79,000 square feet of new leasing on currently occupied space, and 160,000 square feet of renewal.
Speaker Change: As you can see we said 160000 square 161000 square feet of leasing on previously vacant space 79000 square feet.
Speaker Change: Of new leasing on currently occupied space and 160000 square feet of renewal leasing.
Robert Paratte: And on the leasing pipeline, John, you're talking about LA, for Portfolio. I'll just talk about the portfolio. I mean, across the board.
Speaker Change: And on the leasing pipeline, John Youre talking about la.
Speaker Change: Or portfolio.
Speaker Change: Okay.
I'll just talk about the portfolio I mean across the board.
Robert Paratte: We're seeing an uptick in activity. I mean, Angela pointed to the fact that we're 98% leased in San Diego. We've had tenants contacting us both in San Diego and Austin about expanding. So, you know, our pipeline is actually better than it has been for a long time with more, I think, definitive decision making going on in the tenant conversations we're having.
Speaker Change: We're seeing an uptick in activity <unk> appointed to the fact that we're 98% leased in San Diego.
Speaker Change: Had tenants contacting us both in San Diego and Austin about expanding.
Speaker Change: <unk>.
Speaker Change: Our pipeline is actually better than it has been in a long time with more I think definitive decision, making going on and the tenant.
Conversations were having.
Speaker Change: Yeah.
Caitlin Burrows: Thank you. The next question is from Caitlin Burrows with Goldman Sachs. Your line is open.
Speaker Change: Thank you. The next question is from Caitlin Burrows with Goldman Sachs. Your line is open.
Angela M. Aman: Hi, good morning. Maybe the flip side of Steve's question earlier, you've mentioned before that you could consider monetizing, monetizing, stabilized high-quality assets, lower quality assets, or land parcels. So I'm just wondering, what type of asset do you think we could see you sell first? How big of an opportunity could it be? And is it something that you're already kind of working on behind the scenes?
Hi, good morning.
Caitlin Burrows: The flip side of Steve's question earlier, you had mentioned before that you could consider monetizing monetizing stabilized high quality assets lower quality assets and our land parcel. So I'm just wondering what type of assets do you think we could see yourself first how big of an opportunity could it be and is it something that youre already kind of working on behind the scenes.
Angela M. Aman: I mean, there's nothing that's at a stage that I really think is appropriate to talk about at this point or report on. You know, you're right. So we laid out different buckets of potential sources of capital that we could harvest across the portfolio on the call last quarter. I think you laid out the buckets or reiterated the buckets pretty well. You know, we're just always going to be looking to raise capital in places we think are the most attractively priced within the portfolio.
Speaker Change: I mean, theres nothing thats other stage that I really think is appropriate to talk about at this point our report on.
Speaker Change: You are right. So we laid out different buckets of potential sources of capital that we could harvest across the portfolio on our call last quarter I think you laid out the buckets or reiterated the buckets pretty well just.
Speaker Change: He is going to be looking.
To raise capital in places, we think it's most attractively.
Speaker Change: Attractively priced within the portfolio so that may be in the future land bank. It may be in assets, where we have a different point of view about the future trajectory of that asset and it might be in the higher quality assets, where we just don't feel like there's a lot of additional value creation potential at those assets as well.
Angela M. Aman: So that may be in the future land bank. It may be in assets where we have, you know, a different point of view about the future trajectory of that asset. And it might be in higher quality assets where we just don't feel like there's a lot of additional value creation potential for those assets as well. So, you know, how those all price on an implied IRR basis could all be well below our current cost of capital as implied by our stock and implied by, you know, where we can raise debt today. So the goal really, again, is just risk-adjusted returns and trying to, you know, trying to find places to raise capital as attractively as possible.
Speaker Change: So how those all price on an implied IRR basis could all be well below our current cost of capital as implied by our stock in and play by.
Speaker Change: We can raise debt today. So the goal really again, it's just risk adjusted returns and trying to.
Speaker Change: Trying to find places to raise capital as attractively as possible.
Eliott Trencher: Okay, and then I guess more broadly, there is a lack of debt availability for office, as I think you even mentioned earlier. And so you have peers on the East Coast that are taking advantage of this to deploy capital alongside partners through debt funds. So have you considered MES or preferred equity investments and attractive buildings that you would be willing to own if it came to it?
Speaker Change: Okay.
Speaker Change: And then I guess more broadly there is a lack of debt availability for office as I think you even mentioned earlier and so you have peers on the east coast that are taking advantage of this to deploy capital alongside partners through debt funds. So have you considered mezz or preferred equity investments in attractive buildings that you would be willing to own if it came to it.
