Q4 2024 Kilroy Realty Corp Earnings Call

February 11, 2025

An opportunity for Q&A after management's prepared remarks, if you'd like to enter the queue for questions. Please dial star followed by one on your telephone keypad I would now like to hand, the conference over to Doug, Texas with senior director of corporate Finance and Keith You May proceed.

Good morning, everyone. Thank you for joining us on the call with me today are Angela Aman.

Speaker Change: So Jeffrey Keeling, EVP, CFO, and Treasurer, and Elliott Treasurer EVP CIO. In addition, just in smart President and Rob <unk>.

Cheap leasing officer will be available for Q&A.

Speaker Change: Please note that some of the information we will be discussing during this call is forward looking in nature. Please refer to our supplemental package for a statement regarding the forward looking information on this call and in the supplemental this call is being webcast live on our website and will be available for replay for the next eight days our earnings release and supplemental package have been filed on form 8-K.

Speaker Change: The SEC and both are also available on our website.

Speaker Change: Angela will start the call with a strategic overview and quarterly highlights Elliot will provide a transaction market outlook and Geoffrey will discuss our financial results and provide you with our 2025 guidance then we'll be happy to take your questions Angela.

Angela Aman: Thanks, Doug I am pleased to report on a strong end to 2024, which was capped off by outperformance in our financial result in a material acceleration in leasing activity in.

Angela Aman: In addition throughout the course of last year. The team worked tirelessly to prepare for the recovery. We knew would take hold in our markets, making critical senior hires across the platform rethinking processes and systems can be more efficient and nimble successfully completing several in process development and major repositioning projects, taking significant steps to address our future development pipe.

Angela Aman: Line and other non income producing assets, including the sale of our corporate airplane, which closed in the fourth quarter and actively monitoring the market for opportunistic transactions.

Speaker Change: <unk> team has risen to every challenge that has presented itself and the recent devastation in Los Angeles. The location of our corporate headquarters is no exception I have been inspired by the strength and resilience of this team as they work to support our Los Angeles tenants and each other as we've collectively navigated a very challenging start to 2025.

We report on a strong end to 2024, which was capped off by outperformance in our financial results in a material acceleration in leasing activity.

In addition throughout the course of last year. The team worked tirelessly to prepare for the recovery. We knew would take hold in our markets, making critical senior hires across the platform rethinking processes and systems to be more efficient and nimble successfully completing several in process development and major repositioning projects.

Speaker Change: During the fourth quarter of last year, we signed approximately 708000 square feet of leases, achieving our highest level of leasing activity since the fourth quarter of 2019, a testament to the ongoing demand for high quality spaces that align with evolving tenant needs.

Taking significant steps to address our future development pipeline and other non income producing assets, including the sale of our corporate airplane, which closed in the fourth quarter and actively monitoring the market for opportunistic transactions.

Speaker Change: The quarter was headlined by two significant deals first we executed a multi floor lease with Walmart at Skyline tower in Bellevue, Washington, Our regional team worked creatively to accommodate Walmart significant requirement and accelerated timeline simultaneously executing an early termination with an existing tenant for a portion of the space that Walmart will occupy address.

Kilroy team has risen to every challenge that has presented itself and the recent devastation in Los Angeles. The location of our corporate headquarters is no exception I've been inspired by the strength and resilience of this team as they work to support our Los Angeles tenant and each other as we proactively navigated a very challenging start to 2025.

Speaker Change: In late 2025 exploration and achieving a meaningful rent increase in the process in.

Speaker Change: In addition, we executed a 274000 square foot new lease and the San Francisco Bay area with a global technology company that has the subtenant occupying our largest 2026 exploration.

During the fourth quarter of last year, we signed approximately 708000 square feet of leases, achieving our highest level of leasing activity since the fourth quarter of 2019, a testament to the ongoing demand for high quality spaces that align with evolving tenant needs.

Speaker Change: Over 70% of the square footage for this exploration has now been addressed through the lease signed this quarter at a 157000 square foot lease signed with the same tenant in the fourth quarter of 2023.

The quarter was headlined by two significant deals.

First we executed a multi floor lease with Walmart at Skyline tower in Bellevue, Washington, Our regional team worked creatively to accommodate Walmart significant requirement and accelerated timeline simultaneously executing an early termination with an existing tenant for a portion of the space that Walmart will occupy addressing a late 2025 exploration and achieving them.

Speaker Change: This execution combined with an SAP renewal in Bellevue, Washington announced last quarter underscores both the productivity of our team as it relates to addressing our 2026 lease explorations and increased willingness of tenants to engage and make long term commitments related to their space needs.

Meaningful rent increase in the process in.

Speaker Change: Given the historically low levels of new supply and increase workplace attendance requirements, taking effect our markets are demonstrating important signs of sustained recovery and we expect these trends to continue to accelerate over the next several years.

In addition, we executed a 274000 square foot new lease and the San Francisco Bay area with a global technology company.

Subtenant occupying our largest 2026 exploration.

Kilroy has a number of unique opportunities to capture this growing momentum as we executed over the course of this year. One particular area of focus is the embedded upside inherent in our highest quality vacancies specifically those concentrated and recently developed a repositioned assets, including west eighth in Seattle, 2100, Kettner in San Diego and indeed.

Over 70% of the square footage for this exploration has now been addressed through the lease signed this quarter.

157000 square foot lease signed with the same tenant in the fourth quarter of 2023.

This execution combined with an SAP renewal in Bellevue, Washington announced last quarter underscores both the productivity of our team as it relates to addressing our 2026 lease explorations and increased willingness of tenants to engage and make long term commitments related to their space needs.

Speaker Change: Tower in Austin These properties set the standard for quality functionality and market, leading Amanda <unk> ideally positioning them within their respective markets.

Given historically low levels of new supply and increase workplace attendance requirements, taking effect our markets are demonstrating important signs of sustained recovery and we expect these trends to continue to accelerate over the next several years.

Speaker Change: Taken space at these assets alone represented 410 basis points at least occupancy upside at yearend highlighting an exceptional source of future growth for the company.

Speaker Change: And while not reflected in our occupancy statistics statistics until early 2020, the second phase of Kilroy Oyster point in South San Francisco will be a substantial growth driver for the company in the coming years.

Kilroy has a number of unique opportunities to capture this growing momentum as we execute on that over the course of this year. One particular area of focus is the embedded upside inherent in our highest quality vacancies.

Speaker Change: The project received its temporary certificate of occupancy in January 2025, following some slight delays in municipal approval and is now fully ready to welcome tenants.

Typically those concentrated and recently developed a repositioned assets, including West eight in Seattle 2100, Kettner in San Diego and indeed tower in Austin This.

Speaker Change: The spec suites conference facilities, food and beverage offerings and outdoor meeting and event spaces set this project apart from competitive supply in the market and are driving constructive conversations with several life science and office users.

These properties set the standard for quality functionality and market, leading amended physician ideally positioning them within their respective markets.

Vacant space at these assets alone represented 410 basis points leased occupancy upside at yearend highlighting an exceptional source of future growth for the company.

Speaker Change: While the environment in South San Francisco remains highly competitive we are convicted in the quality of what we're delivering and oyster point and the long term success of this project.

And while not reflected in our occupancy statistics statistics until early 2020, the second phase of Kilroy Oyster point in South San Francisco will be a substantial growth driver for the company in the coming years.

As discussed on prior calls we continue to proactively assess our future development pipeline and are executing on various programs to derisk accelerate and maximize value realization for our shareholders. We.

The project received its temporary certificate of occupancy in January 2025, following some slight delays in municipal approval and is now fully ready to welcome tenants.

Speaker Change: We expect to continue to hold certain parcels such as the land associated with future phases of Kilroy Oyster point as our current program continues to represent the best path forward.

Spec suites conference facilities, food and beverage offerings and outdoor meeting and event spaces that this project apart from competitive supply in the market and are driving constructive conversations with several life science and office users.

Other cases, including some of our sites in southern California. It is clear that the path to maximizing value will be a full re entitlement to an alternative use such as residential and we're focused on defining the execution path that will best balance our desire to maximize proceeds with accelerating the timing of monetization.

While the environment in South San Francisco remains highly competitive we are convicted in the quality of what we're delivering and oyster point and the long term success of this project.

