Q1 2025 Kilroy Realty Corp Earnings Call
Harry: Hello and welcome to the Kilroy Realty Corporation, 1Q25 Earnings Conference School. My name is Harry and I will be your operator today.
Harry: All lines are currently in a listen-only mode and there'll be an opportunity or Q&A after management's prepared remarks. If you would like to enter the queue for questions, please style staff forward by one on your telephone keypad. And in the interest of taking questions from as many of you as possible, we respectfully ask that you limit yourselves to one question and one follow-up per person.
Speaker Change: I would now like to hand the conference over to Doug Butterworth, Vice President's Corporate Finance. Thank you. Please go ahead.
Good morning everyone.
Thank you for joining us.
Speaker Change: On the call with me today are Angela Aman, CEO , Jeffrey Kuehling, EVP CFO and Treasurer, and Eliott Trencher, EVP CIO. In addition, Justin Smart, President and Rob Perot, EVP Chief 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 for looking in nature. Please refer to our supplemental package for a statement regarding the for looking information on this call and in the supplemental. Thank you very much.
Speaker Change: 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: Angela will start the call with strategic overview and quarterly highlights, Eliott will provide a transaction market outlook and Jeffrey will discuss our financial results and provide you with updated 2025 guidance. Then we will be happy to take your questions. Angela?
Angela: Thanks, Doug, and thank you all for joining today's call. Despite an environment defined by volatility and macroeconomic uncertainty, I'm pleased to report on a positive start to 2025 with solid leasing activity executed during the quarter and encouraging forward leasing indicators across our portfolio.
Angela: Office demand in our markets continues to rebound as we benefit from the ongoing solidification of return to office mandates, recent meaningful improvements in the health safety and vibrancy of some of our most important submarkets, and materially growing demand from the burgeoning AI industry.
San Francisco best represents the intersection of these important trends.
Angela: The rapid expansion of new AI business formation and growth in the city of San Francisco in the city of San Francisco.
Angela: Combined with recent RTO mandates for major employers in the market, and a crime rate that is now the lowest in 23 years have all contributed to growing foot traffic and the re-emendedization of major office corridors in the city
Angela: representing our largest lease execution in the city since 2019. In addition, during the period, we also experienced a 60% year over year increase in tour activity in our San Francisco portfolio, providing strong visibility on the future pipeline.
Angela: As discussed on prior calls, we have also seen some large, well-established AI users expand into other West Coast markets in the ongoing search for high-quality talent.
Angela: As an example, during the first quarter we signed a 34,000 square foot expansion of a 9,000 square foot data analytics and AI tenant that originally took occupancy just last year at our recently redeveloped West 8,000 in Seattle.
Angela: and often, as in this example, anticipated future growth is materializing quickly as these businesses rapidly scale.
Angela: Across the entirety of our office portfolio, the forward leasing pipeline continues to expand in size and improve in quality. During the first quarter we saw a 40% year-over-year portfolio-wide improvement into our activity, despite the increase in volatility that defined the first few months of this year.
Angela: Although it's reasonable to question a recent headline, we'll impact the pace of future leasing activity. We have to date seen a diminimous impact on transaction volume or velocity.
Angela: Turning to life science, the industry entered 2025 with a combination of hope related to the economic and market backdrop for the sector and caution on the policy and regulatory outlook.
Angela: Since then, market volatility has dampened some enthusiasm around a return of public market financing for the space, while the policy and regulatory outlook has proven more complicated than originally anticipated.
Angela: While there's little question that the sector will need to continue to adapt to a rapidly evolving financial and regulatory climate, consistent with what we have seen play out on the office side, there has been to date no discernible impact on life science leasing momentum in our portfolio.
Angela: During Q-1 at our KOP Phase II Development Project in South San Francisco, we continue to experience meaningful tenant engagement. [inaudible]
Angela: supported by the project's differentiated design, high quality construction, broad amenity offering, and importantly, scale which provides confidence and our ability to meet the ambitious future growth objectives of many of these prospects.
Angela: We have advanced our discussions with several potential tenants and are actively working with them on space plans and pricing [inaudible]
Angela: Active demand requirements currently include tenants interested in our spec suites, as well as several users in discussions for full floors or multiple floors on the campus
Angela: We understand and appreciate the attention and focus that this project continues to receive from the investment community, and we will provide timely updates on the stabs of lease up when they are available.
Angela: As Elliot will cover in a moment, we remain very active on the capital allocation front, as we work towards monetizing those parcels in our future land bank with the highest invest use outside of the company's core competencies. Last night announcing that the first phase of our Santa Phase Summit Land Partial Disposition is now under contract.
Angela: In addition, we are also evaluating a number of operating property disposition where we can achieve attractive valuations and advance our broader strategic goals for the portfolio.
Angela: As we realize proceeds from these efforts, we will evaluate the full spectrum of redeployment opportunities, including acquisitions, leverage reductions, and or stock buybacks, appropriately balancing economics, future growth plans, and balance sheet strength.
