Q2 2024 Kilroy Realty Corp Earnings Call
Speaker Change: Good afternoon, and thank you for attending today's KRC 2Q24 Earnings Conference Call.
Sam: My name is Sam, and I will be your moderator for today's call. All lines will be muted during the presentation portion of the call, with an opportunity for questions and answers at the end. If you'd like to ask a question, you may do so by pressing star one on your telephone keypad.
Sam: My name is Sam, and I will be your moderator for today's call.
Taylor Friend: All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. If you'd like to ask a question, you may do so by pressing star 1 on your telephone keypad. I'll now turn you over to Taylor Friend, Senior Vice President, Capital Markets and Treasurer. Taylor, the floor is yours.
Sam: I'll now turn you over to Taylor Friend, Senior Vice President, Capital Markets and Treasurer. Taylor, the floor is yours. Good morning, everyone.
Taylor Friend: Thank you for joining us. On the call with me today are Angela Aman, CEO, and Eliott Trencher, EVP, CIO, and CFO. In addition, Justin Smart, President, and Rob Paratte, EVP, Chief Leasing Officer, will be available for Q&A. At the outset, I need to say that some of the information we'll be discussing during this call is forward-looking in nature. Please refer to our supplementary package for a statement regarding the forward-looking information included in this call and in the supplementary.
Taylor Friend: Good morning, everyone. Thank you for joining us.
Speaker Change: On the call with me today are Angela Aman, CEO, and Eliott Trencher, EVP, CIO, and CFO.
Speaker Change: In addition, Justin Smart, President, and Rob Perott, EVP, Chief Leasing Officer, will be available for Q&A.
Speaker Change: At the outset, I need to say that some of the information we'll be discussing during this call is forward-looking in nature.
Speaker Change: Please refer to our supplemental package for a statement regarding the forward-looking information on this call and in the supplemental. This call is being webcast live on our website and will be available for replay for the next eight days.
Taylor Friend: This call is being webcast live on our website and will be available for replay for the next eight days. Our earnings release and supplemental package have been filed on a Form 8K with the SEC, and both are also available on our website.
Speaker Change: Our earnings release and supplemental package have been filed on a Form 8K with the SEC and both are also available on our website.
Taylor Friend: Angela will start the call with a strategic overview and quarterly highlights, and Eliott will discuss our financial results and provide you with updated 2024 guidance. Then we will be happy to take your questions.
Speaker Change: Angela will start the call with a strategic overview and quarterly highlights. And Elliott will discuss our financial results and provide you with updated 2024 guidance. Then we will be happy to take your questions.
Angela Aman: Thanks, Taylor. It's great to have you on the call this quarter. I'm pleased to report another strong quarter of results that reflects the hard work and dedication of the entire Kilroy team and underscores the recovery that continues to take hold across our portfolio. However, this recovery will at times be uneven. We are seeing encouraging signs in all of our markets that reinforce our conviction that the trend line is moving in the right direction.
Angela Aman: Thanks Taylor, it's great to have you on the call this quarter. I'm pleased to report another strong quarter of results that reflects the hard work and dedication of the entire Kilroy team and underscores the recovery that continues to take hold across our portfolio.
Speaker Change: While this recovery will, at times, be uneven, we are seeing encouraging signs in all of our markets that reinforce our conviction that the trend line is moving in the right direction.
Angela Aman: From a market perspective, we're seeing particular strength right now in San Diego and Bellevue, Washington, both of which continue to benefit from broad-based demand across a wide range of industry categories supported by higher physical occupancy rates. In San Francisco, total tenant demand in the market has doubled over the course of the last 18 months, and leasing volumes are slowly but consistently improving, supported by growing demand from many new-to-market tenants, including those in the AI sector. And while the Southlake Union submarket in Seattle and our submarkets in Los Angeles have been slower to recover, we are making headway.
Speaker Change: From a market perspective, we are seeing particular strength right now in San Diego and Bellevue, Washington, both of which continue to benefit from broad-based demand across a wide range of industry categories, supported by higher physical occupancy rates.
Speaker Change: In San Francisco, total tenant demand in the market has doubled over the course of the last 18 months, and leasing volumes are slowly but consistently improving, supported by growing demand from many new-to-market tenants, including those in the AI sector.
Speaker Change: And while the Southlake Union Submarket in Seattle and our submarkets in Los Angeles have been slower to recover, we are making headway.
Angela Aman: In particular, in Seattle, the previously noted strength of demand in Bellevue, combined with a limited amount of Class A vacancy in that submarket, is starting to have important spillover benefits for Southlake Union, an encouraging dynamic as we near the completion of our major repositioning project at West 8. A major benefit to Kilroy during this recovery has been and will continue to be the indisputable flight to quality that we are seeing play out in our sector and specifically in our markets, which has been a driving factor behind virtually every conversation we have with existing and prospective tenants alike.
Speaker Change: In particular, in Seattle, the previously noted strength of demand in Bellevue, combined with a limited amount of Class A vacancy in that sub-market, is starting to have important spillover benefits for Southlake Union, an encouraging dynamic as we near the completion of our major repositioning project at West 8th.
Speaker Change: A major benefit to Kilroy during this recovery has been, and will continue to be, the indisputable flight to quality that we are seeing play out in our sector, and specifically in our markets, which has been a driving factor behind virtually every conversation we are having with existing and prospective tenants alike.
Angela Aman: These tenants are singularly focused on the quality and amenity of their space and the capabilities and financial wherewithal of their landlord, and we have no doubt that the focus on quality and sponsorship will only become more attenuated in an environment of virtually no new supply.
Speaker Change: These tenants are singularly focused on the quality and amenitization of their space and the capabilities and financial wherewithal of their landlord, and we have no doubt that the focus on quality and sponsorship will only become more attenuated in an environment of virtually no new supply.
Angela Aman: Over the last 60 days, we've been particularly encouraged by a number of discussions with potential new tenants with space requirements over 100,000 square feet. In addition, recent high-profile return-to-work announcements by major employers and a newfound focus on the enforcement of new and existing mandates underscore the recognition that in-person connection is critical to the long-term success of both employees and organizations. During the second quarter, we signed approximately 235,000 square feet of leases with a weighted average lease term of about five and a half years and cash leasing spreads of approximately minus 4.5 percent, excluding one retail lease in San Francisco. Our leasing spreads were roughly flat.
Speaker Change: Over the last 60 days, we've been particularly encouraged by a number of discussions with potential new tenants with space requirements over 100,000 square feet.
Speaker Change: In addition, recent high-profile return-to-work announcements by major employers and a newfound focus on the enforcement of new and existing mandates underscores the recognition that in-person connection is critical to the long-term success of both employees and organizations.
Speaker Change: During the second quarter, we signed approximately 235,000 square feet of leases with a weighted average lease term of about five and a half years and cash leasing spreads of approximately minus 4.5 percent, excluding one retail lease in San Francisco. Our leasing spreads were roughly flat.
Angela Aman: Leasing activity accelerated as we moved through the quarter, a trend which continued into July, where we signed an additional 184,000 square feet of leases, including a 118,000 square foot multi-year early renewal with SAP at Key Center in Bellevue. Moving to Kilroy-Oyster Point, tenant discussions on phase two remain active. During the last earnings call, we referenced a pickup and touring activity which has continued. And as we approach project completion, prospects are now able to fully appreciate the tangible merits of our campus, which include expansive water views, conferencing facilities with indoor and outdoor meeting spaces, multiple upscale food service offerings, a well-appointed fitness center with an outdoor fitness patio, on-site bay frontage trails reserved for walking and biking, and importantly, the optionality inherent in Kilroy's ability to accommodate future growth on the site.
Speaker Change: Leasing activity accelerated as we moved through the quarter, a trend which continued into July where we signed an additional 184,000 square feet of leases, including a 118,000 square foot multi-year early renewal with SAP at Key Center in Bellevue.
Speaker Change: Shifting to Kilroy-Oyster Point, tenant discussions on Phase 2 remain active.
Speaker Change: During the last earnings call, we referenced a pickup and touring activity, which has continued. And as we approach project completion, prospects are now able to fully appreciate the tangible merits of our campus.
Speaker Change: which include expansive water views.
Speaker Change: conferencing facilities with indoor and outdoor meeting spaces.
Speaker Change: multiple upscale food service offerings, a well-appointed fitness center with outdoor fitness patio, on-site bay frontage trails reserved for walking and biking, and importantly, the optionality inherent in Kilroy's ability to accommodate future growth on the site.
Angela Aman: Our spec suites, which will be delivered in the fourth quarter of this year, are generating interest from multiple early stage life science companies, while later stage life science companies, in addition to more traditional office tenants, are expressing interest in the balance of the project. While the continued acceleration in tenant interest is an affirmation of the quality and relevancy of what we have built, the job is not done until the project is leased. This is a top priority across the organization, and we are laser focused on execution.
Speaker Change: Our spec suites, which will deliver in the fourth quarter of this year, are generating interest from multiple early-stage life science companies, while later-stage life science companies, in addition to more traditional office tenants, are expressing interest in the balance of the project.
Speaker Change: While the continued acceleration in tenant interest is an affirmation of the quality and relevancy of what we have built, the job is not done until the project is leased. This is a top priority across the organization and we are laser focused on execution.
Angela Aman: From a capital allocation standpoint, we have seen an improvement in both the quantity and quality of office and life science offerings that have recently come to market. We're spending more time evaluating transactions and will be ready to execute when we see values that are appropriate relative to the risk environment and our cost of capital. As always, we intend to be disciplined and ensure that any acquisitions we pursue will be value-enhancing for shareholders.
Speaker Change: From a capital allocation standpoint, we have seen an improvement in both the quantity and quality of office and life science offerings that have recently come to market.
Speaker Change: We're spending more time evaluating transactions and will be ready to execute when we see values that are appropriate relative to the risk environment and our cost of capital. As always, we intend to be disciplined and ensure that any acquisitions we pursue will be value-enhancing for shareholders.
Angela Aman: As it relates to dispositions, last quarter, we mentioned that we were in the process of evaluating the highest and best use of various sites in our future development pipeline. We have concluded that several of the sites have an optimal use that is no longer office or life science, and feedback we have received from multiple market participants has further validated this. We're actively working on transactions for a few of these parcels and contemplating a variety of potential structures to maximize value.
Speaker Change: As it relates to dispositions, last quarter we mentioned that we were in the process of evaluating the highest and best use of various sites in our future development pipeline.
Speaker Change: We have concluded that several of the sites have an optimal use that is no longer office or life science and Feedback we have received from multiple market participants has further validated this view
Speaker Change: We are actively working on transactions for a few of these parcels and contemplating a variety of potential structures to maximize value.
Angela Aman: While the ultimate realization of proceeds may take time, as parcels are reentitled for alternative uses, we believe that these transactions will represent a significant, well-priced source of dry powder for the company to participate in an increasingly active acquisitions market, while also continuing to prioritize the balance sheet and maintain the company's substantial liquidity profile. Before turning the call over to Eliott, I'd also like to discuss some of the organizational changes we announced last night.
Speaker Change: While the ultimate realization of proceeds may take time, as parcels are re-entitled for alternative uses, we believe that these transactions will represent a significant
Speaker Change: well-priced source of dry powder for the company to participate in an increasingly active acquisitions market while also Continuing to prioritize the balance sheet and maintain the company's substantial liquidity profile
Speaker Change: Before turning the call over to Eliott, I'd also like to discuss some of the organizational changes we announced last night.