And still other cases, such as with the flower Mart parcel in San Francisco the path to value maximization will require more work and exploration. The original plans for the flower Mart were created against the backdrop of a very different market environment and contemplated $2 3 million square feet of primarily office space to be supported by significant infrastructure investments.

We expect to continue to hold certain parcel such as the land associated with future phases of Kilroy Oyster point as our current program continues to represent the best path forward.

Speaker Change: And the site, which limit the ability to face construction.

In other cases, including some of our sites in southern California. It is clear that the path to maximizing value will be a full re entitlement to an alternative use such as residential and we're focused on defining the execution path that will best balance our desire to maximize proceeds with accelerating the timing of monetization.

Speaker Change: Our team is actively working to create additional optionality for this project that will allow us to be responsive to the market as the recovery continues.

Speaker Change: Although the steps we are taking that will maximize the value of the site over time, there will likely be an earnings implication in the second half of the year, if our planning and design efforts conclude and development is still on warranted based on market conditions.

Still other cases, such as with the flower Mart parcel in San Francisco, the path to value maximization will require more work and exploration.

Speaker Change: Geoffrey will provide some additional details in a moment.

Speaker Change: In conclusion, our fourth quarter and full year results, including a robust leasing volume.

The original plans for the flower Mart were created against the backdrop of a very different market environment and contemplated $2 3 million square feet of primarily office space to be supported by significant infrastructure investments in the site, which limit the ability to face construction.

Speaker Change: Speak to the strength, we are we see emerging across our markets and the Kilroy team is prepared for a busy year across every part of our platform I want to thank the team again for their hard work and dedication in 2024 and for the energy and enthusiasm they are bringing into 2025 Elliot.

Our team is actively working to create additional optionality for this project that will allow us to be responsive to the market as the recovery continues.

Elliot: Thanks Angela.

Speaker Change: The transaction market.

Although the steps, we're taking now will maximize the value of the site over time, there will likely be an earnings implication in the second half of the year, if our planning and design efforts conclude and development is still on warranted based on market condition.

The year on a positive trajectory.

Speaker Change: All human financing levels were higher year over year with a bias towards smaller deals in 2020 for approximately 85% of office sales were under $100 million.

By comparison this number was 70% of transactions back in 2019.

Geoffrey: Geoffrey will provide some additional details in a moment.

Geoffrey: In conclusion, our fourth quarter and full year results, including a robust leasing volume speak.

Speaker Change: Another sign of progress has been the return of core capital to the sector in the fourth quarter. There were notable core deals in Austin and the Bay area with going in yields in the mid <unk> to low 7% range.

Geoffrey: Speak to the strength, we are we see emerging across our markets and the Kilroy team is prepared for a busy year across every part of our platform I want to thank the team again for their hard work and dedication in 2024 and for the energy and enthusiasm they are bringing into 2025 Elliot.

Speaker Change: The combination of deeper bidding pools and a variety of capital sources is encouraging us to start testing the sales market again, something we've put on hold over the last few years as valuations were in flux, we will focus our disposition efforts on properties, where the current market value does not appropriately reflect our assessment of the medium term risk.

Elliot: Thanks Angela.

Elliot: The transaction market.

Elliot: The year on a positive trajectory deal volume and financing levels were higher year over year with a bias towards smaller deals in 2020 for approximately 85% of office sales were under $100 million.

Speaker Change: Fortunately our funding needs are modest over the next few years and our balance sheet is in good shape. So we will only proceed with sales that meet our stringent criteria.

Elliot: By comparison this number was 70% of transactions back in 2019.

Speaker Change: And while we do not acquire anything during the quarter, we remain optimistic about the opportunity set of potential value creating acquisition our.

Elliot: Another sign of progress has been the return of core capital to the sector in the fourth quarter. The renewable core deals in Austin and the Bay area with going in yields in the mid six to low 7% range.

Speaker Change: Our strong balance sheet local market knowledge and operational insights are all advantages, we expect to put to good use in 2025.

Elliot: The combination of deeper bidding pools and a variety of capital sources is encouraging us to start testing the sales work and again something we put on hold over the last few years as valuations were in flux.

Speaker Change: As always we will remain disciplined in our approach and judicious for shareholder capital.

Speaker Change: Turning to landfills as we mentioned last quarter, we are in advanced discussions with residential developers on Tuesday, and our future development pipeline and are expected to generate in excess of $150 million.

Elliot: We will focus our disposition efforts some properties, where the current market value does not appropriately reflect our assessment of the medium term risk.

Elliot: Fortunately our funding needs are modest over the next few years and our balance sheet is in good shape. So we will only proceed with sales that meet our stringent criteria.

Speaker Change: It remains an acute need for more housing in southern California, and re entitling commercial land the logical way to address the significant and growing problem.

Elliot: And while we do not acquire anything during the quarter, we remain optimistic about the opportunity set of potential value creating acquisitions.

Speaker Change: We expect to have more to discuss on our capital recycling initiatives as the year progresses, given continued uncertainty in the transaction market and our expectations for any long dated closing process on our landfill guidance does not contemplate any <unk> impact from such activities and we will continue to update our expectations throughout the year.

Elliot: Our strong balance sheet local market knowledge and operational insights are all advantages, we expect to put to good use in 2025.

Elliot: As always we will remain disciplined in our approach and judicious shareholder capital.

Speaker Change: With that I will turn the call over to Geoffrey Thanks.

Elliot: Turning to landfills as we mentioned last quarter, we are in advanced discussions with residential developers on Tuesday, and our future development pipeline that are expected to generate in excess of $150 million.

Geoffrey: Thanks, Elliot <unk> was $1 20 per diluted diluted share in the fourth quarter and was impacted by several onetime items totaling approximately <unk> 11 per share, including a $6 million gain on the sale of the corporate plane $4 7 million of GAAP restoration fee income and $2 5 million of GAAP termination fee income.

Elliot: It remains an acute need for more housing in southern California, and re entitling commercial land the logical way to address the significant and growing problem.

Elliot: We expect to have more to discuss on our capital recycling initiatives as the year progresses, given continued uncertainty in the transaction market and our expectations for any long dated closing process on our landfill guidance does not contemplate any <unk> impact from such activities and we will continue to update our expectations throughout the year.

Geoffrey: Cash same property NOI growth was 70 basis points in the fourth quarter, including a 90 basis point contribution related to restoration and termination fee income.

Geoffrey: <unk> ended the year at 82, 8% and was impacted by several large move outs that were discussed on last quarter's call, including capital one and Microsoft in the San Francisco Bay area, and a short term lease exploration in Los Angeles.

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

Geoffrey: Thanks Elliot.

Geoffrey: <unk> was $1 20 per diluted diluted share in the fourth quarter and was impacted by several onetime items totaling approximately <unk> 11 per share, including a $6 million gain on the sale of the corporate plane $4 7 million of GAAP restoration fee income and $2 5 million of GAAP termination fee income.

Geoffrey: Now lets discuss 2025 guidance, our 2025 <unk> guidance range is $3 85 to 405 per diluted share representing a midpoint of $3 95.

2025 average occupancy is expected to range between 80, and 82% a decrease of approximately 300 basis points versus our average occupancy in 2024. The decrease was primarily driven by the previously mentioned fourth quarter 2020 for move outs as well as three larger move outs are down.

Geoffrey: Cash same property NOI growth was 70 basis points in the fourth quarter, including a 90 basis point contribution related to restoration and termination fee income.

Geoffrey: Occupancy ended the year at 82, 8% and it was impacted by several large move outs that were discussed on last quarter's call, including capital one and Microsoft in the San Francisco Bay area, and a short term lease exploration in Los Angeles.

Geoffrey: <unk> is expected to occur in the first quarter of 2025 totaling approximately 216000 square feet.

Geoffrey: Following the activity in the first quarter no remaining exploration into 2025 is in excess of 50000 square feet.

Geoffrey: Now lets discuss 2025 guidance.

Geoffrey: 2025, <unk> guidance range is $3 85 to 405 per diluted share representing a midpoint of $3 95.

Geoffrey: Cash same property NOI is projected to decline between negative one five to negative 3% at the midpoint of the range base rent will detract approximately 50 basis points from growth net recoveries will detract approximately 75 basis points and nonrecurring items, such as restoration fee income to be tracked approximately 100 basis points.