Eliott Trencher: Yes, this is Elliot. We've certainly thought about that. We like to think that we're going to be creative and look at where the opportunities are. And, as you said, there is a lack of financing for that type of product. I think the challenge for us is that there has to be a clear path to ownership. You know, our core competency is buying, operating, and building office and life science buildings. And if we can't see that, then it isn't something we would seriously consider.
Speaker Change: This is Elliott, we've certainly thought about that we like to think that we're going to be creative and look at where the opportunities are and as you said there is a lack of <unk>.
Eliott Trencher: Financing for that type of product I think the challenge for us as there has to be a clear path to ownership.
Our core competency is buying operating building office and life science buildings, and if we can't see that then.
Eliott Trencher: It isn't something we would seriously consider.
Dylan Robert Burzinski: Thank you. The next question is from Dylan Burzinski with Green Street Advisors. Your line is open.
Eliott Trencher: Yeah.
Unknown Attendee: Thank you. The next question is from dealing Brzezinski with Green Street Advisors. Your line is open.
Unknown Attendee: Okay.
Dylan Robert Burzinski: Good morning. Thanks for taking the question. I guess, you know, we noticed
Unknown Attendee: Good morning, Thanks for taking the question I guess, we noticed that a few of the land parcels added disclosure to suggest that residential development might be best our highest and best use of some of these land parcels I guess as you sort of think about the portfolio composition today.
Unknown Speaker: that a few of the land parcels added disclosure to suggest that residential development might be the best or highest and best use of some of these land parcels. I guess, as you sort of think
Unknown Speaker: about portfolio composition today.
Unknown Speaker: You know, I think it's 65% office, 25% life science, and 10%.
Unknown Attendee: 65% office, 25% life science, 10% mixed use and as you look across at your acquisition and disposition opportunities I mean is it the expectation that.
Unknown Attendee: Any and all assets are up for sale and that you're willing to sort of underwrite across those three asset classes or how should we sort of be thinking about that.
Unknown Speaker: Transcription by Trans-Expert at Fiverr.com Yeah, well, I'll say a few things. One is that it relates to the development
Angela M. Aman: Yeah, well, I'll say a few things. One is it relates to the development disclosure. And as you noted, you know, their additional disclosure around potential residential multifamily units at East Village in San Diego and 6-0 in Seattle. That was more of just a clarification from a disclosure perspective than anything else.
Yeah, I'll say, a few things one as it relates to the development disclosure and as you noted the additional disclosure around potential residential multifamily units at east village in San Diego and <unk> in Seattle that was more of just a clarification from a disclosure perspective than anything else that's been <unk>.
Angela M. Aman: That's been, you know, a component of potential expectations for those properties for quite a while. And, you know, we were TBD, I think, on at least East Village. We thought the additional disclosure was helpful for people understanding the potential value in those parcels. The company, I think, does have a really strong track record of developing and managing and maximizing value across office, life science, and mixed-use projects like One Potayo.
Unknown Attendee: <unk>.
Unknown Attendee: Potential expectations for those properties for quite a while and we were TBD I think on at least east village. We thought the additional disclosure was helpful for people understanding the potential value on those parcels.
Angela M. Aman: I think we have the expertise and the capabilities to invest in any of those asset classes. As it relates to, you know, ground-up development and some of the parcels in the future land bank, I think it's reasonable to assume at this point that, to the extent that the primary or, in some cases, the only use for that parcel is, you know, outside of our core competencies, a path of execution or likely path of execution would be a sale of the parcel or a joint venture or something like that.
Unknown Attendee: The company I think does have a really strong track record in developing and managing and maximizing value across office across life science and across mixed use projects like like one per se I think we have the expertise and the capabilities to play in any of those asset classes.
Unknown Attendee: As it relates to ground up development in some of the parcels.
Unknown Attendee: In the future land Bank I think it's reasonable to assume at this point that.
Unknown Attendee: To the extent that the primary or in some cases the only.
Unknown Attendee: Use for that parcel is outside of our core competencies that <unk>.
Unknown Attendee: Lots of execution are likely path of execution would be a sale of a parcel of our joint venture or something like that but we're going to look at each and every opportunity as it comes up on a standalone basis, and again really focusing in on risk adjusted returns and where our capital is best deployed and where the capabilities of this platform are best applied.