Angela Aman: One of my key objectives since joining the company has been to ensure that we have appropriate resource levels across each functional area, reflecting both the opportunities and challenges of the environment in which we are operating. As mentioned on previous calls, I have been blown away by the talent and professionalism of this organization, and in particular by the engagement and willingness of the executive and senior leadership teams to embrace change in order to optimally position the platform for success going forward.
Eliott Trencher: One of my key objectives since joining the company has been to ensure that we have appropriate resource levels across each functional area, reflecting both the opportunities and challenges of the environment in which we are operating.
Eliott Trencher: As mentioned on previous calls, I have been blown away by the talent and professionalism of this organization, and in particular by the engagement and willingness of the executive and senior leadership teams to embrace change in order to optimally position the platform for success going forward.
Angela Aman: First and foremost, I'd like to thank Elliott for his partnership over the last six months in his combined CIO and CFO role. Elliott has been truly invaluable to me as I've gotten up to speed at the company, and I'm very much looking forward to continuing to partner with him on all of our capital allocation objectives going forward as he focuses on his chief investment officer responsibilities. In addition to leading our efforts in the transactions market, the investments team, under Elliott's leadership, will also oversee long-term asset-level strategic planning, working even more closely with our leasing and property management teams going forward.
Speaker Change: First and foremost, I'd like to thank Eliott for his partnership over the last six months in his combined CIO and CFO role.
Speaker Change: Eliott has been truly invaluable to me as I've gotten up to speed at the company. And I'm very much looking forward to continuing to partner with him on all of our capital allocation objectives going forward as he focuses on his chief investment officer responsibilities.
Speaker Change: In addition to leading our efforts in the transactions market, the investments team, under Eliott's leadership, will also oversee long-term asset-level strategic planning, working even more closely with our leasing and property management teams going forward.
Angela Aman: As a result of the refinement of Elliott's role, we will be bringing a new CFO on board. I've had the pleasure of working with Jeffrey Keeling in a number of different settings already, and I know that his deep skill set in finance, accounting, asset management, and technology change and innovation will serve the company extraordinarily well going forward. I'm also thrilled to announce the promotion of Lauren Statler to EVP General Counsel. Lauren has been with Kilroy for over 10 years, most recently serving as SVP Corporate Counsel.
Speaker Change: As a result of the refinement of Eliott's role, we will be bringing a new CFO on board. I've had the pleasure of working with Jeffrey Keeling in a number of different settings already, and I know that his deep skill set in finance, accounting, asset management, and technology change and innovation will serve the company extraordinarily well going forward.
Eliott Trencher: She brings significant legal and institutional knowledge to her new role, as well as impeccable insight and judgment. I'm excited to welcome both Jeffrey and Lauren to the executive team. On the leasing team, we also announced that Michael Schmidt will be joining Kilroy as SVP of leasing for the Northern California region. And we're looking forward to welcoming Michael, who will be joining an outstanding team of leasing professionals that are ready to capitalize on the continued recovery in our space. Thanks, Angela. I appreciate the kind words.
Speaker Change: I'm also thrilled to announce the promotion of Lauren Statler to EVP General Counsel. Lauren has been with Kilroy for over 10 years, most recently serving as SVP Corporate Counsel. She brings significant legal and institutional knowledge to her new role, as well as impeccable insight and judgment. I'm excited to welcome both Jeffrey and Lauren to the executive team.
Speaker Change: On the leasing team, we also announced that Michael Schmidt will be joining Kilroy as SVP Leasing for the Northern California region. And we're looking forward to welcoming Michael, who will be joining an outstanding team of leasing professionals that are ready to capitalize on the continued recovery in our space.
Eliott Trencher: It's been a rewarding experience being the CFO for the last two and a half years, and I look forward to focusing on the CIO role going forward. With that said, let's get into the quarterly results. The second quarter represented another solid performance with FFO of $1.10, or one penny below the first quarter. The decrease was predominantly due to lower interest income from lower cash balances and higher G&A due to the timing of spend.
Speaker Change: Eliott.
Eliott Trencher: Thanks Angela, I appreciate the kind words. It's been a rewarding experience being the CFO the last two and a half years and I look forward to focusing on the CIO role going forward. With that said, let's get into the quarterly results.
Eliott Trencher: The second quarter represented another solid performance with FFO of $1.10 or one penny below the first quarter
Eliott Trencher: The decrease was predominantly due to lower interest income from lower cash balances and higher G&A due to the timing of spend.
Eliott Trencher: On a same-store basis, second quarter cash NOI was roughly flat, a substantial improvement from last quarter as we no longer had meaningful non-recurring items in the comparative period. At the end of the quarter, our stabilized portfolio was 83.7% occupied and 85.4% leased. The decrease from the prior quarter was due to some move-outs, mainly in Los Angeles, partially offset by some move-ins in San Diego. The spread between our least and percent occupied is now 170 basis points, the largest it has been since the second quarter of 2023.
Eliott Trencher: On a same store basis, second quarter cash NOI was roughly flat, a substantial improvement from last quarter as we no longer had meaningful non-recurring items in the comparative period.
Eliott Trencher: At the end of the quarter, our stabilized portfolio was 83.7% occupied and 85.4% leased.
Speaker Change: The decrease from the prior quarter was due to some move-outs, mainly in Los Angeles, partially offset by some move-ins in San Diego.
Speaker Change: The spread between our least and percent occupied is now 170 basis points, the largest it has been since the second quarter of 2023.
Eliott Trencher: Turning to the balance sheet, net debt to trailing 12-month EBITDA was in the mid-six times, and our liquidity remained robust. As of quarter end, we had over $1.9 billion of available liquidity, comprised of $835 million of cash and $1.1 billion available on our line of credit.
Speaker Change: Turning to the balance sheet, net debt to trailing 12-month EBITDA was in the mid-six times and our liquidity remained robust. As of quarter end, we had over $1.9 billion of available liquidity comprised of $835 million of cash and $1.1 billion available on our line of credit.
Eliott Trencher: Now let's discuss our updated 2024 guide. No acquisitions or dispositions or for, remaining development spend is anticipated to be $100 to $150 million, which when combined with year-to-date spend represents no change to our original full-year midpoint of $250 million. Our uses of capital for the balance of the year include $125 million in development spend and a $400 million bond maturity in December. We intend to fund both with cash on hand. No change to our G&A guidance of $72 to $80 million. Straight Line Rent is projected to range between negative 7 and 8 million.
Speaker Change: Now let's discuss our updated 2024 guidance.
Speaker Change: No acquisitions or dispositions are forecast. Remaining development spend is anticipated to be $100 to $150 million, which when combined with year-to-date spend, represents no change to our original full-year midpoint of $250 million.
Speaker Change: Our uses of capital for the balance of the year include the $125 million of development spend and a $400 million bond maturity in December. We intend to fund both with cash on hand.
Speaker Change: No change to our GNA guidance of 72 to 80 million.
Speaker Change: Straight Line Rent is projected to range between negative seven and eight million dollars.
Eliott Trencher: Average occupancy is projected to be 82.75% to 83.75%, with no change to the 83.25% midpoint. As a reminder, we continue to anticipate three large move-outs totaling 350,000 square feet in the back half of the year. Salesforce in Seattle will leave in the third quarter, and Capital One and Microsoft in the Bay Area are expected to move out in the fourth quarter. Cash same-store NOI is projected to be between negative 3 and negative 4 percent, a 100 basis point increase at the midpoint due to higher net reimbursements, better parking revenue, and some nonrecurring fee increases.
Speaker Change: Average occupancy is projected to be 82.75% to 83.75% with no change to the 83.25% midpoint.
Speaker Change: As a reminder, we continue to anticipate three large move-outs totaling 350,000 square feet in the back half of the year. Salesforce in Seattle will leave in the third quarter, and Capital One and Microsoft in the Bay Area are expected to move out in the fourth quarter.
Speaker Change: Cash same-store NOI is projected to be between negative 3 and negative 4 percent, a 100 basis point increase at the midpoint due to higher net reimbursements, better parking revenue, and some non-recurring fee income.
Eliott Trencher: In summary, our updated 2024 guidance is projected to range between $4.21 and $4.31, with a midpoint of $4.26, or a roughly $0.04 increase at the midpoint, predominantly due to better operating performance from higher net reimbursements and better parking revenue. On a quarterly basis, guidance implies FFO for the balance of the year will be about $1.03, or $0.07 below the second quarter. The path to get there can be broken down as
Speaker Change: In summary, our updated 2024 guidance is projected to range between $4.21 and $4.31, with a midpoint of $4.26, or a roughly four cent increase at the midpoint, predominantly due to better operating performance from higher net reimbursements and better parking revenue.
Eliott Trencher: Subtract two and a half pennies for lower occupancy, which factors in our move-outs and move-ins, and track three pennies for lower interest income, which is our projected cash balance and reinvestment rate decline over the course of the year. Subtract a penny and a half due to the timing of G&A spend. To conclude, we are pleased with the results from the quarter and that we are able to increase FFO and same-star NOI guidance for the second time this year.
Speaker Change: On a quarterly basis, guidance implies FFO for the balance of the year will be about $1.03, or $0.07 below the second quarter. The bridge to get there can be broken down as follows.
Speaker Change: Subtract two and a half pennies for lower occupancy, which factors in our move-outs and move-ins. Subtract three pennies for lower interest income, as our projected cash balance and reinvestment rate decline over the course of the year. Subtract a penny and a half due to the timing of G&A spend.
Speaker Change: To conclude, we are pleased with the results from the quarter and that we are able to increase SFO and SAMHSA ROI guidance for the second time this year. We continue to be vigilant about the balance sheet and are anticipating opportunities to put it to good use when appropriate. With that, we're happy to take your questions. Sam?
Eliott Trencher: We continue to be vigilant about the balance sheet and are anticipating opportunities to put it to good use when appropriate. With that, we're happy to take your questions. Great, thank you. If you'd like to ask a question, you may do so by pressing star one on your telephone keypad.
Sam: As a reminder, if you're using a speakerphone, please remember to pick up your handset before asking your question. In the interest of time, all questioners will be permitted one question and one follow-up. Our first question is from the line of Nick Yulico with Scotiabank. Nick, your line is now open.
Sam: Great, thank you. If you'd like to ask a question you may do so by pressing star 1 on your telephone keypad. As a reminder, if you're using a speakerphone, please remember to pick up your handset before asking your question. In the interest of time, all questioners will be permitted one question and one follow-up.
Speaker Change: Our first question is from the line of Nick Ulico with Scotiabank. Nick, your line is now open.
Nicholas Yulico: Yeah, thanks. I guess in terms of the, you know, the new hirings that were made, maybe you could just talk a little bit more about, you know, the reason, I guess, for the CFO hiring and the split of the CIO and CFO role, and then, as well, on the GNA side, you know, I know the guidance didn't change, but can you talk a little bit more about, you know, how that could affect the, Yeah, sure, Nick.
Nick Ulico: Thanks. I guess in terms of the new hirings that were made, maybe you could just talk a little bit more about the reason, I guess, for the CFO hiring and the split of the CIO, CFO role, as well on the G&A side. I know the guys didn't change.
Speaker Change: Can you talk a little bit more about, you know, how that could affect the, you know, run rate, GNA, maybe it's a 2025 issue?