Geoffrey: 2025 average occupancy is expected to range between 80, and 82% a decrease of approximately 300 basis points versus our average occupancy in 2024. The decrease was primarily driven by the previously mentioned fourth quarter 2020 for move outs as well as three larger move outs or downside.

Geoffrey: Despite the almost 300 basis point decline in average occupancy expected during 2025, So limited detraction from base rent highlights the strength of our contractual rent growth across the portfolio. Please note that the same property NOI growth is expected to be lower in the second half of the year, primarily due to the trajectory of occupancy and significant restoration fee.

Geoffrey: Is this expected to occur in the first quarter of 2025 totaling approximately 216000 square feet.

Geoffrey: Following the activity in the first quarter no remaining exploration into 2025 is in excess of 50000 square feet.

Geoffrey: Income recognized in the second half of 2024.

Cash same property NOI is projected to decline between negative one five to negative 3% at the midpoint of the range base rent will detract approximately 50 basis points from growth net recoveries will detract approximately 75 basis points and nonrecurring items, such as restoration fee income to be trucked approximately 100 basis points.

As part of our enhanced disclosure efforts beginning in 2025 lease termination fee income will be excluded from both a cash and GAAP NOI a change that has been reflected in our cash same property NOI guidance <unk>.

Geoffrey: <unk> guidance assumes $3 million of such income down from $7 million in 2024.

Geoffrey: Noncash GAAP NOI adjustments, which include the amortization of deferred rent and net below market rent straight line rent and other lease related adjustments are expected to decline significantly in 2025, but remain positive with a range of 2 million to $5 million down from over $20 million in 2020 for the year over year decrease.

Geoffrey: <unk> recognized in the second half of 2024.

Geoffrey: Primarily reflects the cadence of leasing activity over the last 24 months.

Geoffrey: As part of our enhanced disclosure efforts beginning in 2025 lease termination fee income will be excluded from both a cash and GAAP NOI a change that has been reflected in our cash same property NOI guidance.

Geoffrey: The combination of G&A and leasing costs totaled just under $81 million last year, a steep decline from approximately $100 million in 2023. During 2024, our focus was on both reducing the total amount of overhead spending and ensuring that each dollar of spending was appropriately allocated across the platform as we.

Geoffrey: <unk> guidance assumes $3 million of such income down from $7 million in 2024.

Noncash GAAP NOI adjustments, which include the amortization of deferred rent and net below market rent straight line rent and other lease related adjustments are expected to decline significantly in 2025, but remain positive with a range of 2 million to $5 million down from over $20 million in 2020 for the year over year decrease.

Geoffrey: On these goals overhead spending in 2024 came in at artificially low as cost savings initiatives outpaced the timing of certain platform investments the 83% to $85 million overhead guidance. We have provided for 2025 represents a more appropriate run rate going forward.

Geoffrey: Primarily reflects the cadence of leasing activity over the last 24 months.

Geoffrey: Moving to interest income you may recall that last January we pre funded our capital needs for 2024, resulting in elevated cash balances for most of the year, which were utilized to pay down a portion of our term loan balances and repaid $400 million of unsecured notes at maturity in December we expect to maintain less cash on hand during 2025 and <unk>.

Geoffrey: The combination of G&A and leasing costs totaled just under $81 million last year, a steep decline from approximately $100 million in 2023.

Geoffrey: During 2020.

Geoffrey: Reducing the total amount of overhead spending and ensuring that each dollar of spending was appropriately allocated across the class.

Geoffrey: We expect a significant reduction in interest income down from $38 million in 2024 to about $6 million in 2025.

Geoffrey: Okay.

Geoffrey: As it relates to capitalized interest during 2025. Please note two things one is construction at <unk> phase II was completed in January interest capitalization will cease at the earlier of tenant occupancy a one year from base building completion, which will now occur in January 2026.

Geoffrey: Okay.

Geoffrey: Thank you.

Geoffrey: Okay.

Geoffrey: We have provided for 2025 represents a more appropriate run rate going forward.

Geoffrey: Two as we've previously discussed we remain we remain committed to methodically evaluating each land parcel to determine its highest and best use and the optimal program for project execution to provide some additional context related to Angeles comments on the flower Mart. We currently capitalize approximately $7 million of interest expense and an additional $1 million of.

Geoffrey: We expect a significant reduction in interest cycle down from $38 million in 2024 to about $6 million in 2025.

Real estate taxes, and other expenses for the project each quarter for 2025 guidance incorporates a range of potential capitalization scenarios for this project and at the midpoint assumes that capitalization seizes at the beginning of the fourth quarter. This assumption combined with our assumptions for several other parcels in the future development pipeline are expected.

As it relates to capitalized interest during 2025.

Geoffrey: Thank you.

Geoffrey: Okay.

Geoffrey: That could be a one year for base building completion, which will now occur in January 2026.

Geoffrey: Results in capitalized interest of approximately $72 million in 2025 at the midpoint of range versus $82 5 million recognized in 2024, we will offset these assumptions as our plans solidify.

Geoffrey: As we've previously discussed we remain we remain committed to methodically evaluating each land parcel to determine its highest and best use and the optimal program for project execution to provide some additional context related to Angeles comments on the flower Mart. We currently capitalize approximately $7 million of interest expense and an additional $1 million of <unk>.

Geoffrey: In conclusion, we remain well positioned to navigate the evolving market landscape with strong liquidity stable leasing fundamentals and a disciplined capital allocation strategy. Our continued focus on maximizing on maintaining a flexible balance sheet monetizing noncore assets and delivering high quality developments will allow us to drive long term value.

Geoffrey: Real estate taxes, and other expenses for the project each quarter for 2025 guidance incorporates a range of potential capitalization scenarios for this project and at the midpoint assumes that capitalization season at the beginning.

Geoffrey: While adapting to changes in market conditions with that we're happy to take your questions operator.

Geoffrey: Quarter.

Geoffrey: Several other parcels in the future development pipeline are expected to result in capitalized interest of approximately $72 million in 2025 at the midpoint of range versus $82 5 million recognized in 2021.

Geoffrey: Sure.

Geoffrey: Thank you and I'll open the call for your questions if you'd like to enter the queue. Please dial star one on your telephone keypad now if you change your mind I would like to exit the queue. Please I'll start out by Chi Wen.

Geoffrey: When comparing to ask your questions. Please ensure that youll phone is on mute locally.

Geoffrey: Okay.

Geoffrey: Finally in the interest of time, we respectfully ask that you limit yourself to one question and one follow up per person.

Geoffrey: Okay.

Geoffrey: Yes.

Geoffrey: That's right.

Geoffrey: Yeah.

Geoffrey: Okay.

Speaker Change: With that I'll first question stay will be from the line of Paul.

Geoffrey: Okay.

Geoffrey: Sure.

Geoffrey: <unk> with <unk>. Please go ahead. Your line is now open.

Geoffrey: Okay.

Speaker Change: Great. Thanks for taking my question.

Geoffrey: Okay.

Geoffrey: Yes.

Speaker Change: You guys laid out several known move outs for 2025, particularly <unk>.

Geoffrey: Okay.

I was wondering what your current visibility on occupancy is for 2025 do you expect to.

Geoffrey: Okay.

Speaker Change: Potentially bottom this year.

Geoffrey: Okay.

Speaker Change: Yeah.

Geoffrey: Thank you.

Speaker Change: Just that.

Speaker Change: Could you talk through a little bit sort of the dynamic in 2021 that I think temporary excuse me the dynamic in 2025 that I think tougher you did a good job at laying out we've got some significant move outs in the first quarter of the year, which include.

Geoffrey: Thanks.

Geoffrey: Okay.

Geoffrey: Sure.

Geoffrey: Okay.

The 80000 square foot move out we had talked about previously in addition to that short term lease associated with the bankruptcy situation from the fourth quarter.

Geoffrey: Yes.

Geoffrey: Okay.

Geoffrey: Yeah.

Geoffrey: Okay.

Speaker Change: We'll also be we believe significantly downsizing, but remaining in the portfolio in Q1. In addition, as I mentioned in my prepared remarks.

Geoffrey: Yes.

Geoffrey: Okay.

Okay.

Speaker Change: Pretty exciting new deal in Bellevue that also resulted in a termination.

Geoffrey: Okay.

Geoffrey: Unexpected potentially bottomed this year.