Angela M. Aman: But we're going to look at each and every opportunity as it comes up on a standalone basis, and again, really focusing in on risk-adjusted returns, where our capital is best deployed, and where the capabilities of this platform are best deployed.
Unknown Attendee: Thanks.
Speaker Change: Okay. Thanks, Don.
Speaker Change: Yes.
Upal Dhananjay Rana: Thank you. The next question is from Upal Rana with Keycar.
Speaker Change: Thank you. The next question is from Paul Rhonda Whiskey caller your.
Speaker Change: Your line is open.
Angela M. Aman: Great, thank you for taking my question. Angela, you know, last year, we saw about 25% of office leasing in San Francisco be AI related. I'm curious, how is this tracking for this year? And you know, how do you think that kind of trend will go forward?
Speaker Change: Good morning, Thank you for taking my question.
Speaker Change: Hello.
Speaker Change: So last year, you saw a 25% of office leasing in San Francisco to be real.
Speaker Change: Related.
Speaker Change: Just curious how is this tracking for this year and how do you think that kind of trends going forward.
Angela M. Aman: Yeah, I mean, I'll let Rob talk a little more specifically about it, but we do think, and I mentioned in my prepared remarks, we do think this is a real driver of leasing activity, you know, in San Francisco. I also mentioned that the first lease we signed at West 8th and Seattle was an AI company. So we are seeing AI migrate to Seattle as well. Again, I think it's really driven by where, you know, top technology talent resides. And so we think that's going to be a driver in that market as well. But Rob, do you want to go?
Speaker Change: Yeah, I mean, I'll, let Rob talk a little more specifically about it but we do think and I mentioned in my prepared remarks. We do think this is a real driver of leasing activity in San Francisco I also mentioned that the first lease we signed at Westgate in Seattle was an AI company. So we are seeing AI migrate to Seattle as well again, I think really driven by where <unk>.
Speaker Change: Top technology talent resides and so we think that's going to be a driver in that market as well, but Rob do you want to sure yes, just a little more color on San Francisco.
Robert Paratte: Sure. Yeah, just a little more color on San Francisco. As you recall, in Q4, there were three very large transactions that happened that, you know, pushed the leasing up over 750,000 feet. They were Anthropic, OpenAI, and Hive in our 101st building. I can't talk in detail, but one of those companies is looking at expanding significantly beyond what they've already taken, so that's being watched very carefully. Leases that have either been signed or pending, meaning the lease is out for signature.
Rob: As you recall in Q4 there were.
Rob: Three very large transactions that happened.
Rob: Pushed the leasing of over 750000 feet. They were anthropic open AI and hive and our 101st building.
Rob: I can't talk in detail, but one of those companies is looking at expanding.
Rob: Significantly beyond what they've already taken.
Rob: So that's being watched very carefully.
Rob: In Q1 already we have almost 500000 feet of.
Rob: Leases that have either been signed or pending like meaning the leases out for signature.
Robert Paratte: And two of those are AI-backed companies. So we see, you know, we're very encouraged by what we see going from Q4 to Q1. It seems the trend and momentum are building. And we're also seeing, as I said earlier, or implied earlier, a lot of new company formation in the smaller end of the business. If you, you know, in years past or quarters past, we've always talked about sort of the demand in San Francisco for 35% professional services, law firms, et cetera, and 35% tech.
Rob: And two of those are AI backed <unk>.
Rob: Company. So we see we're very encouraged by what we see going from Q4 to Q1, it seems the trend and momentum is building.
Rob: And we're also seeing as I said earlier implied earlier, a lot of new company formation in the smaller end of the business if you.
Rob: In years past or quarters past, we've always talked about sort of the demand in San Francisco's 30, 35%.
Rob: Professional services law firms et cetera, and 35% tech that switch now to about 54% Tech today.
Robert Paratte: That's switched now to about 54% tech today. And the balance is, you know, life science, professional services, and government services. So there's been a significant move up in tech demand. So all of that bodes well for not only AI, but it bodes well for the... Technology and Market in San Francisco.
Rob: The balances life Science professional services and government services. So there's been a move.
Rob: Significant move.
Rob: Up in tech demand, so all of that bodes well for not only.
Rob: AI, but it bodes well for the.
Rob: Technology.
Rob: Market in San Francisco.
Eliott Trencher: Great, that was helpful. And then, you know, one last one for Elliott, you know, there was a decent amount of increase in tenant reimbursements this quarter, but how much of that was seasonality or time-related versus a true increase? And how do you see that trending going forward? Yeah, I think if you're
Speaker Change: Great. That's helpful. And then one last one for Eliot there was a decent amount of increase in tenant reimbursements. This quarter, how much of that was seasonality or timing related versus a true increase and how do you see that trending going forward.