Angela: I'm also pleased to highlight that in April we published our annual sustainability report introducing new and vicious goals that we hope to achieve by 2030 across a wide range of important environmental and social topics.
Angela: Corporate Responsibility is embedded into our culture at Kilroy and I am excited about the significant milestones that we as a team are committed to realizing over the coming years to maintain our leadership in this important area. Thank you.
Angela: Looking ahead, our focus remains on staying agile, investing in our tenants, portfolio, and platform, and maintaining superior financial and operational flexibility
Angela: Kilroy is well positioned to execute on our near and long-term goals and to capitalize on the exciting trends playing out across our West Coast market. Eliott?
Thanks Angela [inaudible]
Angela: Off the sales volume in the first quarter was roughly flat year-over-year. That said, there's a wider array of capital pursuing deals which can generally be grouped into three buckets. Institutional, high net worth, and users.
Angela: Institutional Capitol pulled back the most when rates increased in 2022 but has returned in recent quarters
Angela: For example, 300 Howard Street, a vacant 400,000 square foot building in San Francisco was recently recapitalized by two institutional groups for $111 million or $265 per square foot.
Angela: The price per pound for this building is consistent with other trades of vacant properties in downtown San Francisco, but the transaction is meaningful for the city, since it is the first standalone deal over $100 million since 2022 .
Angela: Furthermore, the recap is a great endorsement from sophisticated investors that the changes in the city are tangible and putting San Francisco on the right track . .
Angela: Additionally, users have been selectively buying office buildings over the past few years, filling a void in the market. The latest example is Lending Club, who recently went under contract to acquire 88 Kerney Street in San Francisco for $75 million, roughly $320 per square foot.
Angela: The significance of this trend is that it reinforces the importance of and commitment to the office and highlights that companies place value and office buildings beyond what investors are currently underwriting. [inaudible]
Angela: While both of these transactions are in the city of San Francisco, there are similar dynamics playing out across all of our markets with notable activity increases in Silicon Valley and Seattle Bellevue
Angela: The second way we are working to maximize value is through select sales. As Angela mentioned, we signed an agreement to sell a portion of our Santa Fe summit site in San Diego for a gross price of $38 million in dollars.
Angela: The sale covers five of the 22 acres and the deal is scheduled to close upon the receipt of entitlements which we estimate to be in 2026
Angela: We remain in active negotiations on multiple other sites in Southern California and continue to be on track to generate gross proceeds inclusive of this initial sale in excess of $150 million in dollars.
Angela: As previously discussed, we anticipate the future land sales to have elongated closing timelines with proceeds to be realized over the next few years.
With that, I will turn the call over to Jeffrey. All right.
Jeffrey: Thanks, Elliot. Before we dive into quarterly results, I want to spend a few moments highlighting the enhancements we made to our disclosures in this quarter.
Jeffrey: First, we provided additional details around the individual component from rental income. The added contact highlights the strength of our operating portfolio by more readily identifying drivers of our rental income stream.
Jeffrey: Second, we added a reconciliation from cash NLI to total NLI. We hope the schedule provides a more intuitive view of our business and visibility into the earnings impacts of non-recurring items, specifically items like restoration and settlement income.
Jeffrey: Finally, we introduce an additional retention statistic that highlights the effect of direct leases executed with in-play subtenants.
Jeffrey: The new metric acknowledges where we've eliminated downtime and maintained occupancy by retaining the in-place subtenant.
Jeffrey: In the first quarter, the retention rate, including subtenants, was almost 1,500 bases points higher than our base retention rate. For comparison, our 2024 retention rate, including subtenants, would have been 42%, almost 1,100 bases points higher than our base retention rate.
Jeffrey: Now turning to the first quarter, FFO with a dollar two per two blue to share and cash same property
Jeffrey: During the period, we delivered cash, same property base rent growth of 90 basis points, despite a 300 basis point decline in average occupancy, reflecting the strong contractual rent escalations embedded throughout our portfolio.
Jeffrey: Occupancy ended the quarter at 81.4% down from 82.8% at year end, and our last earnings call, we discussed the known moveouts of several larger tenants in the first quarter totaling 216,000 square feet.
Jeffrey: The one meaningful variance from our previous expectations was the timing of germ-text downsides and renewal. The 110,000 square foot lease expired in March and is shown as a month-to-month expiration on the lease expiration schedule in the supplemental as of March 31st
Jeffrey: In April , the downsides and renewal was executed resulting as an 81,000 square foot move out from the second quarter
Jeffrey: First quarter gap releasing spreads were negative 15.8% or cash releasing spreads were negative 23% releasing spreads were impacted by a single large transaction which we invested minimal capital to secure a three-year lease with an existing sub tenant. [inaudible]
Jeffrey: The shorter lease term provides us with the opportunity to reset rents earlier when the market recovers.
Jeffrey: This deal resulted in a strong net effective rent, however, the minimal capital commitment led to lower base runs and spreads, excluding the impact of that single lease, cash release and spreads would have been approximately negative 8.3% which is consistent with last quarter
Jeffrey: Turning to guidance, we're reaffirming our four-year guidance, including SFO, cash same-purpose NLI growth, and average occupancy expectations. The midpoint of our range implies a modest deceleration of SFO, consistent with our average occupancy assumptions.