Speaker Change: That will take effect during the first quarter with that new tenant coming online later in the year as well after we get past the first quarter, we do expect a lot more stability in the occupancy level throughout the year Geoffrey mentioned that after the first quarter, our largest move out our largest exploration I should say in 2025 is is no greater than 50000 feet. So there's a really granular.

Geoffrey: Yeah.

Geoffrey: If you could talk through a little bit sort of the dynamic at play.

Geoffrey: Okay.

Geoffrey: That's helpful.

Geoffrey: Scott.

Geoffrey: Yes.

Geoffrey: Okay.

Speaker Change: And we will start to really see the benefit I think from a leasing activity that's been done over the last couple of quarters.

Okay.

Geoffrey: Short term lease associated with the bankruptcy situations in the fourth quarter that will also be.

Speaker Change: As we look into 2026 as you can see in the lease expiration schedule, we certainly have a higher move out year in 2020.

Geoffrey: Hi.

Geoffrey: Okay.

Speaker Change: And I think that Rob and his team have been doing a really excellent job in engaging with tenants as early as possible and starting to address some of those larger explorations our largest exploration in 2020, Texas on it.

Geoffrey: Yes.

Geoffrey: Okay.

Speaker Change: One lease that was just under 600000 feet and as I also mentioned in my prepared remarks, we've made some significant headway on that this quarter and have now interest over 70% of that exploration. So I think we're making really good progress as it relates to 2020 <unk> feel pretty good after we get through the first quarter about how explorations like for the balance of 2025, but sort of how things settle out between.

Geoffrey: Okay.

Geoffrey: Okay. The first part of our largest move out our largest exploration I should say in 2025 is is no greater than 50000 feet. So there's a really granular pool and we will start to really see the benefit I think from the leasing activity that's been done over the last couple of quarters.

Speaker Change: The back half of 'twenty, five and into 'twenty.

Speaker Change: Just going to depend on our continued ability to proactively address those 26 exploration and continue to see leasing pick up across the portfolio for currently vacant space.

Geoffrey: As we look into 2026 as you can see in the lease exploration schedule, we certainly have a higher move out here in 2020.

Geoffrey: And I think that Rob and his team have been doing a really excellent job in engaging with tenants as early as possible and starting to address some of those larger explorations our largest exploration in 2020, Texas on it.

Speaker Change: Yeah.

Okay, Great that was helpful and then.

Speaker Change: On <unk> two.

Geoffrey: One lease that was just under 600000 feet and as I also mentioned in my prepared remarks, we made some significant headway on that this quarter and I'm now interest over 70% of that exploration. So I think we're making really good progress as it relates to 2026 feel pretty good after we get through the first quarter about how explorations like for the balance of 2025, but sort of how things settle out.

Speaker Change: Could you give us a sense of what the conversations have been like over the past few months.

Speaker Change: Maybe what your existing pipeline is currently there.

Speaker Change: Yeah.

Speaker Change: Just kick it off and then turn it over to Rob for some additional detail I mean, I think what I'd say about this project today is that the completion of the project in January it's really sort of changed.

Geoffrey: Between the back half of 'twenty, five and into 'twenty six it's just going to depend on our continued ability to proactively address those twenty-six exploration and continue to see at least in pick up across the portfolio for currently vacant space.

Speaker Change: The nature of the conversations we're having at that project I think even if you saw the project pretty recently now having the amenities fully completed now having the spec suites fully furnished having all the landscaping and it's really changed the dynamic and how that project field and we're seeing that result in additional tour activity and additional constructive conversations across <unk>.

Geoffrey: Okay.

Geoffrey: Okay, Great that was helpful and then on <unk> two.

Geoffrey:

Speaker Change: Broad range of tenants and a broad range of sizes as well I think we've had some pretty good traction and a slightly larger format size than just a spec suites been up 40% to 60000 square foot range as well. So I think all of the dynamics are healthy as we mentioned earlier.

Geoffrey: Could you give us a sense of what the conversations have been like over the past few months.

Geoffrey: Maybe what your existing pipeline is currently there.

Geoffrey: Yeah, I'll I'll just kick it off and then turn it over to Rob for some additional detail I mean, I think what I'd say about this project today is that the completion of the project in January is really sort of changed.

Speaker Change: South San Francisco remains a very competitive market and.

Speaker Change: There is.

Speaker Change: Significant vacancy in the market that we're competing against but I really believe the quality of what we've delivered and oyster point and the scale of what we've delivered on Oyster point is getting a tremendous amount of focus from market participants both the brokerage community and from tenants in the market and even tenants that might not have been considering oyster point at the location and I think.

Geoffrey: The nature of the conversations we're having at that project I think even if you saw the project pretty recently now having the amenities fully completed now having the spec suites fully furnished having all the landscaping and thats really changed the dynamic and how that project fields and we're seeing that results in additional tour activity and additional constructive conversations across.

Speaker Change: We're really pleased at how things are evolving kind of post.

Geoffrey: Broad range of tenants and a broad range of sizes as well I think we've had some pretty good traction and a slightly larger format size than just affect suites been up $40 to 60000 square foot range as well. So I think all of the dynamics are healthy as we mentioned earlier.

Speaker Change: The completion of that project sure adding.

Rob: Adding onto what Angela said this is rob by the way.

Speaker Change: Taking a step back and just looking at <unk> now that it's delivered.

Speaker Change: It is the most notable newly delivered life Science project and the most preeminent market on the West Coast for life Science and as a result, we're seeing a really broad swath of interest from tenants as well as brokers from across the bay area and that that.

Geoffrey: South San Francisco remains a very competitive market and.

Geoffrey: There is a cigna.

Geoffrey: Significant vacancy in the market that we're competing against but I really believe the quality of what we've delivered and oyster point and the scale of what we've delivered in Oyster point is getting a tremendous amount of focus from market participants both the brokerage community and from tenants in the market and even tenants that might not have been considering oyster point at the location and I think we're really pleased.

Speaker Change: Focus sort of runs from life Science buildings were purpose built life science that was the original intent that's still our intent thats our focus for leasing as life science, but given the campus like nature of the project and the leading edge amenities that Angela outlined it's attracting attention from technology companies and financial service.

Geoffrey: <unk> at how things are evolving kind of post <unk>.

Geoffrey: The completion of that project.

Geoffrey: Sure.

Geoffrey: Adding onto what Angela said this is Rob.

Geoffrey: Hey.

Speaker Change: Taking a step back and just looking at <unk> now that it's delivered.

Speaker Change: And sort of what you know the bay area to be especially from large users. So the project has really come on to its own and as I said, it's attracting a lot of attention in a positive way and I know that feedback we're getting both from users as well as the brokerage community is that there is nothing else like this campus thats available in terms of our pipeline you've heard us.

Speaker Change: Over the past few quarters talked about.

Speaker Change: Our pipeline has continued to grow.

Speaker Change: That remains the case, we're in discussions with a variety of companies in different sizes are spec suites are very well received there furnished now.

Speaker Change: It just makes when I think about the years, we've been marketing. This project there is nothing like being able to walk in and go through the landscaping and sit in the conference center or go to an office floor as opposed to trying to market something from renderings and photograph so.

Speaker Change: Touching fuel experience is really translating into we think tangible activity.

Speaker Change: Last thing I'd say is just the overall leasing environment in the Bay area is improving for life Science VC funding for 24 was $11 1 billion, which is up 39% from 2023, and we all know and Thats specific to life science and we all know that VC funding is a big driver of the life science.

Speaker Change: Demand. There has also been activity in the market that has increased over 23. So as I said I think in the overall summary, we're really poised well and I'm very confident about 2025 and oyster point.

Speaker Change: Thank you. The next question will be from the line of Steve <unk> with Evercore ISI. Please go ahead. Your line is open.

Speaker Change: Great. Thanks, Good morning out there Andrew.

Speaker Change: Angela I just wanted to come back to your comment about the 26 lease explorations and I think you said largest one was 600000 and you've addressed over 70% of that just to be clear is that reflected I guess within the lease exploration schedule, that's still showing $1 9 million feet or is that not maybe taken effect, yet I guess I'm just.

Speaker Change: Trying to make sure I understand kind of what's been addressed or what's still to be addressed.

Steve: Yeah, that's a really good question Steve.

Steve: It's still showing in the 2020 exploration schedule, we did add some footnotes this quarter to give you a little bit more detail on what of that number one and the 25 and 26 towers have already been addressed which hopefully will be helpful. But the reason, it's still showing in the 26 towers because as I mentioned in my prepared remarks, it wasn't a renewal with the existing tenant it with a direct deal with.