Eliott Trencher: Yeah, I think if you're comparing it to the prior period, I think you have to recall that last period we had material amounts of real estate tax refunds and that impacted the numbers. So nothing all that unusual in the first quarter; it's really more the fourth quarter.
Eliot: Yes, I think if you're comparing it to the prior period.
Eliot: I think you have to recall that last period, we had material amounts of real estate tax refunds and that.
Eliot: Impacted the numbers so.
Speaker Change: Nothing all that.
Eliot: Unusual in the first quarter, it's really more of the fourth quarter.
Sikta Vadis: Thank you. The next question is from Sikta Vadis with Scotiabank. Your line is open.
Eliot: Thank you. The next question is from Victor <unk> with Scotia Bank. Your line is open.
Eliot: Okay.
Sikta Vadis: Oh, hi. Good morning, everyone. In terms of KOP, development phase two, can you just remind us how much square footage is going to be delivered on the spec suite basis and remind us, you know, the timing for that later this year? And I just want to be clear as to whether you're delivering that.
Eliot: Hi.
Victor: Good morning, everyone in terms of K O P. The development phase two can you just remind us how how much square footage is going to be delivered on the spec suite basis, and remind us the timing for that.
Victor: Later this year and just wanted to be clear as well is if you're delivering that spec space and you've got a lease done and the year would that be something that could come in right away under that situation or is there still some sort of delayed in.
Unknown Speaker: Specspace, and you got a lease done at the end of the year, would that be something that could commence?
Unknown Speaker: Transcripts provided by Transcription Outsourcing, LLC. [inaudible] Hi, so we have two floors that we're doing, so it totals roughly just a little over 80,000 square feet. They will be delivered in October of this year. We've already had, as we talked about earlier between Angela and myself, tour activity, and people looking at them. And yes, that could be, you know, immediate occupancy upon completion. And that's where a lot
Victor: Revenue.
Victor: That would happen.
Rob: It's Rob.
Rob: So we have two floors that we're doing so totals roughly just a little over 80000 square feet.
Rob: They will deliver in October of this year.
Rob: We've already had as we talked about earlier between Angela and myself tour activity and people looking at them and yes that could be immediate occupancy upon completion.
Robert Paratte: And that's where a lot of the demand has been. I mentioned activity has been really light in the whole sub-market, you know, in Q1 or year-to-date, but even in Q4, most of the activity we saw was people looking for sort of, to fill immediate needs. So we do think that once those spec suites deliver, you could see occupancy. And to the extent we have a lease signed, you'd see a commencement pretty quickly.
Rob: And that's where a lot of the demand has been I mentioned activity. It's been really late in the wholesale market in Q1, our year to date, but even in Q4 most of the activity. We saw less people looking for sort of to fill immediate needs. So we do think that once those spec suites deliver you could see occupancy to the extent, we have a lease signed TT you'd see a commencement pretty quick.
Rob: <unk>.
Sikta Vadis: Okay, thanks. Thanks for that. And then just to follow up on, I'm sorry if I missed this, but in terms of the Hollywood portfolio, what drove it?
Speaker Change: Okay. Thanks, Thanks for that and then.
Speaker Change: Just a follow up is on.
Speaker Change: Oh, sorry, if I missed this but in terms of the Hollywood portfolio.
Unknown Speaker: What drove the lease rate down in the quarter?
Speaker Change: What drove the the lease straight down in the quarter.
Unknown Speaker: We had a couple of move-outs from the media center. Nothing, nothing particularly chunky, just a few 20,000 square foot moves out.
Speaker Change: We had a couple of move outs at Sunset Media Center.
Speaker Change: Nothing nothing, particularly chunky just a few 20000 square foot move outs.
Pete Aberofsky: Thank you. The next question is from Pete Aberofsky with Jeffreys. Your line is open.
Speaker Change: Thank you. The next question is from Pete Borawski with Jefferies. Your line is open.
Robert Paratte: Thank you. Yes, I just want to go back to some of Rob's comments earlier about the life science markets. You mentioned a six to nine month lag between funding and leasing decisions. From what you're seeing in the market right now, I think historically that seems to be the rule of thumb. Has it changed at all or kind of been extended by, you know, some of the funding issues or just some macro uncertainty, or is that generally still kind of what you look at as the timeline of a demand recovery? Yeah, it's a good question.