Jeffrey: As a reminder, the midpoint of guidance also assumes the cessation of interest capitalization after the flower mark in the second half of the year.
Jeffrey: As it relates to the balance sheet, Kilroy has a significant uncombred asset base, a well-lettered maturity schedule and substantial liquidity, which together create tremendous financial flexibility in position Kilroy to be nimble and responsive as we navigate a dynamic couple allocation of armament with coming quarters.
With that, we're happy to answer your questions, operator.
Speaker Change: Thank you. If you would like to ask a question, please dial star followed by one on your telephone keypad now. If you change your mind and would like to exit the queue, please dial star followed by two. When preparing to ask a question, please ensure that your phone is unmuted locally. And finally, please limit yourselves to one question and one follow-up person.
Michael Carroll: Our first question today will be from the line of Michael Carroll with RBC. Please go ahead, your line is open.
Speaker Change: Yep, thanks. I got on a little late, so I'm not sure if I missed this or not, but Angela, can you provide an update on how you're viewing the Flower March site right now and maybe can you provide some potential options that they kill or might have for that specific site and what you're analyzing today? Okay.
Speaker Change: to explore a wider range of uses for the Flower Mark site than what was originally programmed, and also to ensure that we can execute it in a way where it can be faced, and we can be responsive to the market as it continues to improve and recover in San Francisco. Let's go.
Speaker Change: As I mentioned earlier, we're very bullish about what we're seeing in the city of San Francisco from a leasing standpoint and from a safety and vibrancy standpoint, particularly just over the last few months.
Speaker Change: We are working hard on the flower mart side and Elliott mentioned. You know, we're very hopeful that we'll get a warm receptivity from the new administration.
Speaker Change: And then maybe can you talk a little bit about the timing. I mean, I'm not sure if that is visible right now, but I mean, does this say when we making these decisions within the next year or how long should we expect from this kind of analyzation to take place?
Speaker Change: Yeah, I think we're actively underway on a number of different things as it relates to the side and having those conversations beginning and expect to continue to help those conversations.
Speaker Change: with the city over the course of this year. There are a lot of different paths that this process could take, and so, excuse me, that makes it a little difficult to give perfect visibility on what we think the timing of an actual conclusion here on the Flower Mart side. But I would remind you that what we had...
Speaker Change: Incorporated into guidance was an assumption that at some point in the second half of the year we stopped capitalizing on the flower mark and to the extent we have you know more clarity on which of the various paths we're on at that point we can update that assumption as appropriate . . .
Speaker Change: The next question, say, will be from the line of Chain of Carlin with Bank of America. Please go ahead, your line is open.
Jayna Garland: Thank you, good morning. Just hoping you could comment a little bit more on the level of leasing this quarter. You know, maybe someone's pulled forward in 4Q or perhaps the fires in LA impacted the leasing sales cycle there. Any kind of commentary around what the forward pipeline looks like today. Maybe geographically. Thank you.
Jayna Garland: Yeah, I'll make a couple comments and then turn it over to Rob to give a broader overview of kind of the pipeline and how it sits today, but I would say [inaudible]
Jayna Garland: The activity on the quarter represented a few things, I think you're right to highlight that Q4 was an exceptionally large leasing volume for it for us.
Jayna Garland: William would have been a healthy increase on a quarter of a quarter basis, excuse me, a year-over-year basis relative to the first quarter of 2024. We feel really good about the pipeline and where it sits and the work that the team has done really across regions to rebuild the pipeline off of that really significant volume in the fourth quarter of last year and I'll let Rob touch on that. I'll let Rob touch on that. I'll let Rob touch on that.
Rob: Yeah, I think, Jenna, just to add to what Angela said, everything is, you know, what's going on. I mean, our leasing teams are fully engaged [inaudible] you know, you know,
Rob: and our very energized working, you know, meat deep and a lot of transactions. And as Angela said, some quarters.
We are lucky and we pull in business from the...
Rob: Fourth Coming Quarter and get it done like we did in Q4. [inaudible]
Rob: and then in some quarters like you won some of its build into Q2, but our pipeline...
Rob: I think the thing that's really important to know is that our leasing teams really focused on rebuilding the pipeline and so we have a numerous transactions right now that are promising and I think it's, you know, it's going to be a matter of time before it plays out and when you really look at the demand [inaudible]
Characteristics in our different markets they do operate in different.
Rob: Modes at different times, which is sort of a good thing for Kilroy. Right now, San Francisco is very active. It's at its first quarter of net positive absorption in five years, according to CBRE. So that's a very promising trend and we've seen that activity show up in our portfolio, which...
Rob: is pretty impressive, Bellevue Washington, again, very strong market. Oftentimes we wish we had more space there to lease, and I think that
Angela: Seattle itself is benefiting from some of the same things Angela said in her script.
Rob: in terms of the political environment, law enforcement, and cleaning up the streets. So we're seeing it West 8.