Steve: Some tenant until you won't see that reflected until the new lease takes effect.

Steve: Okay.

Steve: And then maybe just going back to kind of the flower Mart I guess.

Steve: It sounds like you've got maybe five six months to kind of work out some sort of maybe residential plan for that I guess I'm just trying to read through the tea leaves if you don't.

Steve: I guess I'm trying to say is what milestones do you need to achieve in order to kind of continue to capitalize that project or what would sort of prompt you to go down the path that we just ran out of time and eventually we got to just stop capitalizing the cost on that project.

Steve: It's less than hopefully were not making your read through accumulatively. It's we're trying to be as direct and transparent about it as we can it's less about how much time can we capitalize and more about how much active work, we're doing to continue to maximize value on the site and to prepare it for future development. So we think based on where we stand today as we sort of talked about earlier.

Steve: One of the main hurdles with this project as we think about how this could get executed at the right time in a way that is responsive to market conditions is the ability to phase of the project and so a lot of the work we're going to be doing over the course of this year is meant to really kind of redesign the program there.

Steve: That it's easier to face construction. This is something we've talked about we started talking about probably on last quarter's call, though I'm sorry, it's come up in conversation with the company has had historically as well right now just based on how the.

Steve: The project was designed.

Steve: For $2 3 million square feet high density project with significant infrastructure investments that need to go into the site before you go vertical just very difficult to phase.

Steve: Given how the market has shifted I think it's reasonable to assume that even if development where to start or the way to get development started earlier rather than later is to make sure you've got the ability to phase. It in you can knock off spec on an enormous project, but do it in incremental pieces that are responsive to tenant demand. So that's that's the lion's share of the first component of the work we're doing and then I think to your.

Steve: Question I think the second piece is really evaluating the mix of uses that shouldn't be programmed on the site and really trying to understand not just what will give us the opportunity to maximize value and be most responsive to the way the market kind of continues to shift and evolve, but what does the community need as well and so that's the work we're going to do over the course of this year happened.

Steve: <unk> network over the last year as well, but we think the runway for that probably.

Steve: Through at some point in the second quarter and as Geoffrey sudden his prepared remarks, right excuse me second half of the year and Thats Jeffery said in his prepared remarks right now we assume that capitalization will stop right around the beginning of the fourth quarter.

Steve: Yeah.

Speaker Change: Thank you. The next question will be from the line of Nick <unk> with Scotiabank. Please go ahead. Your line is open.

Steve: Thanks.

Can you just talk about.

Steve: <unk> costs for <unk> phase two went up a bit this quarter and the stabilization date I think it was pushed out a quarter can you just talk about what what drove those.

Steve: Yes, that's the timing was really related to just some slight delays in final municipal approvals for the <unk>.

Steve: <unk> reached full completion in January as we noted in our press release and so.

Steve: It was really it looks like a full quarter move it was really less than that I think based on our plans.

Steve: The change in cost was related to that delay, but also just the trajectory of lease up for the project over the course of the next year.

Steve: Okay. Thanks, and then.

Steve: Second question is just going back to thinking about occupancy for the portfolio. I know you gave a lot of details on this year, which was helpful.

Steve: Should we assume that you just you need sort of an overall.

Steve: Pickup in new leasing activity in your markets, meaning that.

Steve: If you look at last year's level.

Steve: You need to do more than that in terms of new leasing activity based on what I think was.

Steve: A lower retention ratio, you've kind of had historically in the portfolio in order to get back to occupancy growth. So is there anything that sort of a high level that you can point.

Steve: So on that would be helpful.

Steve: No I think thats, the math right I think occupancy is going to come from where the retention rate settles out and we do need new leasing to fill that bucket I think that the movement you have seen in our leasing volume, particularly in new leasing volumes over the course of the last couple of quarters give us some real confidence that we'll continue to see our markets overall continue to ask.

Steve: Tolerate through 2025, but as we've talked about we've got some additional larger move outs in the first quarter of this year. Thanks.

Steve: Things really stabilize after that and to really get occupancy moving in the right direction, we're going to need to see new leasing continued to accelerate.

Speaker Change: The next question will be from the line of Jeffrey Spector with Bank of America. Please go ahead. Your line is open.

Speaker Change: Great. Thank you I guess, just a follow up to that.

Speaker Change: Precision around occupancy and your other comments.

Speaker Change: And I know youre, not providing 2006 guidance, but I guess I just have to ask.

Speaker Change: What is the messaging then on 26 occupancy.

Speaker Change: Okay.

Speaker Change: Yes, you're right, we're not providing <unk> guidance right now, but I do think we've tried to provide as much color and clarity as we can around 2026 lease expirations. It's no surprise that 2000, Twenty's, Texas, a larger exploration year for us and we've talked for the last several quarters really going all the way back to the fourth quarter of last year.

Speaker Change: The team sort of productivity around addressing those explorations early and doing as much as we can to continue to improve the retention rate off of what has been a.

Speaker Change: Historically lower number over the course of last Sharon in 2024.

Speaker Change:

Speaker Change: So I do think the announcement this quarter that we signed 274000 square feet associated with the largest exploration in 2020, which combined with one of the other deals that were signed at the same sub tenant about a year ago is now addressed 70% of the largest expiration in 2026 is a very positive number as I mentioned in my prepared remarks is while last quarter we had.

Speaker Change: Announced the renewal for what I think was a substantial portion of the third largest renewals we had in 2026 as well. So the team really has been doing a very good and very proactive job.

Speaker Change: At Chipping away at some of the larger explorations in 2020 trying to get ahead of those and trying to solidify as much of that as possible and as I mentioned.

Speaker Change: Worked this quarter to provide additional clarity and transparency on the lease expiration schedule. So you can see the impact since some of those those are the ways that those have been address had been with new deals and not with renewals. They are still sitting in the 2026 tower. So very focused on addressing that stabilizing improving the retention ratio as we look into 'twenty five later 'twenty five and into <unk>.

Speaker Change: 26, and then continuing all the work that team is doing across the portfolio.

Speaker Change: Focus on new leasing activity and tap into the demand we are seeing recover really across markets.

Speaker Change: The other thing I want to highlight which is a comment I made in my prepared remarks, it's just taking a step back and looking at what should be some of the easiest spaces to lease in terms of new leasing across the portfolio.

Speaker Change: You just look at three of the assets that have been recently developed our recently repositioned West Athens, Seattle, 2100, <unk> and San Diego, Indeed tower in Austin, There is 410 basis points of leased occupancy upside sitting in just those three assets alone, which is having the highest quality assets in the portfolio. So again I think there are a lot of <unk>.

Speaker Change: This company can Paul that many owners and landlords can pull in terms of how to tap into where the demand sits today and make sure we're accelerating that and so that we can give better line of sight I think as we get $3 25, and enter 2020 to occupancy growth.

Speaker Change: Yeah.

Speaker Change: Okay. Thank you that's very helpful and Angela I did want to follow up on your opening remarks, when you talked about.

Speaker Change: The material acceleration in leasing or strength emerging can you and again I know you just talked about some specific achievements.

Broader.

Speaker Change: Any comments on San Francisco or anything else you could share with us in terms of that strength was it really into year end or you're saying, that's how 25 and start off too and then where is the strength coming from what type of tenants et cetera. Thank you.

Speaker Change: Yeah, Thanks, Jeff I think I mean.

Speaker Change: At the heart of the comment is really the fact that fourth quarter represented our highest leasing activities since the fourth quarter of 2019, and 2024 with our highest leasing year. Since 2019. So you really saw I think even if you look at relative to the first three quarters of the year of 2024, even though it is usually seasonally high was truly an exception and we do see I think really positive.

Speaker Change: Stories across the pipeline across markets as we look into two.

Speaker Change: 2025, I will say that again 2020, the fourth quarter is usually seasonally higher so you shouldn't expect that same level of activity to continue on a quarterly basis throughout two.

Speaker Change: <unk> 2025, but in terms of basic theme and sort of looking year over year I think we're very encouraged by what's in the pipeline I'll, let Rob comment more specifically, yes, hi, Jeff Let me just take a step back talk about the portfolio from a.

Rob: Broader picture in the markets, where we have the ability to push rents, which are Bellevue San Diego in Austin.