Unknown Attendee: Thank you, yes, I just wanted to go back to somewhat Rob's comments before about the life Science market you mentioned, a six to nine month lag.
Unknown Attendee: Between plumbing and leasing decisions.
From what Youre seeing in the market right now I think historically that seems to be the rule of thumb has it changed at all or kind of been extended by.
Unknown Attendee: You know some some of the funding issues or just some macro uncertainty or is that generally.
Unknown Attendee: Still kind of what you look at is the timeline of the demand recovery.
Robert Paratte: First of all, it depends, you know, on the immediacy of the tenant. If they have something that they're feeling very positive about, in the FDA, for example, then that could drive immediacy, you know, on the tenant's part. But as a rule of thumb, it's typically six to nine months; that's the same with office space. I would just caveat that by saying, you know, there's still a lot of scrutiny by boards and by, you know, as a lease, potential lease floats up through senior management; there's a lot of examination and reexamination that goes on. So it's, it potentially could, you know, delay that a little bit.
Speaker Change: Yes, it's a good question first of all it depends on the immediacy of the tenant if they have something that they are feeling very positive about in the FDA. For example, then that that could drive immediate immediacy on the tenant's part, but as a rule of thumb. It's typically six to nine months Thats the same with office.
Speaker Change: I would just caveat that by saying there is still this.
Speaker Change: A lot of scrutiny by boards and buy as a lease or.
Potential lease floats up through senior management, there is a lot of examination and reexamination that goes on so it's potentially could delay that a little bit, but we are seeing tenants acting with conviction. So.
Robert Paratte: But we are seeing tenants acting with conviction. So overall, it's feeling like there's more certainty out there in terms of closure. Okay, that's helpful. And another one on the life science market.
Speaker Change: Overall, it's feeling like Theres more.
Speaker Change: Certainty out there in terms of closure.
Robert Paratte: I know you don't have you don't have any huge vacancies. It's much smaller spaces that you're dealing with. But you gave some helpful figures on South San Francisco in terms of demand that you're tracking. Just curious if you could give kind of the same in terms of the pipeline and the general outlook in San Diego. Yeah, the San Diego market is, you know, there have been some, again, I think it's three or four fundings of companies in the UTC and Torrey Pines submarkets that are encouraging. You know, honestly, in San Diego, the large format users haven't come back yet.
Speaker Change: Okay. That's helpful and another one on the life science market I know you don't have.
Speaker Change: You don't have any any huge vacancies it's much smaller.
Speaker Change: Races that youre dealing with but you gave some helpful figures on.
Speaker Change: South San Francisco in terms of demand that you're tracking just curious if you can give kind of the same in terms of the pipeline and the general outlook in San Diego.
Robert Paratte: But we are seeing, you know, an increase in tour activity. We don't have any vacancy, but we do track tenants and we're always trying to talk to them about other opportunities we have outside of Torrey Pines. So I think Torrey Pines and UTC are in a recovery mode as well, but just large format users, which are typically down there, haven't surfaced in a meaningful way.
Speaker Change: Yes, the San Diego market is.
Speaker Change: There has been some again I think it's three or four fundings of companies.
Speaker Change: The UTC and Torrey Pines Submarkets.
Speaker Change: That are encouraging.
Speaker Change: Honestly in San Diego, the large format users haven't come back yet, but we are seeing.
Speaker Change: An increase in activity, we don't have any vacancy, but just we do track tenants and we're always trying to.
Speaker Change: Talk to them about other opportunities we have outside of Torrey pines, So I think torrey pines, and UTC or in AR.
Speaker Change: Recovery mode, as well, but just large format users, which are typically down there haven't.
Speaker Change: Surface in a meaningful way.
Angie: Thank you. We currently have no further questions, so I will hand it back to Bill to conclude. Thank you, Angie, and thank you, everyone, for joining us.
Speaker Change: Thank you. We currently have no further questions. So I'll hand back to <unk> to conclude.
William E. Hutcheson: Thank you, Angie, and thank you, everyone, for joining us today. We appreciate your continued interest in KRC.
Thank you Angie and thank you everyone for joining us today. We appreciate your continued interest in Trc.
Speaker Change: Hi.
Unknown Speaker: Thank you, everyone. This concludes today's call. Thank you for joining us. You may now disconnect your line.
Speaker Change: Thank you everyone. This concludes today's call. Thank you for joining you may now disconnect your lines.
Speaker Change: Hmm.
Speaker Change: [music].