Rob: We have seen a slight uptick into our activity, so we're hoping that that trend continues. This is the trend.
Rob: continues to perform quite well from a leasing perspective. In the last two markets, San Diego and Austin are doing fine, we have a good pipeline in both those regions.
Thank you very helpful, that's it for me [inaudible]
Speaker Change: The next question today will be from the line of Steve Sakwa with Evercore ISI. Please go ahead, your line is now open.
Steve Sacwa: Yeah, thanks. Angela, I just wanted to come back to the leasing pipeline and the deal activity you mentioned that slipped. I guess one, could you just kind of actually quantify what the leasing pipeline is? Yeah, that's a good question.
Speaker Change: You know, what level of deals kind of slipped, I guess from Q1 in April ? [inaudible]
Really healthy momentum kind of rebuilding that pipeline. And-
Speaker Change: Again, I think two are activity tends to be one of the most important leading indicators in terms of a forwardly activity, so we're seeing really good progress there, as I mentioned with a 40% portfolio wide improvement, really driven by the city of San Francisco, but certainly more broad based as well.
Speaker Change: You know, across the different markets as Rob is highlighting. We've got different dynamics playing out in many of our markets, but I think, you know, across the board seeing that improvement in return to office across many of our metrics.
Speaker Change: Seeing the last election results and the way that several of our cities are improving from a health safety and vibrancy perspective, all of that is certainly contributing to the pipeline and then
Speaker Change: Really in San Francisco and to some degree, Seattle Bellevue, a little bit in San Diego as well. We're seeing AI as a real driver of leasing activity in momentum more broadly across the board.
Thank you.
Speaker Change: I'm sorry, but were you able to quantify the April ? I think you said some deals that you thought would get done in Q1 kind of slipped into Q2 so is there a quantification you can put around that? [inaudible]
Speaker Change: Yeah, there was probably at least, I'm gonna say, 50 to 60,000 square feet of deals that just slipped into the first quarter of April But again, the pipeline at March 31st, the forward pipeline was about 15% of where it had been at 1231 [inaudible]
Speaker Change: The next question today will be from the line of Seth Bergey with City Group. Please go ahead, your line is open.
Hi, this is Cindy McIntyne for Seth, [inaudible]
Speaker Change: So on the sale of land, Santa Fe Summit for 38 million is the plan for a second phase of the sale of the other 17 acres
Speaker Change: and then more broadly, how are you thinking about monetizing the land bank versus other existing operating portfolio positions?
Eliott: Hey, it's the New Intelligence, so we are evaluating a few different sales that are referenced in the prepare remarks that is one of them.
Eliott: And the way we sort of thought about the land sales are to kind of focus on where we think that there's appetite from third party capital. And today that's really around land where there's a higher and better use outside of office and life science.
Eliott: Similarly, the strategy there is to kind of look at where we think that there's appetite from third party capital, where we think that there's good value and that value is, and our view of what the outlook of that asset or that market will be is less optimistic and maybe worth third party capital value again. And so that's how we've tried to prioritize what assets we look to monetize.
Eliott: Great, thanks, and then one more for me. In terms of renewals, are you still seeing companies reduce space on renewals, or have you seen more of a trend of expansions like the one at West A? Okay.
Eliott: I thought if I misunderstood the question I apologize, but in terms of renewals we're seeing for the most part, companies
Retaining the footprint they've had. And, um...
Eliott: And then, you know, I know you are asking about renewals, but in many cases in San Francisco, particularly new companies coming to market are actually looking for more, you know, the space requirement changes.
Eliott: Particularly for AI companies where flexibility is very important to them and so that's out.
Speaker Change: As Angela mentioned in her remarks, the large deal that we did in San Francisco was the result of being able to accommodate a dynamic sort of growth pattern they have. So on a renewal basis, it's much better than it was, you know, a year and a half ago where most
Speaker Change: Companies were trying to adjust five or ten percent. We're seeing people stay in the same footprint.
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Speaker Change: The next question will be from the line of Caitlin Burrows with Goldman Sachs. Please go ahead, your line is open.
Caitlin Burrows: Hi, good morning. Maybe just, yeah, I think it's morning there. Just a question on the capitalized interest point. So it seems like the two big movers to capitalized interest over the next 12 months will be KOP 2 and Flower Mart. So maybe just starting with KOP 2 is the right way to think about it. The $828 million that you've incurred so far that could go up to it seems like roughly a billion that that will come off in early 26 and then similarly for Flower Mart. I'm wondering.
Caitlin Burrows: Sure, Caitlin, this is Jeffrey. You nailed it with KOPE 2, so it will come off in early 2026.
Speaker Change: And then last quarter, we did touch on some of the individual components for the Foulmer, so there's about $7 million of capitalized interest per quarter, and then additional $1 million of carried costs for the parcel, such as insurance or taxes.
Caitlin Burrows: Okay, yeah, got it. And then maybe just in terms of like the types of users that are active, you guys have talked about AI Abonch, which is great to hear. I know finance isn't like the huge, the biggest exposure for you guys, but I guess could you talk a little bit about the types of...