Angela Aman: I'm happy to take both of those questions. The decision in particular on the CIO and CFO split was really just a recognition that, particularly in this environment, those are two independently full-time jobs. Ellie has been doing a beautiful job over the last couple of years wearing both of those hats.
Speaker Change: Yeah, sure, Nick. I'm happy to take both of those questions.
Speaker Change: The decision in particular on the CIO and CFO split was really just a recognition that particularly in this environment, those are two independently full-time jobs.
Angela Aman: But as we look into the environment going forward, I would say we're excited, as you heard from both Ellie and me in our prepared remarks about transaction activity picking up or evaluating more things as we go forward. And I think his time and attention on the investment side will really be to the company's benefit over the longer term. I would say, as you think about all of the organizational changes we announced last night, I'd just make a couple of comments.
Speaker Change: Eliott's been doing a beautiful job over the last couple of years of wearing both of those hats.
Speaker Change: But as we look into the environment going forward, I would say we're excited, as you heard from both Ellie and I in our prepared remarks.
Speaker Change: about transaction activity picking up or evaluating more things as we go forward. And I think his time and attention on the investment side will really be the company's benefit over the longer term.
Angela Aman: As I mentioned earlier, I think one of the most important things in an environment that's as challenging and dynamic as the one we're operating in is that we've got the right level of resources across every part of the business. So you saw some changes as relates to sort of the executive leadership team, the leasing team, just making sure that across all the parts of the business, we have the right resources to meet the environment. That said, we are going to be – have been, and will continue to be extraordinarily disciplined with every dollar of G&A spent.
Speaker Change: I would say as you think about all of the organizational changes we announced last night, you know, I just make a couple comments.
Speaker Change: As I mentioned earlier, you know, I think one of the most important things in an environment that's as challenging and dynamic as the one we're operating in is that we've got the right level of resources across every part of the business. So you saw some changes as it relates to sort of the executive leadership team.
Speaker Change: the leasing team, just making sure that across all the parts of the business we have the right resources.
Speaker Change: to meet the environment. That said, we are going to be, have been, and will continue to be extraordinarily disciplined with every dollar of GNA spent.
Speaker Change: And that reflects not just the total amount of GNA that we incur going forward, but also making sure that every dollar of that GNA is responsibly allocated across the platform. So while certainly, you know, sort of what you saw in the announcement last night are some ads.
Angela Aman: And that reflects not just the total amount of G&A that we incur going forward but also making sure that every dollar of that G&A is responsibly allocated across the platform. So while certainly, sort of what you saw in the announcement last night are some ads that do represent areas of the business where I saw a need to invest in, we've been able to more than offset that by additional savings and efficiencies in other areas of the business to fund those investments.
Speaker Change: that do represent areas of the business where I saw a need to invest in. We've been able to more than offset that by additional savings and efficiencies in other areas of the business to fund those investments. From a run rate perspective, obviously, you know, we've left the GNA guidance range a little wide this year given timing and other things that could impact.
Angela Aman: From a run rate perspective, obviously, we've left the G&A guidance range a little wide this year given the timing and other things that could impact 2024. But as you think about it on a stabilized basis, you should expect that we see, as a result of all the organizational initiatives, modest net savings going forward. Okay, yeah. Thanks.
Speaker Change: 2024. But as you think about it on a stabilized basis, you know, you should expect that we see as a result of all the organizational initiatives, you know, modest net savings going forward.
Nicholas Yulico: And then my second question is just on, you know, Oyster Point phase two, if you could just talk a little bit more about, you know, the types of tenant demand you are seeing. Are these expanding tenants in the market? Are you trying to, you know, move tenants from other buildings on the market? And I just wanted to be clear about, you know, as we think about that project and the cost, Unknown Attendee, Eliott Trencher, Jing Bonnel, Nicholas Yulico, Stephen Smart, Robert Paratte, I don't know if there's an issue where you're trying to grab tenants that have expirations a couple years out, and to be competitive, and you may have to offer, you know, more free How should we think about that decision?
Speaker Change: Okay, yeah, thanks. Thanks, Angela. And then second question is just on, you know, Oyster Point Phase 2. If you could just talk a little bit more about...
Speaker Change: the types of tenant demand you are seeing. Are these expanding tenants in the market? Are you trying to move tenants from other buildings in the market? And I just wanted to be clear on, as we think about that project and the cost.
Speaker Change: that's listed in the supplemental. If, you know, full TI build-out is at this point still reflected in that cost and then on the free rent side how we should think about that because
Speaker Change: I don't know if there's an issue where you're trying to grab tenants that have expirations a couple years out and to be competitive and you may have to offer more free rent. How should we think about that decision making?
Robert Paratte: Yeah, I'm going to let Rob tackle some of the specifics around the demand we're seeing and deal economics and things like that. But I would just make the point up front that, you know, again, echoing my prepared remarks, we've seen pretty broad-based demand in different size categories and companies in the life science space that are at different stages. And our ability to accommodate sort of each and every one of the RFPs or level of interest we've seen in the market reflects the very strategic decisions the company made over the last couple of years to go multi-tenant, to inspect some suites in one of the buildings while holding the other two buildings available for some of the larger format tenants that would really want to customize their own space.
Speaker Change: Yeah, I'm going to let Rob tackle some of the specifics around the demand we're seeing and deal economics and things like that, but I would just make the
Rob Perott: The point up front that, you know, again, echoing my prepared remarks, we've seen pretty broad based demand in different size categories and companies in the life science space that are at different stages and our ability to accommodate sort of each and every one of the
Rob Perott: The RFPs, or level of interest we've seen in the market, reflects the very strategic decisions the company made over the last couple of years.
Rob Perott: to go multi-tenant, inspect some suites in one of the buildings while holding the other two buildings available for some of the larger format tenants that would really wanna customize their own space.
Angela Aman: So, I think that the project is exceptionally well positioned to meet all of the areas of demand we're seeing in the market. And I referenced in my prepared remarks as well that it's not just life science companies, but we have had, you know, inbound interest from some more traditional office users as well as we have in phase one of the project also. So, we're really encouraged by where things sit, but I just want to emphasize that, you know, our ability to meet that demand is a result of how this project's been positioned from a development standpoint over the last couple of years. Rob? Sure. Hi Nick.
Rob Perott: So I think that the project is exceptionally well-positioned to meet
Rob Perott: All of the areas of demand we're seeing in the market and I referenced in my prepared remarks as well that it's not just life science companies, but we have had
Rob Perott: you know, inbound interest from some more traditional office users as well as we have in Phase 1 of the project.
Rob Perott: Also, so we're really encouraged by where things sit, but I just want to emphasize that, you know, our ability to meet that demand is a result of how this project's been positioned from a development standpoint over the last couple of years. Rob?
Robert Paratte: Let me just give you a little bit of a backdrop. As Angela said, you know, I actually think this couldn't be a better time to be delivering in the environment we're entering into, where VC funding is improving, and demand is improving measurably. So, at the beginning of the year, we had 2 million square feet. We're now up to 2.8 million square feet of life science demand, and that's translating into activity we're having at Oyster Point, and our activity has moved sort of the natural progression from touring activity into, you know, more detailed, you know, paperwork, I guess I would say.
Rob Perott: Hi, Nick. Let me just give you a little bit of a backdrop. As Angela said, I actually think this couldn't be a better time to be delivering in the environment we're entering into, where VC funding is improving.
Speaker Change: Demand is improving measurably. So at the beginning of the year, we had 2 million square feet. We're now up to 2.8 million square feet of life science demand. And that's translating into activity we're having at Oyster Point. And our activity.
Speaker Change: has moved sort of the natural progression from touring activity into
Speaker Change: More detailed paperwork, I guess I would say. I'm not going to go into a lot of detail and give color, but we're very pleased with that activity.
Robert Paratte: I'm not going to go into a lot of detail and give you color, but we're very pleased with that activity that coincides with the delivery not only of the spec lab space in October that Angela mentioned, but also of the landscaping and the amenities and all the things that really distinguish our project from other projects in Oyster Point.
Speaker Change: that coincides with the delivery, not only of the SPEC lab space in October that Angela mentioned, but also
Angela Aman: the landscaping and the amenities and all the things that really distinguish our project from other projects in
Michael Griffin: So, and the demand we're seeing, I would say, you know, I won't go more into it than Angela did. Some of it, you know, a little bit of it is exploration driven, but interestingly, the bulk of it is funding driven, meaning they've raised money, or they have products nearing production and commercialization. So, things are really shaping up nicely, as I said. The next question is from the line of Michael Griffin with Citigroup. Michael.
Speaker Change: And the demand we're seeing, I would say, I won't go more into it than Angela did, a little bit of it is exploration-driven, but interestingly,
Speaker Change: The bulk of it is funding-driven, meaning they've raised money or they have products nearing production and commercialization, so things are really shaping up nicely, as I said.
Speaker Change: Next question is from the line of Michael Griffin with Citigroup.
Angela Aman: Great, thanks. I just wanted to turn to leasing for a first question. Angela, I think you referenced in your prepared remarks that you're starting to see tenants greater than 100,000 square feet enter the market. Can you give us a sense of what that means?
Speaker Change: Michael
Michael Griffin: Great, thanks. I just wanted to turn to leasing for a first question. Angela, I think you referenced in your prepared remarks, you're starting to see
Angela Aman: Are these tech firms looking to commit to more space? Is it just, you know, them testing the market to try to find a good deal? Or is there maybe some increased confidence that these bigger leases are, you know, coming down the pipe? Yeah, I think it's a combination, right?
Michael Griffin: tenants greater than 100,000 square feet enter the market. Can you give us a sense? Are these tech firms looking to commit to more space? Is it just them testing the market to try to find a good deal? Or is there maybe some increased confidence that these bigger leases are coming down the pipe?
Angela Aman: And you're seeing sort of broad-based demand. So some of it, yes, is that in markets like San Francisco, you're seeing some relatively new to market tenants with big expansion plans that are looking at bigger square footage requirements based on how, you know, their businesses have evolved over the last year or so, which is really encouraging. In other markets outside of San Francisco, it's been much, much broader.
Speaker Change: Yeah, I think it's a combination, right? And you're saying you're saying sort of broad based demand. So some of it, yes, is, you know, markets like San Francisco, you're saying.
Speaker Change: Some relatively new to market tenants with big expansion plans that are looking at at bigger square footage requirements based on how you know, their businesses have evolved over the last year or so, which is really encouraging. In other markets outside of San Francisco, it's been much, much broader based.
Speaker Change: and, you know, from more traditional kind of office tenants, not just in the tech space but really across the board. So I think every case is a little bit different. I know one of the tenants I'm sort of alluding to in those comments, you know, it's really about a recognition that they need to get more people back in the office, which is great to see and encouraging to see that as a trend throughout the portfolio as well.
Angela Aman: And, you know, for more traditional kind of office tenants, not just in the tech space but really across the board. So I think every case is a little bit, a little bit different. I know one of the tenants I'm sort of alluding to in those comments, you know. It's really about a recognition that they need to get more people back in the office, which is great to see and encouraging to see that as a trend throughout the portfolio as well. I could add a little more.
Michael Griffin: Great. That's helpful. I hope you're well.
Speaker Change: I could add a little more. Great, that's helpful. I hope you're well. Oh sure Rob. Now go ahead, if you're satisfied with this. No, no, no, you can go ahead. I'd be curious to get your insights as well.