Rob: Not surprisingly those are the markets that have had the strongest return to office.

Mandates over time, but they also hit on exactly what it Angela said in terms of these are the best projects most visible project in the market and they are attracting.

Rob: Very strong tenant demand and we're really pleased with the activity there in a market like San Francisco and I think this is wanted to really kind of focused in on in 2004. There are a lot of notable things that happen there were 86 AI.

Rob: AI deals done in 2024 to put that perspective, we get questions a lot about is AI real.

Rob: A number like that points to the fact that it's real there are projections that next year 25 could be another two 1 million five feet of AI absorption.

Rob: Vacancy, which is interesting to note the decline for the first time in 19 consecutive quarters and the fourth quarter finished with moderately positive absorption. So.

Is that a trend too early to call, but based on the demand we see in the pipeline, which has remained at about $6 5 million square feet.

Rob: And that is close to some of the pre pandemic numbers, we've had in the past.

Rob: I think things look promising for San Francisco. The other thing I'd say is sublease space has declined so I think we need another quarter or two to know if we've hit that inflection point of <unk>.

Rob: Continued space absorption and lack of sublease space coming on the market, but things have certainly improved.

Rob: Los Angeles I think is just on <unk>.

Rob: Fortunately with the disasters that happened in early January understandably.

Rob: Transaction activity took a short pause, but things are ramping back up the law is still of our market is probably the one that's most still in recovery in terms of just demand for space in the west side, particularly.

Rob: We do have activity in Hollywood, which is encouraging.

Rob: So I think thats, just sort of a good summary, and indeed tower again, you read a lot of statistics about Austin, but keep in mind, we're CBD focused it's brand new product we're doing.

Rob: We've got an incredible tenant roster and we have more in the pipeline.

Rob: From companies that are actually moving into Austin or expanding their footprint due to the quality is indeed towers. So overall 25 is setting itself up to look pretty positive yeah, I'd say just generally.

Rob: Really across the board on.

Rob: Cross markets right now one thing you really saw it come through in the fourth quarter leasing and we are seeing in the pipeline as we look out until the first quarter as well as just the willingness and ability of tenants to make decisions and to commit to longer term to know what their plans are to be able to really make decisions around that so I think that's that part of the really healthy diner.

Rob: We needed to see recover in order to feel more confidence about how the pipeline transpires over the over the course of this year.

Speaker Change: Thank you. The next question will be from the line or Jamie Feldman with Wells Fargo. Please go ahead. Your line is open.

Rob: Yeah.

Jamie Feldman: Great. Thanks for taking the question.

Rob: For Blaine today.

Rob: I guess Angela to your last point on tenant decision, making and confidence we've seen a couple of major headlines a year to date.

Rob: Whether it's AI with deep seek and questions around demand there and then now with NIH funding in the life science market and what kind of cuts we'll see.

Speaker Change: Are you seeing any kind of hesitation for tenants like how are both of these headlines.

Rob: I mean, maybe it's a positive.

Speaker Change: I'm not quite sure, but what are your thoughts on what are you guys seeing in your conversations with tenants on both of those topics and their ability to make decisions and plan.

Speaker Change: Well I think it's a I think they are both really good questions I think it's a little early to say with any extreme.

Speaker Change: Extreme degree of confidence, but it does feel like what we're hearing and continue to hear on AI, even though the rapidly developing situation is that some of these developments that we've seen recently it could be really good purchased additional application development in and use cases off of the AI given that.

Speaker Change: Potentially improved cost structure of some of some of those investments. So I think right now we haven't heard anything about a slowdown in activity in that sector relative to what we've seen in the news over the last couple of quarters, which is encouraging on the life science side again, it's pretty early to say I think you've got cross currents, there including really.

Speaker Change: Highly deregulation banks and and pro innovation.

Speaker Change: The New administration, so we'll see how all of that.

Speaker Change: It kind of shakes out.

Speaker Change: But again.

Speaker Change: Just go back to the comments, we made specifically about <unk> and the kind of traction we're seeing with our project now that it's been completed and the fact that the project is phase one that really has the ability to cater to a wide and broad range of users I think we're really well positioned to continue to make progress with that asset over the coming year.

Speaker Change: Okay.

Speaker Change: Maybe a better way to ask you have you have you heard of any deals being put on hold.

Speaker Change: Hi.

Speaker Change: Based on either one of these topics.

Speaker Change: I have not Rob Jamie This is Rob we haven't had heard of any deals put on hold and in fact, it was going to say that some of the activity in our buildings has picked up year to date. So.

Speaker Change: More to come but.

Speaker Change: We're not seeing anything on the ground and.

Speaker Change: In fact elsewhere in Seattle were seeing AI popping up there as well so.

Speaker Change: Yeah.

Speaker Change: Thank you. The next question will be from the line of Anthony Petrone with J P. Morgan. Please go ahead. Your line is now.

Anthony Petrone: Yes. Thank you.

Anthony Petrone: You mentioned residential is alternative uses a couple of times for land and so forth I think you still own three multifamily towers, just remind us on thoughts on on why keep those or whether they are impediments to using those as sources of cash with cap rates they are being pretty low.

Anthony Petrone: Yes, it's a really good question I would say the three that we continue to own Kim <unk> Hollywood and then and then the residential <unk> are all projects that are very integrated with the other uses we have at those projects with the office then.

Anthony Petrone: Retail in the case of <unk>. So it is more challenging to break that out on a standalone basis, it's not impossible, but I think it's more challenging we view some of these assets.

Anthony Petrone: Significant growth drivers for the company long term and so control matters a lot in terms of our ability to continue to maximize value on many of those projects, but as you noted future development pipeline, we've been clear I think over the course of the last year that were open to whatever path is going to best maximize value for shareholders and really trying to be as creative and.

Anthony Petrone: Proactive as possible to accelerate timelines to monetization I think Elliot and team has done a great job of continuing to move those things forward. So I'm pleased with what we're seeing there as well.

Anthony Petrone: Yeah.

Anthony Petrone: Okay, and then just second question.

Anthony Petrone: Think crews had announced some way off and I think it is going back into Jim's hands, just what's the what's the credit behind that is it actually like GM or is it just continued on its own credit.

Speaker Change: Hey, this is every year, we have GM credit the entire lease so there's no payment concerns on our end.

Anthony Petrone: Yeah.

Speaker Change: Thank you and the next question today will be from the line of Michael Griffin with Citigroup. Please go ahead. Your line is open.

Anthony Petrone: Okay.

Speaker Change: Great. Thanks.

Speaker Change: Maybe not to beat a dead horse here, but just on the demand youre seeing for those higher quality repositioned assets like West stayed kettner, and indeed, and maybe Rob. This is best for you but.

Just just given youre seeing increased tenant activity there, but in order to get deals over the finish line or you're going to have to sacrifice I guess more on the concession side to get deals done at those properties or what was the organic demand there.

Speaker Change: <unk>, where you can hold concession is pretty steady.

Speaker Change: I don't think we have to sacrifice Michael.

Speaker Change: Thank you.

Speaker Change: Again with the amenities and the mix we have in various assets that we're talking about which are premier assets that have vacancy tenor.

Speaker Change: Tenants see value in that and often when you get into a discussion with somebody about space like that.

Speaker Change: The amenities and the life quality of life for their employees is what ends up driving the decision thats not to say, we're not in a very competitive market. We are and we're meeting market, but youre not going to see us do.

Speaker Change: The crazy things that have been done in the past with lots of free rent three years of free rent et cetera, but we have particularly at what states we have increased demand.

Speaker Change: Our team on the ground is very busy and.

Speaker Change: Im optimistic about.

Speaker Change: 25% for West States.

Speaker Change: That project is delivered in September of 'twenty forward with all new amenities and larvae and it's really paying off in terms of activity.

Speaker Change: There's always a balance there right I mean, I think the point to really call out there is the amount of vacancy thats sitting in some of the highest quality assets that should have some of the best economics across the portfolio and I think as activity is picking up across all of those markets should be some of the space at least the first day.

Speaker Change: To Rob's point, we're in a competitive market environment, but we don't feel the need.

Speaker Change: We're talking about here isn't a desire to undercut the market in order to take occupancy we know what we know the investments we've made on those projects. We know the quality of what we have delivered and we're going to make sure that we signed leases that are commensurate with the value in those buildings and what the real estate is really worth.