Yeah, Caitlin, this is Rob. Um, um,
Speaker Change: I'll talk about a couple of markets. If you look at Bellevue, for example, there is an AI component to it. Our transaction in Bellevue was the third largest of the quarter in Q1, but there's other uses such as private services, law firms, Tommy Bahama with a large. [inaudible]
Speaker Change: Retailer that used office space in San Francisco, the most notable
Speaker Change: Editions aside from technology were really JP Morgan and their large renewal with the city and Morgan Lewis moving to the Trans-American pyramid.
Speaker Change: and I think, you know, just one side note that's really, I think compelling about the change in San Francisco related to JP Morgan.
Speaker Change: through a combination of their expanding business. It's a key market for them.
Speaker Change: The combination of their expanding business and philanthropy on their own account, they're saying that they're contributing up to 1.2 billion to the economic growth and prosperity of San Francisco, and we're seeing more companies doing that. So this tracks...
Speaker Change: Exactly with what Angela was saying about the improving environment. So...
Speaker Change: to see that. I think particularly with the large law firms that are either wanting to come here for technology or just other Pacific business.
Speaker Change: The next question today will be from the line of Nick Yulico with Scotia Bank. Please go ahead, your line is open.
Speaker Change: Hi, thanks. So, I guess just going to the occupancy guidance range for the year. So, you know, if we just for, you know, Durham Tech happening in the second quarter or not first quarter, it looks like you're
Speaker Change: You're sort of right in the middle of that average occupancy guidance.
Speaker Change: right now, with that impact. So can you just maybe flesh out a bit, like what the assumptions are to get to, you know, bottom or high end of the range in terms of what does that mean, you know, for leasing activity, picking up or not, and any major known move on, still expected. Thanks.
Speaker Change: that's contemplated within our guidance range. Obviously, if that happens in the quarter, you'll see the occupancy move down just a bit. When we think about the third quarter, I just want to remind everyone that we do have two development properties that will come into the stabilized pool, which will affect occupancy and is included within our guidance range. [inaudible]
Speaker Change: So that will bring it down a touch in the third quarter as well and when we get to the fourth quarter our projections are pretty stable at that point we will see.
Speaker Change: NGC with the sign, but not occupied, arranged this quarter. There is a bunch of friend starts that are coming online at the end of the year. So, you'll see the final number kind of bounce around. You can take on how many of those we get started.
Speaker Change: I think the other thing to note is just, you know, Rob did a good job on hitting particularly in San Francisco, which is our largest market. The degree to which tenants are looking for plug-and-place space and flexibility in the ultimate
Speaker Change: You know, the ultimate footprint and youth, and really working to get into space as quickly as possible. So that's what our spec suites program.
It's particularly effective.
Speaker Change: and we do have a number of market ready specs we'd available in that market, as well as across other markets as well, that to the extent over the next quarter or two we really can accelerate leasing activity, we've got a shot at getting some of those in occupancy by year end, which would drive us to the upper end of the range. So that's really the focus in terms of, or the variability in terms of what could get us to the top end of the range. [inaudible]
Speaker Change: but even just based on things that are signed. To date, we expect you for to be a positive net absorption quarter.
Speaker Change: Right, so when Jeffrey mentioned the redevelopment assets that are coming into the stabilized occupancy pool in Q3, those are redevelopment properties, not KOP.
KOP wouldn't come in until 2026.
Speaker Change: So lease up at KOP is not a driver of the occupancy guidance we've given or our performance within that range.
Speaker Change: I do want Rob to spend a minute, though, just talking a little bit and expanding on the momentum we've seen at KOP which has been notable and as I mentioned earlier has included activity both on the spec suites as well as as full floor and multiple floor uses on the campus. Sure, hi Nick.
Rob: Science companies, we also still see a variety of users in tech and fin tech, but really the predominant user is related to life science.
Rob: and obviously our campus and the land we have placed into that very well.
Rob: I would say also just giving more color that we're commencing space planning and design planning dialogue with several of these users and with a couple we're into detailed cost estimation analysis.
Rob: with a variety of single floor users. And those are really giving that color because those are really important precursors. [inaudible]
Rob: to the next step of getting to either a completed L.O.I. or at least. [inaudible]
Rob: We do have a lot going on. I think the macro situation doesn't help expedite getting things signed, but we have people that are very focused
Rob: and haven't seen a pullback to date. And lastly, to your question to Angela, you know, the spec suites are by building those, you know, and marketing them now, we actually have quite a bit of activity on those, so that is a good 2025 possibility. Thank you very much.
Speaker Change: The next question today will be from the line of John P. Kim with BMO. Please go ahead, your line is open.
Thank you. Just following up on KOP2.
Speaker Change: Yeah, well, I want to first address sort of the question about spreads and leasing activity that was executed in the quarter and then let Rob kind of touch again on the leasing strategy at KOP2 but
You know, just remember what Jeffrey mentioned in his remarks.