Robert Paratte: Oh, sure. Okay. No, go ahead. If you're satisfied with it. No, no, no, you can.
Robert Paratte: I'd be curious to get your insights as well. Sure, what I would say if you look at both the Pacific Northwest and San Francisco, you're seeing a real uptick in the demand from AI companies. So in San Francisco, year to date, about 15% of all transactions that have happened in the market are by AI. And that's about 400,000 feet.
Rob Perott: Sure. What I would say if you look at both the Pacific Northwest and San Francisco, you're seeing a real uptick in the demand from AI companies. So in San Francisco year-to-date
Speaker Change: About 15% of all transactions that have happened in the market are by AI and that's about 400,000 feet.
Speaker Change: There's about 600,000 feet more of deals that are expected to sign that are in active kind of last stage discussions So AI is really ramping up and when you look at Seattle It is having a spillover effect in the you know, we are talking to some AI companies as our
Robert Paratte: There are about 600,000 feet more of deals that are expected to sign that are in an active kind of last stage discussion. So AI is really ramping up. And when you look at Seattle, it is having a spillover effect. And, you know, we are talking to some AI companies about being our other owners. And, you know, largely, that's because of the great workforce that's up in the markets that we operate in. And, you know, Seattle being probably the second most attractive market from an AI technology perspective, and as Angela said, you know, some of the other users are, it really is driven by the need for space and bringing people back from, you know, home to the office.
Speaker Change: other owners, and you know largely that's because of the great workforce that's up in the markets that we operate in and you know Seattle being probably the second most
Robert Paratte: And so, in general, leasing activity is accelerating, and it's looking good across our platform. You know, we have a couple of markets that are a little slower, but generally, the pace is picking up. Yeah, I mean, just following up kind of on that AI demand, Rob. I feel like we've been hearing about that for a while. But just given the elevated vacancies, particularly in San Francisco, I mean, how much do you think that demand from this subgroup is going to be able to move the needle?
Speaker Change: Attractive market from an AI technology perspective and as Angela said, you know, some of the other users are it really is driven by the need for space and bringing people back from you know home to the office and so
Angela Aman: In general, leasing activity is accelerating and it's looking good across our platform. We have a couple of markets that are a little slower, but generally the pace is picking up.
Speaker Change: Yeah, I mean, just following up kind of on that AI demand, Rob, I mean, I feel like we've been hearing about that for a while, but just given the elevated vacancies, particularly in San Francisco, I mean, how much do you think that demand from this subgroup is going to be able to move the needle?
Robert Paratte: You know, it's a good question, and the numbers belie what goes on behind the scenes. But if you look at it right now, we're still tracking at 6.9 million square feet of demand in San Francisco, which is getting close to pre-pandemic levels of demand that were typically around eight million square feet. And I can just give you some color that we see and what we respond to. But right now, there are 16 tenants in the market that are over 100,000 feet in San Francisco. And if you look again, I always use a pie chart.
Rob Perott: You know, it's a good question and the numbers belie what goes on behind the scenes, but if you look at it right now We're still tracking at 6.9 million square feet of demand in San Francisco, which is getting close to
Rob Perott: pre-pandemic levels of demand that were typically around 8 million square feet. And I can just give you color that we see and what we respond to. But, you know, right now there are 16.
Rob Perott: tenants in the market that are over a hundred thousand feet in San Francisco. And if you look again, I always use the pie chart. If you look at the pie chart for demand that I just described,
Robert Paratte: If you look at the pie chart for demand that I just described, over 50% of that is technology-related, and then there's a percentage of that that is AI. So I guess I would say, big picture, that sublease space, although, you know, you hear about Twitter and they're putting space on the market, but sublease space that's quality space is slowly, you know, becoming less. So we're down to about eight and a half million square feet of sublease space now.
Rob Perott: Over 50% of that is technology-related, and then there's a percentage of that that is AI. So, I guess I would say big picture that Subway's space, although, you know, you hear about Twitter and they're putting space on the market, but...
Speaker Change: Sublease space, that's quality space, is slowly, you know, becoming less, so we're down to about eight and a half million square feet of sublease space now, but as we've said on numerous calls, it's going to take time to chip away at that, but we're pleased by the demand.
Robert Paratte: But as we've said on numerous calls, this is going to take time to chip away at that. But we're pleased by the demand, you know, that we're seeing. And I guess the last thing I'd say about Twitter is that they still intend to keep 300 people in San Francisco.
Speaker Change: You know that we're seeing and I guess the last thing I'd say about Twitter is they still intend to keep 300 people in San Francisco so they're only going to sublease a portion of what they lease
Robert Paratte: So they're only going to sublease a portion of what they lease. Yeah, I mean, I think, as you're hearing from Rob, there's no question that AI demand is really making an impact in San Francisco. And we're seeing it in the broader market statistics, but also very much seeing it in the vacancies we have across the portfolio or will have in the second half of the year. In addition, we're seeing some of that spillover demand, as Rob mentioned, from AI companies that are primarily based in San Francisco looking at other markets like Seattle, and to some degree, San Diego, just trying to get access to tech talent that's resident in other markets as So it's primarily a dynamic we're seeing in San Francisco, but it's certainly not limited to San Francisco either. Next question is from the line of Camille Bonnel with Bank of America Merrill Lynch. Camille.
Speaker Change: Yeah, I mean, I think as you're hearing from Rob, there's no question that AI demand.
Speaker Change: is really making an impact in San Francisco. We're seeing it in the broader market statistics, but also very much seeing it on vacancies we have across the portfolio, or will have in the second half of the year. In addition, we're seeing some of that spillover demand, as Rob mentioned, from AI companies that are primarily based in San Francisco, you know, looking at other markets like Seattle and, to some degree, San Diego, just trying to get access to tech talent that's resident in other markets as well. So it's primarily a dynamic we're seeing in San Francisco, but it's certainly not limited to San Francisco either.
Speaker Change: Next question is from the line of Camille Bunnell with Bank of America Merrill Lynch.
Camille Bonnel: Hello. Hello, Angela, you called out how LA is recovering more slowly. So I wanted to dig in a bit further into the demand you're seeing at a sub market level. Can you talk to the size of the tenant and the areas you're seeing signs of recovery versus weakness? Yeah, I mean, we're seeing, you know, decent traction kind of across the portfolio, but it has been the dynamic I referenced in my prepared remarks about the larger format tenants coming back, that dynamic isn't yet fully taking hold in the LA market, you know, really, in any of the sub markets, we do think that some of the strongest sub markets in Los Angeles are, you know, sort of nearing relatively full occupancy and hope that we're going to see some spillover benefits, not unlike what I described, you know, between Bellevue and South Lake Union in the Pacific Northwest, but seeing some spillover benefits, you know, that will that will benefit our portfolio, particularly in in West LA.
Speaker Change: and Camille. Thank you. Thank you.
Camille Bunnell: Hello, hello Angela. You called out how LA is recovering more slowly so I wanted to dig in a bit further into the demand you're seeing at a sub-market level. Can you talk to the size of the tenant and the areas you're seeing signs of recovery versus weakness?
Speaker Change: Yeah, I mean, we're seeing, you know, decent traction kind of across the portfolio, but it has been the dynamic I referenced in my prepared remarks about the larger format tenants.
Speaker Change: Coming back, that dynamic isn't yet fully taking hold.
Speaker Change: in the L.A. market, you know, really in any of the sub-markets.
Speaker Change: We do think that some of the strongest submarkets in Los Angeles are, you know, sort of nearing relatively full occupancy and hope that we're going to see some spillover benefits, not unlike what I described.
Camille Bonnel: You know, demand continues to be, you know, relatively broad-based, primarily kind of professional services and those kinds of uses, but we just haven't seen the return of some of the larger format demand like we've seen in other places, Rob. Yeah, hi, Camille.
Speaker Change: between Bellevue and Southlake Union in the Pacific Northwest, but seeing some spillover benefits.
Speaker Change: that will benefit our portfolio, particularly in West L.A.
Rob Perott: You know, demand continues to be, you know, relatively broad-based, primarily kind of professional services and those kinds of uses, but we just haven't seen the return of some of the larger format demand like we've seen in other places. Rob?
Angela Aman: You know, the challenge in West LA, we're, you know, we're closest to, is really Playa Vista, which is a different submarket. And that's a larger format market, in general, anyway. And so you've seen some space give-backs by Metta, etc. But interestingly, YouTube, which is a Metta company, just extended for 10 years and got a 100,000 foot lease out there. So, as Angela said, it's sort of there, you know; nothing is static, right?
Rob Perott: Yeah, hi Camille. You know, the challenge in West L.A. we're, you know, we're closest to is really Playa Vista, which is a different sub-market, and that's a larger format market in general anyway, and so you've seen some space give backs by
Rob Perott: Meta, etc. But interestingly YouTube, which is a meta company, just extended for ten years and a hundred thousand foot lease out there So as Angela said, it's sort of there, you know, nothing is static, right? It's changing within the sub markets and the offerings we have in our portfolio
Robert Paratte: It's changing within the submarkets, and the offerings we have in our portfolio are suited to smaller users, and the bulk of users right now in the market are around 20,000 feet. If you look at, you know, where our Westside Media Center project is, for example, and then Hollywood, where we have assets and vacancy, also has had an uptick, actually, in activity. It's just sort of the general comment I'd make is that, you know, activity is picking up, but the pace of transactions is still, you know, slower than we'd like.
Speaker Change: are suited to smaller users, and the bulk of users right now in the market are around 20,000 feet if you look at, you know, where our Westside Media Center project is, for example. And then Hollywood, where we have assets and vacancy, also has had an uptick, actually, in activity.
Speaker Change: Sort of the general comment I'd make is that, you know, activity is picking up, but the pace of transactions is still, you know, slower than we'd like.
Robert Paratte: Okay, and in some of your markets, we've been seeing leasing activity from growing tech companies being focused on sublease space. So I wanted to better understand how much space within Kilroy's portfolio is being sublet versus a year ago, and how much of your pipeline is backselling true vacant space versus filling already occupied space. Hey, Camille, it's Eliott.
Speaker Change: Okay, and in some of your markets we've been seeing leasing activity from the growing tech companies.
Speaker Change: being focused on sublet space. So I wanted to better understand how much space within Kilroy's portfolio is being sublet versus a year ago and how much of your pipeline is backfilling true vacant space versus refilling already occupied space.
Eliott Trencher: So, as we sit here today, about 11 or 12% of Kilroy's portfolios are available for sub-lease. If we look back a year ago, maybe that was 10-ish percent. So, it's moved a little, but not all that meaningful. And then, you know, we've tried to start giving breakdowns in our press releases of how our leasing breaks out between spaces vacant and spaces currently occupied. So, for the quarter, we had 122,000 square feet of the 235 that were new leasing on previously vacant space, 55 on new leasing that was occupied, and then 58 of renewal. The next question is from the line of Blaine M. Heck with Wells Fargo. Blaine?
Speaker Change: Thank you.
Speaker Change: Hey Camille, it's Eliott. So as we sit here today, it's about 11 or 12 percent of Kilroy's portfolios available for sublease. If we look back a year ago, maybe that was
Eliott Trencher: 10-ish percent. So it's moved a little, but not all that meaningful. And then, you know, we've tried to start giving breakdowns in our press release of how our leasing breaks out between spaces vacant and spaces currently occupied. So for the quarter,
Eliott Trencher: We had 122,000 square feet of the 235 that was new leasing on previously vacant space, 55 on new leasing that's occupied, and then 58 of renewal.