Speaker Change: Thanks, I appreciate all the color there and then maybe just one on the transaction market since we haven't heard from Elliott in a while it.

Speaker Change: It seemed like from your commentary things are opening back up may be stalling a bit obviously did the deal at del Mar back in the third quarter, but can you give us a sense of what kind of capital is interested in either buying or selling office properties. These days and maybe some insights in IR.

Speaker Change: Our hurdle rates of your underwriting too for prospective transactions.

Michael: Yes, Michael.

Speaker Change: What we're really seeing is that whereas maybe a year or two ago. It was strictly opportunistic capital.

Speaker Change: We're starting to see more of a range and as we kind of talked about our decision to slow some of our dispositions in prior years. It was because when we looked across the table and we were just being opportunistic capital, which we didn't think would be optimal counterparty for us as we're trying to maximize value that's starting to diversify a little bit.

Speaker Change: Youre seeing more institutional funds youre seeing high net worth.

Speaker Change: And there are a range of hurdles for those different kinds of buyers. So as a seller it becomes a little bit more appealing.

Speaker Change: And Thats why were going to kind of.

Speaker Change: If our toe and see how things go as a buyer.

Speaker Change: We are looking at what the quality of the opportunities are and as we've talked about in prior quarters that is improving we are seeing better real estate to underwrite.

Speaker Change: And we're going to look at what are our IRR is our take a medium to longer term view factor in growth as well as whatever what our cost of capital is at that period of time.

Look to make accretive investments.

Speaker Change: Thank you and the next question will be from the line of Caitlin Burrows with Goldman Sachs. Please go ahead. Your line is open.

Speaker Change: Hi, everyone, maybe another follow up on <unk> I guess could you just go through if you were to do some spec suite leasing say like today. It seems like those users could move in more quickly. So I don't know if thats like a month or something and then if there was a larger deal done.

Speaker Change: What would kind of be the expected timing based on size for likely signing versus economic occupancy.

Carolyn: Hi, Carolyn.

I mean, we can do a spec suite.

Carolyn: Tomorrow and occupied by the weekend it's furnished.

Carolyn: The labs are furnished and ready to go.

Carolyn: For a deal thats larger and going from shell I would expect.

Carolyn: Probably again, it's highly dependent on the tenant and how much they have.

Carolyn: Pre planning in place for design and layout of labs, and suites, which we can help accelerate but I would bet anywhere from probably a year to 18 months maybe.

Carolyn: Maybe.

Carolyn: Maybe less than 18 months, but if somebody is really going to have their act together, but we've typically seen nine to 12 months and I think thats, probably what you should count on.

Carolyn: Well it really depends on Rob's point on the use and how complex the whole data.

Carolyn: Okay.

Speaker Change: And then I guess, maybe big picture thinking about 2024 results at least on an absolute basis came in materially higher than original guidance. So I was wondering if you guys could go through I know you went through in the prepared remarks, some of the drivers for <unk>, but like.

Speaker Change: What might've been noncash surprise items that are more one time versus I know you did some short term leasing.

Speaker Change: That sort of thing, perhaps it could continue but just trying to consider like how 'twenty four.

Speaker Change: It turned out and what that may or may not suggest for 25.

Speaker Change: Yeah, Jeffrey I'll go through more specifics on our fourth quarter number and how much of that sort of as recurring and carries forward versus some of the onetime items, but theyre really what they.

Speaker Change: Entirely de Minimis amount of short term leasing and the productivity statistics, we've reported for the quarter I think it was about 20000 feet.

Speaker Change: Yes sure Kevin.

Speaker Change: Thinking maybe the broader context of 2020 for guidance and how 2024 outcomes integrate with 2025.

Speaker Change: The big kind of unexpected driver in 2024 related to some of the restoration fee income that you saw recognized in Q3 and Q4.

Speaker Change: When we gave the guidance range. We did talk about the same property NOI growth into 2025, and how there is 800 basis point drag associated with that so when you think about next year, there's not really kind of assumptions within our numbers that that's going to continue in the future.

Speaker Change: In Q4, you're right there was some volatility a lot of it was.

Speaker Change: I think.

Speaker Change: Forecasts that are highlighted last quarter.

Speaker Change: But just to reiterate we did have the termination fee income for <unk> that was unanticipated that was a positive outcome from our perspective that was related to the.

Speaker Change: Walmart deal that we signed up in Seattle. Additionally, there were a couple smaller.

Just accounting assumptions, if you will in that a tenant moves from cash to accrual and there was an effect.

Speaker Change: Sign extension for a tenant and you see some kind of moderate effects of that so none of those things I would assume kind of carryover into 2025 and when you look at our guidance for 2025, there is not a big collection of nonrecurring items in that.

Speaker Change: We've tried to be as specific and transparent we can about as many line items that might affect that number as possible. So hopefully that guidance thats helpful. And then the other big driver in Q4 was obviously that gain on the sale of the plane.

Speaker Change: Thank you. The next question will be from the line of Michael Carroll with RBC. Please go ahead. Your line is now open.

Speaker Change: Yes. Thanks, I just have a couple of clarification questions I guess with regards to the 216000 square feet of move outs. In <unk> 25 does that include the Bellevue move out to accommodate Walmart or is that move outs or downtime at that specific asset. In addition to the 2016 that was met.

Speaker Change: <unk>.

Speaker Change: It does include that.

Speaker Change: Okay, Great and then can you talk a little bit more about the landfill activity.

Speaker Change: You have the $150 million and discussions that you've been continuing to highlight like what's the level of activity level behind that $1 50, what other projects are interest are there right now and is that kind of something that we can be talking about throughout the year or is that still kind of in the back burner.

Speaker Change: Potentially I would say anything else is at an earlier stage.

Speaker Change: It's something that we are factoring into our 2025 forecast.

Speaker Change: So and as Angela kind of outlined when we look at our land they are different buckets.

Speaker Change: Some of our land like she said.

Speaker Change: We're not looking to do anything its really that second bucket of where theres, a higher and better use outside of office or life science, So there might be one or two others, but it's a little too early to.

Speaker Change: To get into it.

Speaker Change: Yeah.

Speaker Change: Thank you and the next question will be from the line of Columbus Inscape with Green Street Advisors. Please go ahead. Your line is open now.

Speaker Change: Yeah.

Speaker Change: Hey, guys. Thanks for taking the question.

Speaker Change: Just wanted to touch on sort of the new leasing pipeline. Obviously, you guys had a very strong quarter in terms of new leasing in <unk>, but as you sort of look at the pipeline today.

Speaker Change: The enable it to sort of backfill or replenish strong amount of activity that you guys did during the quarter.

And if so can you kind of talk about sort of what you guys think is sort of driving the renewed activity as it relates to what you're seeing is it simply returned to office is it plus.

Speaker Change: Macro uncertainty can kind of walk through that.

Speaker Change: Yeah, I'll start with the last part first I mean, I think what's creating demand is.

Speaker Change: A variety of factors one is.

Speaker Change: Returned to office and you've got that going on in large scale across the west coast now and Thats, having an impact I mean for example, downtown Seattle had a 23% increase in traffic in the last 90 days or so so rush hours back.

Speaker Change: But it's also a function of just business needs and business confidence that we are hearing with our.

Speaker Change: The customers we're talking to there is just I think.

Speaker Change: Sentiment is that things are more stable just in terms of predicting the future and then lastly, some of its exploration driven and as Angela said numerous times, if you've got an exploration coming up the flight to quality is going to be an important component in that.

Speaker Change: And I'm sorry, your first part of your question was the pipeline.

Speaker Change: Looking back from Q1.

Speaker Change: 24, I'd say our pipeline today is stronger meaning we have more LOI in place on an LOI has a much higher degree of certainty for closure then proposals are certainly tours. So.

Speaker Change: So far six weeks into the year, it's feeling good.

Speaker Change: You know one of the trends, we're seeing across the pipeline as well, but I think he'll continue to play out is that what you've seen over the last few years are really maybe even since the start of the pandemic.

Speaker Change: Tenants being much more conservative about space planning.

Speaker Change: Hoping and sort of programming the potential for expansion down the road as their needs continue to change and evolve and I think we'll have some pretty interesting expansion to talk about over the coming quarters. So I think thats really positive definitely seeing as Rob highlighted earlier demand from AI and data analytics companies I'm hopeful that over the next quarter or so we're going to say.