Speaker Change: that really the driver of the negative spreads during the quarter of the most significant driver of the negative spreads was one larger lease we find it was a direct deal with an existing sub tenant that had very little capital in it. [inaudible]
Speaker Change: that optically looks like a lower spread, but as Jeffrey mentioned was a very positive net effect of rent and I think the right decision for that building. It's also a three year lease which gives us the ability to get another bite at the apple and reset rent in a few years as the market continues to improve. So I think across the board that was the right decision, though obviously contributing to a negative spread number in the quarter. [inaudible]
Speaker Change: I think on, if you just look at second generation leasing, I think that the TILC number was pretty consistent actually with where we had been throughout all of 2024. So I think if there was any increase, it was only in first-gen space and it's just a function of the build out of those tenants, but I think a very small pool there as well.
Sure, and...
Speaker Change: Kudos to you, John , on your think of the myo comment yesterday that was clever. We, you know, back to KOP specifically.
Speaker Change: We have a really good handle on what the competition's doing and we price everything and we're going aggressively after tenants based on a variety of factors, meaning who's the tenant, when's their occupancy or expected occupancy, how much space do they need? [inaudible]
Speaker Change: and there are other factors, and I don't want to go too much into what our strategy is because I know a lot of people listen to this call, but we're seeing every transaction that's in the market, and we're talking to a lot of folks right now, and as I said earlier to Nick, I think that we're...
You know, we're working on some really promising.
Speaker Change: Transactions. Yeah, I think, you know, obviously it's a very competitive environment right now, given the amount of supply and South San Francisco.
Speaker Change: and maybe a follow-up for Rob. Can you rank your markets in terms of where you see the most leasing activity and the likelihood of occupancy growth? I notice this quarter, Seattle and Austin had an increase in least rate. So I don't know if that is representative of what you're seeing on the ground with your pipeline. That's fine.
Yeah, I mean, I think...
Speaker Change: We've had some recent expansions and it continues to be our second strongest market.
Speaker Change: Austin Raids, Maintain, and we're still in the high forties, low fifties, triple net, depending on the other.
Speaker Change: Parts of the package, the concessions, and things like that. But,
Speaker Change: Those markets are all very promising, and I think San Francisco even there is still a dichotomy between top tier rents and the lower tier rents, but because our product [inaudible]
Speaker Change: to these emerging technology companies, both AI and regular tech. So on one hand, at Projects
Speaker Change: Tech Interest at Projects like 303 Second, we have a mix of technology and more fire category, I would say tenants and a hundred first sort of has that mix.
Speaker Change: as well. So I think that San Francisco is just going to take time. We're seeing positive movement on subtly space is now down to six million feet. That's partly absorption and partly converting to direct space.
Speaker Change: We have, as I said earlier, positive absorption for the first time in Q1. I'm, I'm, I'm, I'm, I'm, I'm,
Speaker Change: I can't predict rent growth there, but I think we're seeing better circumstances than we did not that long ago.
Speaker Change: Yeah, it just adds to that, you know, one thing we talked about last quarter's call was the opportunity embedded in the portfolio from just some of our high quality vacancies.
Speaker Change: which included West Eighth in Seattle, Indeed Tower in Austin, and 2100 Katner, and the improvements in the lease rate you mentioned.
Speaker Change: in Seattle and at Indeed, really, you know, where those are and in Austin, where really those two of those three assets I would also say.
Speaker Change: No wonder the leases that flipped from late March into early April was at 2100 Katner so we are making really good progress at leasing up at I think very compelling economics from the highest quality vacancies in the portfolio and you know putting us in a position to realize that growth as quickly as possible [inaudible]
Speaker Change: The next question will be from the line of Dylan Burzinski with Green Street Advisors. Please go ahead, your line is open.
Dylan Berzinski: Hi, morning. Thanks for taking the question. I guess just going back to some of the comments made on TRP phase 2.
Speaker Change: Are you going to be able to sort of give a square footage of the overall pipeline that is sort of touring or looking at that space today?
Dylan Berzinski: and maybe you can comment on sort of the two larger users that are interested. Just how big of a potential space need those are.
Yeah, I mean, I guess I'll start with that.
Dylan Berzinski: The second part of your question first. I mentioned in the prepared marks we've got some users looking at the spec suites. We have a number of users looking at spec suites and those generally range from
Dylan Berzinski: 15 to 25,000 square feet. Floor plates at KOP2 are in the 40 to 44,000 square foot range. So when I mentioned other larger tenants exploring full four uses or multiple floor uses, I would say it's somewhere between one and three floors at other parts of the campus.
Speaker Change: That's helpful. And then I guess just maybe touching on sort of net effective, you know, especially in San Francisco, Elliott, I think you alluded to, you know, that deal that black stem and did co-west it. But as you start to see, you know, potential bases resets across your various markets, do you guys sort of view that as? [inaudible]
Dylan Berzinski: a potential for a further step down in terms of meta-effective rents given the much lower bases that these buyers are coming to that.
Dylan Berzinski: I think it's a little early to say, you know, and without talking about any individual owners based specifically, I think that there's a balance between
Dylan Berzinski: Where someone has sort of bought a building, and then what kind of capital they're intending to put into the building in the building.