Blaine Heck: Great, thanks. First, to follow up on the personnel announcements, can you talk about the process behind selecting Jeffrey for the CFO position? Did you run a broader process, or was this just a prior relationship that kind of stuck out as a good fit? And then, after these changes, how should we be thinking about the current senior management team that's in place and the structure of the management team? Angela, I guess, have we reached what you see as an optimal team now? Are there any other contemplated or considered possible additions or changes we should think about going forward? Yeah, thanks, Blaine. I appreciate it.
Speaker Change: The next question is from the line of Blaine M. Heck with Weld Fargo. Blaine?
Speaker Change: Great, thanks. Just to follow up on the personnel announcements first, can you talk about the process behind selecting Jeffrey for the CFO position? Did you run a broader process or was this just
Speaker Change: you know, a prior relationship that kind of stuck out as a good fit. And then, you know, after these changes, how should we be thinking about the current senior management team that's in place and the structure of the management team? Angela, I guess, have we reached what you see as an optimal team now? Are there any other contemplated or considered?
Angela Aman: possible additions or changes we should think about going forward?
Angela Aman: I would say as it relates to the CFO search and process. You know, I've spent a lot of time over the last six months really just getting my arms around this organization and what I felt like it needed. And, you know, part of that identification was recognizing the need for full-time focus on the chief investment officer side, which freed me up to think specifically about what kinds of skills and what background I thought would be best suited for the CFO role here, in particular, given where we are from, you know, a business perspective, but where we are in terms of the platform perspective as well, and some changes I'd like to see over the next few years I have worked with Jeffrey at two different companies over time. I know his skill set very well.
Angela Aman: Yeah, thanks, Lane. I appreciate it. I would say as it relates to the the CFO search and process, you know, I've spent a lot of time over the last six months really just getting my arms around this organization and what I felt like it needed. And, you know, part of that identification was recognizing the need for full time focus on the chief investment officer side.
Angela Aman: which freed me up to think specifically about what kinds of skills and what background I thought would be best suited for the CFO role here in particular, given where we are from a business perspective, but where we are in terms of the platform perspective as well, and some changes I'd like to see over the next few years in terms of business process improvements and continued investment in technology and data analytics and things like that.
Angela Aman: I think he's going to be a great fit, not just from the, you know, exactly sort of the work that I see the CFO role doing over the next few years, but certainly from a cultural perspective. I think he's going to be a great fit with the rest of this executive team and, you know, with the accounting and finance functions that he'll work most closely with. So, that was kind of the thought process there. Look, I, you know, I tried to really emphasize this in my prepared remarks.
Angela Aman: I have worked with Jeffrey at two different companies over time. I know his skill set very well. I think he's going to be a great fit, not just from, you know, exactly sort of the...
Angela Aman: the work that I see the CFO role doing over the next few years, but certainly from a cultural perspective, I think he's gonna be a great fit with the rest of this executive team and with the accounting and finance functions that he'll work most closely with.
Angela Aman: I've been really blown away by the talent and professionalism of this entire team, and as we've navigated, you know, a dynamic business environment, but also this, you know, CEO transition process, the willingness of everybody to really embrace change and, you know, help me get up to speed and all of that. So, I'm very pleased with where we sit today from an executive leadership perspective and, you know, ready to continue to focus on the opportunities and challenges in front of us. Okay, great. That's really helpful.
Angela Aman: So that was kind of the thought process there. Look, I tried to really underscore this in my prepared remarks, I've been.
Angela Aman: really blown away by the talent and professionalism of this entire team and as we've navigated, you know, a dynamic business environment but also this, you know, CEO transition process, the willingness of everybody to really embrace change and
Speaker Change: help me get up to speed and all of that. So I'm very pleased with where we sit today from an executive leadership perspective and ready to continue to focus on the opportunities and challenges in front of us.
Angela Aman: Switching gears to capital allocation, can you guys just give an update on your thoughts on share repurchases, just given where the stock is trading, and whether they might be an attractive kind of alternative use of funds as you guys remain on the sidelines with respect to acquisitions and development? Yeah, I mean, I'd say a few things, you know, I think maybe it was not long after I joined that we refreshed both our buyback program and our ATM program to make sure that we have all the tools available to us as we navigate what will continue to be a pretty dynamic capital markets environment.
Speaker Change: Great, that's really helpful. Switching gears to capital allocation, can you guys just give an update on your thoughts on share-free purchases, just given where the stock is trading and whether they might be an attractive alternative use of funds as you guys remain on the sidelines with respect to acquisitions and development?
Angela Aman: So we're certainly, you know, able and prepared to do that, to the extent it makes sense. But I don't think you should expect us to execute on a buyback program in a way that that takes leverage higher, right? So it would only be with an identified source of proceeds.
Speaker Change: Yeah, I mean, I'd say a few things, you know, I, you know, you might have seen, I think maybe it was not long after I joined, we refresh both our buyback program and our ATM program to make sure that we have
Speaker Change: You know, all tools available to us as we navigate what will continue to be a pretty dynamic capital markets environment. So we're certainly, you know, able and prepared to do that to the extent it makes sense.
Speaker Change: I don't think you should expect us to see us execute on a buyback program in a way that takes leverage higher, right? So it would only be with an identified source of proceeds.
Angela Aman: And we'd have to be looking around at all of the investment alternatives that are available to us at that point in time. As I mentioned, I do think, through the rationalization of the future land pipeline, that we will have some nice proceeds that we'll want to reinvest in the most economically attractive way. But, as I tried to emphasize in my prepared remarks, it's going to take us some time to realize those proceeds in order to maximize value on each of those parcels.
Speaker Change: and we'd have to be looking around at all of the investment alternatives that are available to us at that point in time. As I mentioned, I do think, you know, through the rationalization of the future land pipeline.
Speaker Change: that we will have some nice proceeds that we'll want to reinvest in the most economically attractive way. But as I tried to underscore in my prepared remarks, it's going to take us some time to realize those proceeds in order to maximize value on each of those parcels.
Angela Aman: So, you know, I think at that point in time, when we get there and we have proceeds in the door, Elliot and I will be working through that conversation about what we are seeing in the transaction market. Where is the stock at that point in time? And what's the best alternative when we're in that position? Anything you want to add, Elliot?
Speaker Change: So, you know, I think at that point in time, when we get there and we have proceeds in the draft.
Eliott Trencher: You know, Eliott and I will be working through that conversation about what are we seeing in the transaction market, where is the stock at that point in time, and what's the best alternative when we're in that position. Anything you want to add, Eliott? No, I think that pretty well covers it. I mean, near term, we kind of highlighted.
Eliott Trencher: No, I think that pretty well covers it. In the near term, we kind of highlighted what our priorities are for our capital, which is to ensure that the development pipeline is fully funded. And then, I think beyond that, it's making sure that the balance sheet is in the right shape so that when we are ready to do something, we have all of our options in front of us. The next question is from Steve Sakwa with Evercore ISI. Steve. Steve. Hi, good morning out there.
Eliott Trencher: what our priorities are for our capital, which is to ensure that the development pipeline is fully funded. And then I think beyond that, it's making sure that the balance sheet is in the right shape so that when we are ready to do something, we have all of our options in front of us.
Eliott Trencher: The next question is from the line of Steve Saqua with Evercore ISI.
Steve Sakwa: Angela, just sticking on the kind of new hires, you know, Michael Schmidt on the leasing side, to come in and compliment Rob. Does he have a background in life science leasing? Is it more office leasing? Just wanted to kind of get your feel for the kind of team and the depth of the life science leasing and, you know, how that could help in an improving leasing environment. Yeah, I mean, as you can appreciate, the Bay Area overall is a very big market for us.
Eliott Trencher: Steve.
Steve Saqua: Hi, good morning out there. Angela, just sticking on the kind of new hires, you know, Michael Schmidt on the leasing side, you know, to come in and compliment Rob. Does he have background in life science leasing? Is it more office leasing? Just wanted to kind of get your feel on
Speaker Change: Kind of the team and the depth of the life science leasing and you know how that could help in an improving leasing environment
Steve Sakwa: We have somebody on the team there who's doing a great job at servicing that market as well. But Michael Schmidt, you know, coming in, will play a key role in continuing to build out our practice overall in the San Francisco market and the Bay Area. And I think it's going to be a really great addition to the team and somebody that, you know, Rob can get a lot of leverage from in that market.
Angela Aman: Yeah, I mean, as you can appreciate, you know, the Bay Area overall is a very big market for us. We have somebody on the team there who's doing a great job at servicing that market as well, but Michael Schmidt, you know, coming in will take a key role in continuing to build out our practice overall in the San Francisco market and Bay Area, and I think it's going to be a really great addition to the team and somebody that, you know, Rob can get a lot of leverage from in that market.
Angela Aman: I do think, as we probably talked about before, you know, we're continuing to evaluate our needs across the broader leasing platform, and all of my comments around making sure that we have the right resources in the right place is really underscoring that, that we have a lot of challenges and opportunities in front of us from a leasing side, and I want to make sure that we have all of the resources we need for that function to really be successful at continuing to capture outsized market share going forward. So, you know, stay tuned. There might be some additional, you know, hires on the leasing side to just support our efforts, you know, across the portfolio. I think it's a very reasonable question to point out life science and to ask if you'll see some additions there.
Angela Aman: I do think, as we probably talked about before, you know, we're continuing to evaluate our needs across the broader lease platform. And all of my comments around making sure that we have the right resources in the right place are really underscoring that we have a lot of challenges and opportunities in front of us from a leasing side. And I want to make sure that we have all of the resources we need for that function to really be successful at continuing to capture outsized market share going forward.
Angela Aman: So, you know, stay tuned; there might be some additional hires on the leasing side to just support our efforts across the portfolio. I think it's a very reasonable question to point out life science and to ask if you'll see some additions there.
Angela Aman: I'd prefer to wait to announce anything when we have somebody teed up, but we're continuing to evaluate our needs in all parts of the business.
Angela Aman: You know, I'd prefer to wait to announce anything until we have somebody teed up, but we're continuing to evaluate our needs in all parts of the business. Okay, and then secondly, on kind of coming back to the LA market, I guess just given all the challenges that we're seeing across all the streaming platforms and kind of the cable companies and just the issues all going on in the media sector, I'm just wondering how you think about the LA footprint in total and whether you are kind of moving maybe some more of those assets and submarkets potentially into the disposition bucket. Yeah, it's a good question.
Speaker Change: Okay, and then secondly on kind of coming back to the L.A. market, I guess just given all the challenges that we're seeing across all the streaming platforms and kind of the cable companies and
Speaker Change: Just the issues all going on in kind of the media sector. I'm just wondering how you're thinking about the LA footprint in total and whether you are kind of moving maybe some more of those assets and sub markets potentially into the disposition bucket.
Angela Aman: There's I mean, obviously, you know, particularly in the sectors you referenced, there are a lot of cross currents right now. And, you know, it's certainly a place we're spending a lot of time and focus on really making sure we're on top of and understanding, you know, what's happening, particularly in our Hollywood portfolio. I just underscore how high quality our assets are in Hollywood, and how well leased they are, and how, you know, the credit profile, etc., of what we have in that market. So we feel pretty good about it right now.