Speaker Change: And what will be the largest lease we signed in the city of San Francisco and some time with one of those types of uses so.

Speaker Change: I think all of this is moving in the right direction I think Rob really hit it on the head to say it tends or just more prepared for a bunch of different reasons, including return to office and including just the way their businesses are strategically evolving to be able to commit to longer term periods and.

Speaker Change: <unk>.

Speaker Change: Higher square footage number of social sand some of this expansion.

Speaker Change: Maybe just touching on sort of your comments around the team engaging or trying to engage with tenants more so on.

Speaker Change: Leases expiring over the next 18 months are you seeing tenants more receptive to engaging in those conversations earlier than say they were.

Speaker Change: Year or 18 months ago and then.

Speaker Change: As it relates to sort of the downsizing that we've seen not only across your markets just across the country of tenants upon renewal downside and a large portion of the space. I mean do you think we're sort of in the later innings of that and do you expect that to continue to be a sort of a headwind for the space for this for the foreseeable future.

Speaker Change: I think a couple of things on that.

Speaker Change: Think there's always even in a more.

Speaker Change: Youre talking about San Francisco for example, in a more normalized market tenants rightsize space, whether that means they need more or they need less.

Speaker Change: It feels like give backs have slowed down, but that's impossible to predict.

Speaker Change: On the renewal basis, we've seen some in our portfolio keep the same amount of space some of them taken more than some of given back.

Speaker Change: And I think that to answer your question, specifically I think about a year, particularly a year and a half ago. I don't think you could get anyone to really engage in a conversation about 25 exploration for example, much less a 2006 and that's changed materially.

Speaker Change: In the last I'd say nine months, it's relatively recently.

Speaker Change: Pretty much across the board, we're finding that up in Seattle, San Diego, even San Francisco.

Speaker Change: Again, it just points to companies who are planning for the future.

Speaker Change: The next question will be from the line of Brendan Lynch with Barclays. Please go ahead. Your line is open.

Brendan Lynch: Great. Thanks for taking my question you guys have talked a lot about the versatility of K O P to beat various types of demand.

Brendan Lynch: One of your competitors commented that life science companies are looking for more traditional office space.

Brendan Lynch: Rather than lab space. So first question is that something youre seeing too.

Brendan Lynch: And then second question is the excess supply in South San Francisco, primarily on the lab space side.

Brendan Lynch: With respect to the office comment.

Brendan Lynch: I won't go into too much but keep in mind like I said earlier <unk> is a purpose built life science project. Some of the projects that we compete with are conversions. So their former office buildings that have been converted to life science that got smaller floor plates. So they naturally appeal to the office components of a life.

Science company, but the typical kind of lay out that we see in the conversations we have are roughly a 60 40 split between lab and office on a floor.

Brendan Lynch: And just remember outside of the spec suites at <unk> right now we can accommodate any mix of lab and office tenant would want so we can.

Speaker Change: I think.

Speaker Change: Credibly flexible in meeting the demand wherever it is as well as accommodating as I mentioned earlier traditional office users to Rob's point I mean this has been purpose built for life science as we look at the long term ability to maximize the value of this project over time through future phases.

Speaker Change: Really helpful. Let's look out primarily life science, that's been our focus and that's why we'd like to see it move, but we're really open right now.

Speaker Change: A range of different uses and really encouraged.

Speaker Change: By some of the non life science demands that we're saying that will help us drive I think better outcomes across the board.

Speaker Change: Great. Thanks, that's helpful. The press release also alluded to an investment in fifth wall, maybe you could tell us how much you've invested and what you hope to accomplish there.

Speaker Change: Hey, Brandon Elliot so it was a pretty modest investment.

Speaker Change: And our goal in investing as well as the leader in the prop tech space and Sue.

Speaker Change: It's important that when if we're going to partner, we do it with somebody that sees a lot of different things.

Speaker Change: But the objective is to really better integrate technology into our operations.

Speaker Change: And by doing so we think we can drive efficiencies across the portfolio we have.

Speaker Change: Been very.

Speaker Change: Vocal about our investments in sustainability over the years and in addition to obviously the benefits that has this environment.

Speaker Change: Our drivers in reducing utility costs across the portfolio that we've been able to realize so think of it in a similar way, yes, I mean kilroy has been known as a leader in sustainability and innovation and this investment is one of the many ways I think we're going to maintain that leadership position over time.

Speaker Change: Thank you and the next question will be from the line of John Kim with BMO. Please go ahead. Your line is open.

Speaker Change: Thank you.

Speaker Change: Now that you've judged that private jet is there anything else.

Speaker Change: So you can do on the cost savings front and as Geoffrey mentioned in prepared remarks that platform investments will probably require a higher amount of overhead expense than what you had last year, but I wanted to delve into that a little bit further and just given the.

Speaker Change: The trajectory of earnings is there anything you can do on the cost savings front.

Speaker Change: Yes, I think I think we made material progress on cost savings during the course of 2024, and we worked really hard since I joined last January that really looking at G&A and overhead and trying to do two things, which I started talking about as early as this call last year number one reduce the overall level of overhead and acknowledgment of some of the challenges in our space in our sector.

Speaker Change: But also and importantly, making sure that we allocated every dollar of G&A and the most sort of value enhancing ways across the platform. So it's those two things together with Jeffrey really highlighted in his remarks is that those two line items together G&A and leasing costs totaled right around $100 million in 2023 and so.

Speaker Change: We saw a steep decline from $99 million down to I think $83 million $85 million last year. So now we're looking at that comment that number coming up just a little bit as we look into.

Speaker Change: Into 2025, which I would say, it's a little bit better of a run rate we identified a lot of cost savings, which we executed on over the course of next year. We also identified some of the costs, we were saving needed to be reallocated into the platform and that reallocation process, just took a little bit longer on the cost savings that so I wouldn't I wouldn't view this as an increase in G&A.

Speaker Change: I would say, we're settling into the right run rate for the company going forward, but I absolutely want to emphasize that we are always looking critically at G&A and we want to make sure that this platform is as effective and efficient as possible.

Speaker Change: Yeah.

Speaker Change: Okay, and Angela you mentioned opportunistic investments how close are you to getting.

Speaker Change: Sales tower in Austin to pencil out for you.

Speaker Change: It seems like it would've been a complementary assets, what you're achieving in the market.

Speaker Change: And also maybe for Rob if you could talk about the type of tenants that are active in the market and whether or not that represents expansions or new tenants in the market or is it just musical chairs.

Rob Jamie: Yeah, Yeah. It was just on the sell building I'll, let lance jump in here as well look we think Thats a fantastic building I do think youre right, its very complimentary or would've been complementary to what we own in Austin today, and indeed tower from a quality standpoint.

Speaker Change: It.

Speaker Change: I think I think it's fair to say that pricing more resemble to core that opportunistic and we're very conscious of where our cost of capital is now and we're very conscious of making sure that as we continue to pursue capital allocation strategy that we are doing so in a way that maximizes value to shareholders. So we have to we have to balance those things and just to that point I think.

Our strategy has always been pretty consistent around not just owning a really high quality assets.

Speaker Change: And really good locations, but doing so in ways that we think can drive value creation and shareholder value and so we need to be able when we look at any investment look at all of our criteria and make sure that an investment with all of our criteria for us to pursue it.

Speaker Change: Yeah.

Speaker Change: And then John are you talking about tenants in the market in Austin or are you talking about you are talking Austin Kelly. It is nodding his head, yes, so I'm interpreting that as yet.

Speaker Change: So the types of tenants in the CBD were seeing.

Speaker Change: The deals we have been making with your professional services banking law firms et cetera, I would say really positive note and something to watch with estimates that large tenant activity has picked up again in and around the domain in northwest Austin So.

Speaker Change: More to come on that but there are in addition to Amazon there are other large requirements.

Speaker Change: That have been looking around in northwest Austin So.

Speaker Change: From our perspective with India Tower, we have a good pipeline and we're sort of getting the best of the best of the <unk>.

Services professional services firms that are out there.

Speaker Change: Yeah.

Speaker Change: Thank you and with no further questions on the line at this time. This will conclude the Kilroy Realty Corporation fourth quarter 2024 earnings Conference call. Thank you for your participation today you may now disconnect your lines.

Q4 2024 Kilroy Realty Corp Earnings Call

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