Dylan Berzinski: and certainly some of the treats earlier in this cycle which had a lower basis. Our view was those buildings needed a fair amount of capital.
Dylan Berzinski: So it'll be interesting to see how different folks business plans play out what the total amenity offerings are and how they kind of contrast to market to see what that means in terms of tenant preference.
Speaker Change: The next question today will be from the line of Peter Abramowitz with Jeffries. Please go ahead, your line is open.
Peter Abramowitz: Yes, thank you for taking a question. Just wanted to ask, have you commented on direct TV in their exploration 26 and 27, and can you kind of handicap what you think the likelihood of her
Speaker Change: I won't handicap it, but we have discussions with them.
So, I don't have much more to say right now, the 27th,
Speaker Change: and starting to have those conversations as well with 2027 and it is a little bit early on some of the 2027s and plans for many of our tenants.
Speaker Change: Continued shift and change, particularly as we returned off as policies continued to solidify. So even conversations we had six months ago have changed, I think, for the better in terms of renewal and tension over the recent quarters. Thank you for joining us today.
Speaker Change: So, just wondering if you could comment on any kind of comparable trades in your markets and if you could give us any more info on...
Speaker Change: Maybe markets that you're looking at from exposure in or characteristics of those assets you might be looking to sell and what you think pricing would be like today.
Speaker Change: So, we touched on a few comps in San Francisco. Those were for buildings that were...
Speaker Change: Much less occupied than, you know, market. So it's just important when you think about basis to kind of
that factor that in? [inaudible]
Speaker Change: Strategy of getting out of this market or getting into that market. It's really as we have evaluated each asset and tried to make a determination on how we see the next few years playing out of that particular asset and then based on other. Thank you, Peter.
Speaker Change: Characteristics or qualities, how big the asset is, how much capital it will require, who the likely buyer pool is.
Speaker Change: trying to make a determination of where we think we can get great execution. So it's where the concentric circle of something that doesn't fit in our medium term strategic plan overlaps with where we think that there's capital that's going to price this efficiently is how we've kind of concentrated on on our discussion strategy. Thank you very much.
Speaker Change: Thank you. The next question will be from the line of Upal Rana with Key Corp. Please go ahead, your line is open.
Speaker Change: Great, thank you. Just, you know, on Durham Tech, you know, their downsizing was communicating on prior calls but was a result of what you expected and what has been the demand on the space that they're giving back. Thanks.
Speaker Change: I could say the result is better than we expected and we're marketing, I mean obviously keeping them in the whole space would have been better but the outcome was good for us and we're marketing the remaining space. It's actually a really good building and fitted out nicely so we have seen some activity on it.
Speaker Change: Yeah, I remember Durham Tech was a bankruptcy and so there's new ownership there and it just has taken them it took them a little bit longer than we expected for them to really get their arms around the business and understand what their needs were going to be but I think this was roughly in line with what we had expected.
You know, it's...
L.A. is such a-
Speaker Change: You know, fragmented large market, meaning there's so many smaller submarkets, but if you look at Long Beach, for example, it's actually, as I said earlier, done very well on its...
Due to the campus, we renovated the campus. [inaudible]
Speaker Change: and that's paid off. We're located right between LAX basically in Orange County, so it's a very convenient stop-off point, and there's a lot of disness going on between those areas.
Speaker Change: Hollywood has for us, we don't have studio space in Hollywood, Hollywood for us has had some activity and it's improved a little bit over the last
Speaker Change: You're so, so we're working on some things that we hope to bring. [inaudible]
to fruition. I think the West Side...
Speaker Change: You know, it's just it's a matter of how much space was absorbed in the past you kind of hit this plateau usually when there's a lot of leasing and there was a lot of big tech leasing. [inaudible]
Speaker Change: Excuse me on the west side over the past two years and I think...
Speaker Change: Part of that is Tenants just either trying to write size or figure out that they've got enough space [inaudible]
Speaker Change: But we're seeing a little bit of thawing. I mean, we've had some uptick and tour activity at our assets on the west side. It's just going to take time. And the last thing I'd say is...
Speaker Change: I think the political environment in LA is just getting better but a little bit behind where we are in Seattle and San Francisco .
Okay, great, thank you
Speaker Change: The next question will be from the line of Young Koo with Wells Fargo. Please go ahead, your line is now open.
Yonku: Good, thank you. I just want to go back to your occupancy guidance commentary. So it looks like the redevelopment assets that's coming back online in Q3 with estimated stabilization dates in Q3, are you saying that those are going to be coming back online at how to presently, how should we think about that?
Yonku: There are not going to be coming on at 100% least. As we reported in the supplemental discord, there are zero percent least. So there's some progress that's being made on those, but I would assume that obviously the full basis goes into the denominator and there might be some amount of leasing when they say it was.
Speaker Change: OK, so when you're talking about estimated stabilization date, how should we think about that?
Speaker Change: The stabilization is basically communicated in the supplemental as Q3. It's not based on hitting a leasing target. It's based on the time since substantial completion of those projects. So they will come on in Q3 regardless of what, personally, they're at at that point in time. It's based on the time since substantial completion of those projects. It's based on the time since substantial completion of those projects.