Speaker Change: Yes, it's a good question. I mean, obviously, you know, particularly in the sectors you referenced, there are a lot of cross-currents right now, and
Speaker Change: It's certainly a place we're spending a lot of time and focus to really make sure we're on top of and understanding what's happening, particularly in our Hollywood portfolio. I just underscore how high quality our assets are in Hollywood and how well leased they are and how the credit profile, et cetera, of what we have in that market. So we feel pretty good about it right now. Overall, I do think LA in general,
Angela Aman: Overall, I do think, you know, excuse me, LA, in general, is a very big market with lots of very distinct sub markets. And I think as we consider, you know, our footprint in LA longer term, it's very reasonable to ask if there is some, you know, sub market positioning that we'll continue to think through as we move forward. But the dynamics you mentioned are certainly ones that we're taking into account. We do feel good about the portfolio we have that's exposed to those kinds of sectors today. The next question is from the line of Upal Rana with Key Corp.
Speaker Change: It's a very big market with lots of very distinct sub-markets, and I think as we consider, you know, our footprint in LA longer term, it's very reasonable to ask if there are, if there is some, you know, sub-market positioning.
Speaker Change: that we'll continue to think through as we move forward. But the dynamics you mentioned are certainly ones that we're taking into account. We do feel good about the portfolio we have that's exposed to those kinds of sectors today.
Speaker Change: The next question is from the line of Upal Rana with Key Corp.
Upal Rana: Great, thanks for taking the question. Angela, on the land parcel rationalization that you mentioned in your prepared remarks, could you give us some color on what some of those parcels are? And what's the best use case for some of them now, if it's not office?
Paul: and Paul.
Upal Rana: Great, thanks for taking my question. Angela, of the land parcel rationalization that you mentioned on your prepared remarks,
Upal Rana: Could you give us some color on what some of those parcels are and what's the best use case of some of them now, if it's not office, and would you consider structuring a deal where you may participate in any of those land parcels?
Angela Aman: And you know, would you consider structuring a deal where you may participate in any of those land parcels? Yeah, I think I think those are all good questions. I'm going to defer conversations about specific parcels until we're, you know, closer to execution, and we can be more specific about exactly what the plans are there. But, you know, as I think you've heard me say in both of my prepared remarks and, you know, in the Q&A here, I'm very excited about our future prospects at KOP.
Angela Aman: Yeah, I think those are all good questions. I'm going to defer conversations about specific parcels until we're closer to execution and we can be more specific.
Speaker Change: about exactly what the plans are there. But, you know, as I think you've heard me say both in my prepared remarks and...
Speaker Change: in Q&A here. I'm very excited about our future prospects at KOP. So we can kind of put that to the side. I think, you know, our ability to continue to build out KOP over time.
Angela Aman: So we can kind of put that to the side. I think, you know, our ability to continue to build out KOP over time, in a way that's driven by tenant demand and, you know, where we take appropriate levels of risk as we continue to phase out that project, will make a ton of sense for the company. And I'm really excited about our ability to do that.
Speaker Change: in a way that's driven by tenant demand and, you know, where we take appropriate levels of risk as we continue to phase out that project.
Angela Aman: It's only going to enhance the value of what we have in phase one and phase two as well. Other parcels across that future land bank, you know; we've got a range of sizes in the future land bank. And there are clearly parcels in there that, you know, were bought at one point with the assumption that they would be office or life science projects where the markets just shifted, or sub-market dynamics had just shifted, and we now think the highest and best use is likely something other than office and life science.
Speaker Change: We'll make a ton of sense for the company and I'm really excited about our ability to do it. It's only going to enhance the value of what we have in Phase 1 and Phase 2 as well.
Speaker Change: Other parcels across that future land bank, you know, we've got a range of sizes in the future land bank, and there are clearly parcels in there that, you know, were bought at one point with the assumption that
Speaker Change: They would be office or life science projects where the markets just shifted or sub-market dynamics have just shifted And we now think highest and best use is likely something other than office and life science
Speaker Change: I would say primarily, those other uses are going to be residential or residential related. So there are, there is maybe one parcel in that future land bank where we're considering, you know, more of an alternative use.
Angela Aman: I would say primarily those other uses are going to be residential or residential-related. Though there is maybe one parcel in that future land bank where we're considering, you know, more of an alternative use than residential. So, you know, I just want to reiterate what I said in my prepared remarks, which is that I'm really very encouraged by the level of activity and engagement we've seen on those parcels. And I think it's going to represent a really attractive source of capital for the company to continue to participate in the acquisition market going forward or look at all of our other capital allocation alternatives. All right, great. Thank you. That was very helpful.
Speaker Change: than residential. So, you know, I just again underscore what I said in my prepared remarks, which is that I'm really very encouraged by the level of activity and engagement we've seen on those parcels.
Speaker Change: And I think it's going to represent a really attractive source of capital for the company to continue to participate in the acquisition market going forward or look at all of our other capital allocation alternatives.
Eliott Trencher: And then, Elliot, could you give us an update on your known move outs and backfilling progress? You know, there's still a decent chunk in the back half, and I wanted to get a better sense of visibility of occupancy into year end. Yeah, I'll start with the move outs.
Eliott Trencher: All right, great, thank you, that was helpful. And then, Eliott, could you give us an update on your no move-outs and back-filling progress? There's still a decent chunk in the back half and wanted to get a better sense on visibility of occupancy into year-end.
Eliott Trencher: And then, Rob, if you want to give any market commentary on them, but we touched on three in the prepared remarks that total about 350,000 square feet. That's about 60-plus percent of what we've got expiring over the balance of the year, and those three, we have Salesforce in Seattle. We have already had some activity there, and some of that space is actually already backfilled. That's going to happen in the third quarter.
Eliott Trencher: Yeah, I'll start with the move outs and then Rob, if you want to give any market commentary on them, but we touched on three in the prepared remarks that total about 350,000 square feet. That's about.
Rob Perott: some 60 plus percent of what we've got expiring over the balance of the year. And those three, we have Salesforce in Seattle.
Rob Perott: We have already had some activity there and some of that space is actually already backfilled.
Robert Paratte: And then in the fourth quarter, Microsoft has some space in the Bay Area, about 75,000 square feet. And then Capital One, that's a little over 150,000 square feet, also in San Francisco. And Rob, if you want to... Yeah, I really don't have much more to add to what Eliott said, other than we've been touring those known vacancies already. So, more to come. Next question is from the line of Caitlin Burrows with Goldman Sachs. Caitlin.
Rob Perott: That's gonna happen in the third quarter.
Rob Perott: And then in the fourth quarter, Microsoft has some space in the Bay Area, about 75,000 square feet.
Rob Perott: and then Capital One, that's a little over 150,000 square feet, also in San Francisco, and Rob, if you want to... Yeah, I really don't have much more to add to what Eliott said other than we've been touring those known vacancies already, so more to come.
Caitlin Burrows: Hi there, maybe a quick one on you guys ending the quarter with over $800 million in cash. It sounds like the plan for that is to fund development and pay down the December bond maturity. But I guess at what point would you look to reaccess the unsecured bond market? Or do you expect this to be more of like a permanent debt paydown? So, Caitlin, I think it's a good question.
Rob Perott: Next question is from the line of Caitlin Burroughs with Goldman Sachs. Caitlin?
Caitlin Burroughs: Hi there. Maybe a quick one on the, you guys ended the quarter with over $800 million of cash. It sounds like the plan for that is to fund development and pay down the December bond maturity, but I guess at what point would you look to reaccess the unsecured bond market, or do you expect this to be more of like a permanent debt pay down?
Eliott Trencher: And, you know, from our perspective, the thought process is not just, you know, what's going on in the unsecured bond market, which has obviously gotten a little bit more attractive over the recent weeks and months, but what would the use of proceeds be as well? And so, you know, we're in the fortunate position where, after our December 2024 maturity, we don't really have anything until October of 2025. We will have to address that.
Caitlin Burroughs: So, Caitlin, I think it's a good question and, you know, from our perspective, the thought process
Speaker Change: is not just what's going on in the unsecured bond market, which has obviously gotten a little bit more attractive over the recent weeks and months.
Eliott Trencher: Our track record has been that we are proactively getting ahead of those maturities. So, we think that if we can see an opportunistic time to raise some capital, that's a logical use of that capital. But we're also going to keep our eyes open for other uses, as Angela touched on, be that acquisition opportunities or whatnot. But we, as we're doing all of that, we need to be very mindful that the leverage is not taking up those. So, if we're going to the bond market, the most likely use is to repay future debt. Got it.
Speaker Change: but what would the use of proceeds be as well? And so, you know, we're in the fortunate position where after our December 2024 maturity, we don't really have anything until October of 2025. We will have to address that. We have, our track record has been that we are proactively getting ahead of those maturities. So, we think that if we can see an opportunistic time to raise some capital, that's a logical use of that capital. But we're also going to keep our eyes open for other uses, as Angela touched on, be that acquisition opportunities or whatnot.
Speaker Change: As we're doing all of that, we need to be very mindful that the leverage is not ticking up, though. So if we're going to the bond market, the most likely use is to repay future debt.
Caitlin Burrows: Okay. And then maybe just back to the leasing side, it seemed like the second quarter activity was relatively softer, but then July was strong. So it also sounds like the larger deal market is not necessarily as strong, so that would suggest they're more smaller deals. But I guess going forward, kind of how's the leasing pipeline and outlook for the remainder of 2024 looking, and also that mix of small versus large users. Hi Caitlin.
Speaker Change: Got it. Okay. And then maybe just back to the leasing side, seemed like the second quarter activity was relatively softer, but then July was strong. So it also sounds like the larger deal market is not necessarily as strong. So that would suggest they're more smaller deals. But I guess going forward, kind of how's the leasing pipeline and outlook for the remainder of 2024 looking and also that mix of small versus large users. Thanks.
Robert Paratte: As you probably inferred from my comments, I mean, the pipeline is looking good. I mean, we've already since the quarter, you know, the third quarter, we've signed 183,000 square feet of leases, and we have more in the pipeline in various stages of discussion. So it feels like, you know, Q3 and Q4 could finish strong, and that is consistent with what we're seeing in the markets that we operate in, where, you know, demand continues to increase, and expectations are that, you know, small and larger transactions are going to happen.
Speaker Change: Hi Caitlin, as you kind of probably inferred from my comments, I mean, the pipeline is looking good. I mean, we've already
Speaker Change: Since the quarter, you know, the third quarter, we've signed 183,000 square feet of leases.
Speaker Change: And we have more in the pipeline in various stages of discussion. So it's feeling like, you know, Q3 and Q4 could finish strong.
Speaker Change: is consistent with what we're seeing in the markets that we operate in where, you know, demand continues to increase and expectations are that, you know, small and larger transactions are going to happen. And I wouldn't say that it's all...
Robert Paratte: And I wouldn't say that it's all small tenant activity. We have some larger tenants, as Angela alluded to earlier, that are tenants that we're talking to. So, you know, you're just not seeing the size and volume of large tenants that you saw in 2017 or 18, but we're also coming out of something, you know, into an improving environment. Yeah, I think that's exactly right.
Speaker Change: Small Tenant Activity. We have some larger tenants, as Angela alluded to earlier, that were tenants that we're talking to. So, you know, you're just not seeing the size and volume of large tenants that you saw in 2017 or 2018.
Speaker Change: We're also coming out of something, you know, into an improving environment. Yeah, I think that's exactly right. As I said in my prepared remarks, this is the first time we've really seen.
Angela Aman: As I said in my prepared remarks, this is, you know, the first time we've really seen recently a sort of re-acceleration in demand from users that are looking for over 100,000 feet. So not, you know, some of the mega deals maybe, but certainly, a strong improvement in the, you know, average deal size in the forward pipeline that we think is really encouraging. That's true both on the renewal side and on the straight new leasing side as well.
Speaker Change: recently a sort of re-acceleration in demand from users that are looking for over 100,000 feet.
Speaker Change: So not, you know, some of the mega deals maybe, but certainly, you know, a strong improvement in the, you know, average deal size in the forward pipeline that we think is really encouraging. That's true, both on the renewal side and
Dylan Burzinski: So any comments in Q&A about a lack of return on the larger deals were sort of more sub-market, you know, or market specific, particularly in Los Angeles. But across the entirety of the portfolio, we're definitely seeing things move in that direction. The next question is from the line of Dylan Burzinski with Green Street Advisors. Dylan. Thanks for taking the question.
Speaker Change: and on the straight new leasing side as well. So any comments in Q&A, you know, about a lack of returnable larger deals with sort of more sub-market, you know, or market-specific, particularly in Los Angeles, but across the entirety of the portfolio, we're definitely seeing things move in that direction.
Dillon: The next question is from the line of Dillon Brzezinski with Green Street Advisors. Dillon?
Angela Aman: Angela, just wanted to go back to your comments on seeing assets or higher quality assets coming to market at a faster pace. I mean, are there certain markets where you're seeing a larger quantity of assets come to market? And then, I guess as a follow-up to that, is your sense that these sellers are having more realistic expectations versus where, you know, we heard of assets coming to market, say last year, 18 months ago? I think that's a really important question, Dylan.
Dillon Brzezinski: Thanks for taking the question. Angela, I just wanted to go back to your comments on seeing assets or higher quality assets coming to market at a faster pace. I mean, are there certain markets where you're seeing a larger quantity of assets come to market? And then, I guess, as a follow-up to that,
Speaker Change: Is it your sense that these sellers are having more realistic expectations versus where we heard of assets coming to market, say, last year, 18 months ago?
Angela Aman: I think in terms of just where we're seeing the activity on the higher quality assets, I think it has been relatively distributed across markets. We've evaluated things, and I think almost all of our markets that we would categorize as higher quality than what we've seen come out over the last couple of years. So that part of the equation, at least is pretty broad-based, but based on what I said earlier, we're waiting to execute in an environment where we feel pricing does reflect the overall risk environment and our cost of capital, and we certainly haven't seen things get all the way there yet, which is why you just haven't seen executions from us yet.
Angela Aman: I think that's a really important question, Dillon. I think in terms of just where we're seeing the activity.
Speaker Change: and the higher quality assets. I think it has been relatively distributed across markets. We've evaluated things and
Dillon Brzezinski: I think almost all of our markets that we would categorize as, you know, higher quality than what we've seen come out over the last couple of years. So that part of the equation, at least, is pretty broad based, but
Dillon Brzezinski: You know, based on what I said earlier, you know, we're waiting to execute for an environment where we feel pricing does reflect the overall risk environment and our cost of capital. And we certainly haven't seen things get all the way there, which is why you just haven't seen executions.
Angela Aman: But we think that this environment where we are seeing more market testing from potential sellers and more market testing of assets that would at least be a fit for us from a quality and long-term growth standpoint is very encouraging, and we think more market testing will lead to the compression of that bid-ask spread as we move forward. Dylan, this is Elliot.
Dillon Brzezinski: from us yet. But we think that, you know, this environment where we are seeing more market testing
Dillon Brzezinski: from potential sellers and, you know, more market testing of assets that would at least be a fit for us from a quality and long-term growth standpoint is very encouraging and we think, you know, more market testing will lead to, you know, the compression of that bid-ask spread as we move forward.
Eliott Trencher: I'd just add to that that when you think about some of these owners, they've lacked liquidity for a few years, and now that they're getting to a point where it's been a while, they may have other needs in terms of how they allocate their portfolios, it's logical that they're going to come out and sort of be a little bit more open-minded when testing the market. And so we think that this is a trend that can continue. That's helpful commentary.
Dillon Brzezinski: And Dylan is Elliot. I just add to that that.
Dylan: when you think about some of these.
Speaker Change: owners, you know, they've lacked liquidity for a few years. And so now that they're getting to a point that, you know, it's been a while, they may have other needs in terms of how they allocate their portfolios, it's logical that they're going to come out and sort of
Speaker Change: Be a little bit more open-minded when testing the market. And so, you know, we think that this is a trend that can continue
Angela Aman: And then one more follow-up question, if I could, I guess, as you look at the portfolio concentration today, are there certain markets that you're more interested in growing over time? You know, I think for most of our markets, it's a question of really understanding how sub-markets are sort of evolving and where we want to position ourselves from a sub-market perspective. We certainly want to continue to grow the Austin portfolio. As I think you're well aware, we've got one very high-quality asset in the Austin CBD and a development site near the domain, but I certainly hope we can continue to expand that portfolio over time and in the right way.
Speaker Change: That's helpful commentary and then one more follow-up if I could. I guess as you look at the portfolio concentration today, are there certain markets that you're more interested in growing over time?
Speaker Change: You know, I think for most of our markets, it's a question of really understanding how sub-markets are sort of evolving and where we want to position ourselves from a sub-market perspective.
Speaker Change: We certainly want to continue to grow the Austin portfolio, as I think you're well aware, we've got one very high quality asset in the Austin CBD and a development site near the domain, but certainly hope we can continue to expand that portfolio over time and in the right way.
Angela Aman: You know, outside of that, the only other comment I've made before and I'll make again here is that I think as we look at the portfolio, one of the other conversations we're having internally is just about relative market positioning as well. I think over time, you will see our relative positioning to the Bay Area come down.
Speaker Change: You know, outside of that, the only other comment, you know, I've made before and, you know, I'll make again here is that
Speaker Change: I think as we look at the portfolio, one of the other conversations we're having internally is just about relative market positioning.
Speaker Change: as well. I think over time you will see our relative positioning.
Angela Aman: There's probably a little bit of portfolio pruning there, but my broader hope is that, you know, really we're just growing the denominator in other markets like Austin and San Diego and the Pacific Northwest, et cetera, rather than, you know, significant sales out of the San Francisco market. We're very excited about what we're seeing in terms of the stabilization and recovery in San Francisco, and we certainly don't need to rush that relative exposure question given where we sit, you know, from a market standpoint today, but I think long-term, you know, that's something you should expect to see us move in that direction methodically. Next question is from the line of Pete Abramowitz with Jeffries. Pete.
Speaker Change: to the Bay Area come down. There's probably a little bit of portfolio pruning there, but my broader hope is that, you know, really we're just growing the denominator in other markets like Austin and San Diego and the Pacific Northwest, etc., rather than, you know, significant sales out of the San Francisco market. We're very excited about what we're seeing in terms of the stabilization and recovery in San Francisco, and we certainly don't need to rush that relative given where we sit, you know, from a market standpoint today, but I think long term, you know, that's something you should
Speaker Change: You should expect to see us move in that direction methodically.
Speaker Change: Next question is from the line of Pete Abramowitz with Jefferies.
Pete Abramowitz: Yes, thank you very much. And thanks for taking the questions. Could you just talk about Dermtech?
Pete Abramowitz: Yes, thank you very much and thanks for taking the questions. Could you just talk about Dermtech? I know they filed for Chapter 11.
Eliott Trencher: I know they filed for Chapter 11 back in June. Just curious how that's being treated, whether in terms of your FFO guide or how it's incorporating into your occupancy guide. And are they still in that space in San Diego? Hey, it's Elliott. They are still in that space. They are still occupying it. They have paid rent in July.
Pete Abramowitz: back in June. Just curious how that's being treated, whether in terms of your FFO guide or how it's incorporating to your occupancy guide, and are they still in that space in San Diego?
Eliott Trencher: As far as what's in the guidance, there's a range of outcomes. But you can assume that, as we typically do, we're pretty conservative with how we think about these things. Okay, that's helpful.
Eliott Trencher: Hey Pete, it's Eliott. They are still in that space, they are still in occupancy, they have paid rent in July. As far as what's in the guidance, there's a range of outcomes, but you can assume that as we typically do, we're pretty conservative with how we think about these things.
Pete Abramowitz: And then in terms of capital allocation, you just talk about potentially other opportunities and other parts of the capital stack, whether it be mezzanine positions, things like that. And is that something you've considered something that seems attractive to you on a risk-adjusted basis? And if so, kind of what you're underwriting from a return standpoint?
Pete Abramowitz: Okay, that's helpful. And then in terms of capital allocation, you just talk about potentially other opportunities and other parts of the capital stack, whether it be
Speaker Change: mezzanine positions, things like that. Is that something you've considered? Something that seems attractive to you on a risk-adjusted basis? And if so, kind of what you're underwriting from a return standpoint?
Eliott Trencher: Yeah, so we've touched on this in prior quarters. It's something that we haven't historically done, but we are open to doing. I think from our perspective, we know that our expertise is buying, operating, leasing, you know, real estate. It's not lending on real estate.
Speaker Change: And we've touched on this in prior quarters. It's something that we haven't historically done, but we are open minded about doing. I think from our perspective, we know that our expertise is
Speaker Change: is buying, operating, leasing, you know, real estate. It's not lending on real estate. So to the extent that we are going to go up higher in the capital stack, we want there to be
Eliott Trencher: So, to the extent that we are going to go higher in the capital stack, we want there to be a clear path to ownership and not just being in the lending business and, you know, kind of trying to replicate those as loans come due. That isn't our expertise. But we are going to try and be creative and open-minded and look for ways to create value. The next question is from the line of Michael Carroll with RBC. Michael.
Speaker Change: a clear path to ownership and not just being in the lending business and you know kind of rep trying to replicate those as loans come due that that isn't our expertise but we are going to try and be creative and open-minded and looking for ways to create value
Speaker Change: Next question is from the line of Michael Carroll with RBC. Michael?
Michael Carroll: Thanks, I just wanted to follow up on the potential monetization of some of the land parcels. And I know that you said that there might be some alternative uses for the sites that you have. Can we assume that you're actively entitling these sites to fit those better uses? I think you said rezoning for most of them. Is that going on right now? And how long of a process does that typically take?
Michael Carroll: I just wanted to follow up on the potential monetization of some of the land parcels. I know that you said that there might be some alternative uses for the sites that you have. Can we assume that you're actively entitling these sites to fit those better uses? I think you said resi for most of them. Is that going on right now? And how long of a process does that typically take?
Angela Aman: Yeah, in some of these cases, we are going through that process, you know, working with people who might be eventual, you know, buyers for that to make sure that the right things are getting entitlements as well. So we're evaluating that and making sure things are moving, you know, in the right direction there. As I said, these things can take time, and the amount of time it's going to take is going to be different by market and sub-market. So it's not easy to generalize.
Speaker Change: Yeah, in some of these cases, we are going through that process, you know, working with people who might be eventual, you know, buyers for those to make sure that the right things are getting entitled as well.