Speaker Change: Gotcha. Thank you for that. And then just one last from me. You talked about Direct TV at least in 26. Hashtag we think about the length in the least that's the expiring in 25th also? So.
Speaker Change: You know, we have some things going on there that we
Speaker Change: You know, I don't want to name tenets, but we have, I guess explain more about your question because we did announce that we took care of some of that leasing. [inaudible]
Speaker Change: If you remember, that's our largest exploration in 2026, which is just under 600,000 feet. We've announced as a last quarter that we had addressed, I believe, 430,000 feet of that.
Speaker Change: And it's footnoted on the lease expiration page in the supplemental.
Speaker Change: The next question today will be from a line of Brendan Lynch with Barclays. Please go ahead, your line is open.
So the-
Speaker Change: Transaction that we've completed has residential and as of right use. And so that's the reason that this portion was the first portion to be solved.
Speaker Change: So, you know, can't predict how, how any process will go about, but this is something that's a bright, we're confident we can do.
Speaker Change: Okay, thank you. It sounds like you're a bit tied on capacity in San Diego. What is the prospect of developing the rest of the space at Santa Fe Summit into incremental office space?
Speaker Change: That's not our expectation, you know, I think one development in a lot of market. [inaudible]
Speaker Change: It does not make sense today and that's why we have not undertaken any kind of development.
Speaker Change: But as it kind of mentioned earlier, that's the balance of...
Speaker Change: The Santa Fe Summit of Ancide, something that we are evaluating is one of our potential land sales.
Speaker Change: and that area has really transformed. There's been a lot more residential that's come into...
Speaker Change: to that part of town, and so we think there's a higher and better use there. [inaudible]
Speaker Change: Yeah, two point though. I mean, San Diego has been a great market for us. We've performed extraordinarily well, particularly in some markets like Delmar, which is what drove the acquisition we did last year to continue to increase. [inaudible]
Speaker Change: Exposure and capacity and San Diego and give the team more to lease in that market since it's been going as well as it has. So we're certainly interested in continuing to grow that portfolio. This site just doesn't, to Eliott's point, really is not office or life signs are not the best uses for this site. [inaudible]
Speaker Change: Thank you, and the next question will be from the line of Steve Sakwa of Evercore ISI. Steve, please go ahead, your line is open and please limit yourself to one question.
Steve Sackroy: Hi, Steve. Yes, just want to follow up on the land and the sale of Santa Fe Summit. You know, if you do kind of a quick mask.
Steve Sackroy: The five acres you're selling is, I think, north of $7 million an acre and I realize it's only a piece of that whole land parcel but you know...
Steve Sackroy: It kind of would suggest that maybe there's not impairment, maybe there's even upside, just trying to think through kind of the value there and maybe had to think about value for the overall land portfolio and I guess what would ultimately precipitate you to kind of think about taking impairments on the land bank.
Steve Sackroy: I'll start on that. So, I think that to Brendan's question, you know, part of why-
Steve Sackroy: The deal is structured the way it was because this first phase is at the right. The balance of the site is not and so there will be a change in use required there if it does go residential so when you think about what that means on a per acre basis. .
Steve Sackroy: City to get it effectuated change in use so it's not an unreasonable starting point but our expectation is that anything that happens on the balance would not quite be at the per acre value that we executed on the first phase. [inaudible]
Steve Sackroy: as far as the 150 million plus that we've talked about for land sales in the works, you know, our expectation for those are that they are at or better than where we're carrying them.
Speaker Change: Thank you. Our next question will be from the line of Caitlin Burrows with Goldman Sachs. Caitlin, your line is open. Please go ahead and listen to yourself to one machine. Thank you.
Speaker Change: Disclosure, so it's just wondering if you could go through your thing. My apologies to interrupt. Okay, if you want to start your question again.
Speaker Change: Thank you. I'm apologies. We missed the first part of the question of the question.
Speaker Change: Yes, I know you guys made some updates to your disclosure, so I was just wondering if you could go through your thinking on taking out the same star NOI gap trends and the commence leasing if you thought it was creating confusion or being understood incorrectly
Speaker Change: Sure, we tried to just reevaluate the entire package to make sure it was really clear on what the economic drivers of our business were.
So specifically when we're looking at cash first gap NOI. [inaudible]
The revenue recognition timing with some of the non-recurring items.
Speaker Change: It seemed to be causing a lot of volatility and maybe confusion for understanding our business. So we tried to step back and simplify the same property NOI disclosure to make sure that it actually tracked more closely with the economics of the day-to-day business and then...
Speaker Change: We hope that it's much easier to see just how those kind of items flow through the financial statements as we think about
Speaker Change: We thought it gave enough context for people to understand where the business was going from a foreign perspective and I decided that was probably the best disclosure to keep.
Speaker Change: Thank you, everyone. This will conclude today's Kilroy Realty Corporation 1Q25 earnings conference call. Thank you again for everyone who joined us. You may now disconnect your lines.