Speaker Change: So we're evaluating that and making sure things are moving, you know, in the right direction there. As I said, these things can take time, and the amount of time it's going to take is going to be different by market and sub-market.
Angela Aman: I think, you know, a couple of the parcels could move a little bit more quickly than others. But, you know, even in the best case scenario, it will take a not insignificant amount of time to re-entitle them to something beyond what they're currently entitled to. Okay, and should we assume that you probably don't want to sell these parcels until you actually get them in title because you just want to maximize your value to make sure that everything's suitable for the next developer?
Speaker Change: So it's not easy to generalize. I think, you know, a couple of the parcels could move a little bit more quickly than others. But, you know, even in the best case scenario, it will take, you know, a not insignificant amount of time to re-entitle for something beyond what they're currently entitled for.
Speaker Change: Okay, and should we assume that you probably don't want to sell these parcels until you actually get them entitled, because you just want to maximize your value and make sure that everything is suitable for the next developer?
Angela Aman: Yeah, I mean, I think it's just a question of how do we maximize value on the parcels, right? And so I think Eliott and his team have run through a really thoughtful process of evaluating each of these scenarios, testing the market, and understanding, you know, if we sell them today, what's the value? If we hold them a little bit longer and entitlement, what's the value then?
Eliott Trencher: Yeah, I mean, I think it's just a question of how do we maximize value on the parcels, right? And so I think Eliott and his team have run through a really thoughtful process of evaluating each of these scenarios, testing the market and understanding.
Eliott Trencher: You know, if we sell them today, what's the value? If we hold them a little bit longer and entitle, what's the value then? And, you know, is there a wide enough gap between those two numbers to make continuing to carry the assets through reentitlement attractive to us? And I think.
Angela Aman: And, you know, is there a wide enough gap between those two numbers to make continuing to carry the assets through re-entitlement attractive to us? And I think, in effectively all scenarios, that's the case, that the best outcome for shareholders is for us to hold them through re-entitlement as long as we're confident that we can re-entitlement them in the correct way to maximize value for the end buyer.
Eliott Trencher: In effectively all scenarios, we do think that's the case, that the best outcome for shareholders is for us to hold them through re-entitlement, as long as we're confident that we can re-entitle them in the correct way to maximize value for the end buyer, that's the better outcome from just a valuation standpoint. But it really is just a question of understanding each individual situation.
Angela Aman: That's the better outcome from just a valuation standpoint. But it really is just a question of understanding each individual situation and testing the market a little bit and understanding, you know, where values lie and making the right economic decision. Next question is from John P. Kim with BMO.
Eliott Trencher: and testing the market a little bit and understanding where values lie and making the right economic decision.
John Kim: Thank you. I wanted to ask about the $2.5 million lease termination fee this quarter. Was this factored into your guidance previously, or was it a new event? And also, any color on either the tenants or the market that it's located in? Yeah, hey, John.
Speaker Change: Next question is from John P. Kim with BMO.
Eliott Trencher: John.
Speaker Change: Once asked about the $2.5 million lease termination fee this quarter, was this factored into your guidance previously or was it a new event? And also any color on either the tenants or the market that it's located in?
Eliott Trencher: So this was a tenant in Bellevue. It was not factored into our guidance previously. It has an impact on same store sales because it is a cash lease termination. It has a negligible impact on FFO.
Speaker Change: Yeah, hey John, so this was a tenant in Bellevue. It was not factored into our guidance previously. It has a an impact on Same Store because it is a cash lease termination. It has a negligible impact on FFO. So when when you think about
Eliott Trencher: So when you think about how we talked about the drivers earlier, you know, we made that distinction of one of the drivers of same store growth including some of the fee income, but that was not a driver of FFO growth. And as far as the market itself is concerned, we touched on one of our stronger markets. And so it's one that we feel pretty good about the activity that we're seeing there. Okay, and then just wanted to follow up on the SAP renewal and how much of a downsize that is, and also on the answer about no move outs. If you could give any no move outs that you expect in 2025. Hey John, it's Rob.
Speaker Change: How we talked about the drivers earlier, you know, we made that distinction of one of the drivers of same-store growth included some of the fee income, but that was not a driver in FFO growth.
Speaker Change: And as far as the market itself, we've touched on one of our stronger markets and so it's one that we feel pretty good about the activity that we're seeing there.
Speaker Change: Okay and then just wanted to follow up on the SAP renewal and how much of a downsize that is and also on the answer on no move-outs if you could give any no move-outs that you expect in 2025
Robert Paratte: So it is a downsize. It's probably over half the space. But we've got, you know, I don't want to give you too much color, but it's, you know, we've got activity in the space. And Bellevue, as Elliott just alluded to, is one of the strongest markets in our portfolio and one of our and in one of our strongest assets. So we feel good about releasing potential for that space. And there is a sub-tenant in place in a large portion of that space, which does help as you think about the risk profile there.
Rob Perott: Hey John, it's Rob.
Rob Perott: So it is a downsize it's probably
Speaker Change: over half the space.
Speaker Change: But we've got, you know, I don't want to get too much color to you, but it's, you know, we've got activity on the space. And Bellevue, as Eliott just alluded to, is one of the strongest markets in our portfolio. And one of our strongest assets, so we feel good about releasing potential for that space.
Robert Paratte: As far as 2025, one of the things that we've pointed out in the past is that we don't have any expirations above 100,000 square feet. So, as you think about the chunkiness of the rollover schedule or the retention, it's not something that should be as chunky in 2025.
Speaker Change: And there is a subtenant in place in a large portion of that space, which does help as you think about the risk profile there. As far as 2025,
Speaker Change: One of the things that we've pointed out in the past is we don't have any expirations above 100,000 square feet, so as you think about the chunkiness to the rollover schedule or the retention, it's not something that...
Eliott Trencher: And so, of course, there'll be some tenants that stay, some that go, but nothing is as meaningful as what we've seen in 2024. Our last question today is from the line of Brendan Lynch with Barclays. Brendan, great.
Speaker Change: should be as chunky in 2025. And so, of course, there'll be some tenants that stay, some that go, but nothing is as meaningful as what we've seen in 2024.
Speaker Change: Our last question today is from the line of Brendan Lynch with Barclays. Brendan?
Brendan Lynch: Thanks for taking my question. Angela, in the past, I've heard you talk about being interested in highly amenitized A-plus assets with broken capital structures. I was wondering if you're seeing any more of that type of opportunity or what your expectations would be for. Yeah, you haven't seen that kind of distress really hit the market yet. I mean, you know, when we were talking earlier about, you know, additional high-quality assets coming to market, you know, I wouldn't say that there are any with really broken capital structures or any of those situations that are really being, you know, sort of forced into the market by the lender.
Brendan Lynch: Great, thanks for taking my question. Angela, in the past I've heard you talk about being interested in highly amenitized A-plus assets with broken capital structures. I'm wondering if you're seeing any more of that type of opportunity or what your expectations would be for the future?
Angela Aman: Yeah, you haven't seen that kind of distress really hit the market yet. I mean, you know, when we were talking earlier about, you know, seeing some of them.
Angela Aman: additional high-quality assets come to market, you know, I wouldn't say that there are any with really broken capital structures or any of those situations that are really being
Brendan Lynch: As you might expect, I think in certain submarkets, potentially, or certain markets that we operate in, where you have seen higher levels of overall new supply in the market, I think you might find us in a situation over the next couple of years where, with construction loans coming due or something like that, there are some high-quality assets we could, you know, potentially look at from an acquisition standpoint, you know, that would be sort of facilitated by something going on But, you know, most of what we're seeing come to market right now is high-quality assets with, sort of, good sponsorship, but people like Elliot alluded to earlier that just haven't had liquidity and are looking to sell the asset because maybe the ownership structure of the fund that was in or something like that, they were anticipating a liquidity event by now, and it makes sense to at least test the market and see where values lie. Maybe just a related follow-up.
Angela Aman: You know, sort of forced into the market by the lender.
Angela Aman: As you might expect, I think in certain submarkets, potentially, or certain markets that we operate in, where you have seen higher levels of overall new supply in the market, I think you might find us in a situation over the next couple of years where, with construction loans coming due or something like that, there's some high-quality assets we could
Angela Aman: potentially look at from an acquisition standpoint.
Angela Aman: You know, that would be sort of facilitated by something going on in the capital structure, but...
Angela Aman: You know, most of what we're seeing come to market right now is high quality assets with sort of good sponsorship, but people like Elliott alluded to earlier that just haven't had liquidity and, you know, are looking to sell the asset because...
Speaker Change: Maybe the ownership structure of the fund it was in, or something like that. They were anticipating a liquidity event by now, and it makes sense to at least test the market and see where values lie.
Angela Aman: You mentioned that you're looking to or interested in expanding in Austin in the future. That's a market that does have some supply coming online over the next couple years. Maybe just how should we think about the market and the opportunity to expand with that type of background? Yeah, I mean, I think that's a really good example of the dynamic I was just talking about.
Speaker Change: Maybe just a related follow-up. You mentioned that you're looking to or interested in expanding in Austin in the future. That's a market that does have some supply coming online over the next couple years. Maybe just how should we think about the market and the opportunity through to expand through that type of acquisition?
Angela Aman: I, you know, I would say, as we look at what's happening in the options CBD, we've got Indeed Tower in that market, which is a very high-quality asset, you know, where we're still in lease up, but feel really good about the demand prospects and how broad-based that demand has been. So, you know, I feel good about the market, the dynamics overall. It is a market that's being impacted by pretty significant levels of new supply right now, which isn't really impacting our ability to get Indeed Tower leased up just based on the quality and how differentiated that asset is.
Speaker Change: Yeah, I mean, I think that's a really good example of the dynamic I was just talking about. I, you know, I would say, as we look at what's happening in the Austin CBD,
Speaker Change: You know, we've got Indeed Tower in that market, which is a very high quality asset, you know, where we're still in lease up, but feel really good about the demand prospects and how broad based that demand has been.
Speaker Change: So, you know, feel good about the market, the dynamics overall. It is a market that's being impacted by pretty significant levels of new supply right now, which isn't really impacting, you know, our ability to get Indeed Tower leased up just based on the quality and how differentiated that asset is. But as we do think about continuing to expand in Austin over the next few years, I think that new supply dynamic certainly could be to our benefit in terms of our ability to,
Angela Aman: But as we do think about continuing to expand in Austin over the next few years, I think that new supply dynamic certainly could be to our benefit in terms of our ability to acquire some high quality new assets where, you know, sort of the long term financing picture for those assets as they stabilize is not what people might originally anticipated. So it certainly might be an attractive way for us to continue to grow that portfolio, but it's certainly a little bit speculative today, and we'll continue to watch that market closely and evaluate opportunities as they come.
Speaker Change: The long-term financing picture for those assets as they stabilize is not what people might have originally anticipated so it certainly might be an attractive way for us to continue to grow that portfolio, but Certainly a little bit speculative today, and we'll continue to watch that market closely and evaluate opportunities as they come
Operator: Thank you. That concludes our Q&A session, as well as the KRC 2Q24 earnings conference call. Thank you all for your participation on today's call, and you may now disconnect your lines.
Speaker Change: Thank you. That concludes our Q&A session, as well as the KRC 2Q24 earnings conference call. Thank you all for your participation on today's call, and you may now disconnect your lines.