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spk10: Good day and welcome to the third quarter 2021 Kilroy Realty Corporation earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing star then zero on your telephone keypad. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note, this event is being recorded. I would now like to turn the conference over to Michelle Ngo, Senior Vice President, Chief Financial Officer, and Treasurer. Please go ahead.
spk00: Good morning, everyone. Thank you for joining us. On the call with me today are John Kilroy, Tyler Rose, Rob Perot, and Elliot Trencher. At the outset, I need to say that some of the information we will be discussing 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 telecast live on our website and will be available for replay for the next eight days, both by phone and over the Internet. Our earnings release and supplemental package have been filed on a Form 8K with the SEC, and both are also available on our website. John will start the call with an update on our market conditions and review our operational and strategic activities. I will discuss third quarter financial results and provide you with updated earnings guidance for 2021. Then we'll be happy to take your questions. John?
spk06: Thanks, Michelle. Hello, everybody. Thank you for joining us today. I'll start with some macroeconomic comments before getting into our leasing and capital allocation. It's been just over a year and a half since the pandemic began, and we are really starting to see the revitalization of cities across the West Coast. City dwellers are returning to their urban apartments and once again embracing city life. After a tough 2020, residential net absorption is approaching 100,000 units in our five markets, driven in large part by high density areas like Hollywood, South Market, downtown Seattle, and downtown Austin. Restaurants, bars, coffee houses are full, concerts and sporting events have returned, and slowly but surely more companies are coming back to the office. The recent easing of the San Francisco mask mandate is another step in the right direction that we believe will continue to encourage more in-person gatherings and collaborations. The technology and life science companies that make up so much of our portfolio continue to thrive. Stock prices are near all-time highs and VC fundraising is on track for a record year, which is translating into a war for talent, growth in job postings, and additional real estate procurement. Improving market conditions help to drive a strong and productive leasing quarter for Kilroy. We signed more leases in the third quarter than the first two quarters of 2021 combined. Since the second quarter, we have signed just under 600,000 square feet of development, new and renewal leases. For the 510,000 square feet in the stabilized portfolio that were signed, gap rents were up on average 26% and cash rents were up 14%. Additionally, we have a number of leases under documentation. And in Austin, we're very encouraged with the market and our early stage lease negotiations. A few facts according to recent reports about Austin. There are 185 people moving to Austin on average each day. And interest among companies wanting to move to Austin and those that want to expand in Austin is above pre-pandemic levels. Let's look at some of these transactions. In the office sector, we signed a long-term 71,000 square foot lease in the UTC submarket of San Diego. The lease is for a new development project, which we commenced construction on just last month. So now it's 100% leased just a month after starting construction. The competition between technology tenants and life science tenants remains healthy. Both sectors continue to grow and seek more modern, efficient work environments. In life science, the third quarter was particularly active for us. we signed three leases totaling 330,000 square feet of headquarters space with publicly traded companies in San Diego, including Tandem Diabetes Care, DermTech, and Sorrento Therapeutics. The mark-to-market rent increases on these three leases were approximately 45%, with an average term of approximately 12 years. In residential, we now have fully leased all 608 units of our One Paseo project at rent levels that have increased 25% since the beginning of the year. Jardine, our Hollywood luxury tower that was completed last quarter, is now more than 60% leased, well ahead of projections. With respect to leasing, I'd like to highlight the following trends, which we feel bode well for the future of our enterprise. Sentiment amongst corporate real estate executives is more positive than it has been the past 18 months. We're experiencing significantly more tours and requests for proposals within our portfolio. This is both for existing and development projects. Rental rates in strategically located modern buildings are on the rise as the result of tenants seeking the best space in the market. Vibrant and distinctive office, curated retail, and residential experiences are drawing a talented labor force back to metropolitan areas. Moving to our capital allocation activities, we made two significant announcements during the quarter. First, in September, we completed the off-market acquisition of West 8th in the Denny Regrade sub-market of Seattle for $490 million. West 8th is a 539,000 square foot LEED Platinum office tower situated on a full city block, just steps from Amazon's 5 million square foot headquarters campus. We like the opportunity for a number of reasons. The location is terrific, with unmatched transit access and proximity to numerous retail amenities. Rents continue to increase in this submarket, and we see significant rental upside. And given the quality and condition of the building, we expect limited capital investment in any releasing scenario. Year to date, this brings our total acquisitions to $1.2 billion, which have been funded by our $1.1 billion dispositions. The second announcement relates to our continued allocation of capital to our life science platform. Earlier this year, we commenced construction on the second phase of our approximately 50-acre, 3 million square foot Oyster Point project, which is a life science campus in South San Francisco. KOP 2, which totals just under 900,000 square feet across three buildings, will be home to numerous amenities that will serve all phases. We are particularly excited about Phase 2 given the strong demand, rising rental rates, and timing. No other competitive project will be delivering in this timeframe. We are in early discussions with multiple prospective tenants interested in securing major portions of the project, and expect even more interest in the buildings once construction goes vertical in the first quarter of next year. In addition to KOP, we are expanding our San Diego life science significantly. Availability for top tier space in the region's most sought after life science submarkets is essentially non-existent. Barriers to entry are high and rental rates are at historic levels. And we are capitalizing on these dynamics in Del Mar, UTC, and the I-56 corridor, where we have modern, highly convertible assets and a land pipeline. In the UTC and Del Mar submarkets, as I noted in my earlier remarks, we signed 330,000 square feet of pre-leases across three buildings, which will be converted to life science use. And just a few miles east on the 56 corridor, We expect to commence construction next year on the first of two phases of our Santa Fe Summit project. Each phase consists of approximately 300,000 square feet. To summarize, we will deliver 2.5 million square feet of state-of-the-art life science facilities over the next 30 months. And over time, the three future phases of Kilroy Oyster Point will expand our life science portfolio by another 1.5 to 2 million square feet. When completed, we have assembled a best-in-class life science portfolio in the strongest locations, which will total 5.5 million square feet with an average age under five years. With full build-out, life science and healthcare tenants will be 25 to 30 percent of our NOI. Lastly, delivering our in-process development and positioning our future development projects remain a high priority in our capital allocation strategy. We have 2.6 billion of in-process projects on track for completion over the next two years. This pipeline is 52% leased and 74% leased when excluding the just commenced KOP2, which we started five months ago. They will generate approximately $170 million in incremental cash NOI when stabilized, which will grow our current annual NOI by more than 20%. all else being equal. The cost is fully funded through the year end 2022. I'll wrap up with a few final observations. In nearly every conversation we are having these days with our tenants and potential tenants, one big theme emerges. Companies want a work environment that attracts, excites, and motivates their workforce. They want location, scale, a contemporary design, a healthy environment, and relaxed ambience that will draw people in and support their creativity and productivity. This is the most profound impact the pandemic has had on the office sector, and we think KRC is well-positioned to capitalize on these conditions. Over the last 10 years, we created the youngest, best-in-class platforms across office life science and residential, and we are poised to deliver strong growth and value creation over the coming decade. We're more encouraged every day about our market's recoveries. The reopening is going to happen in fits and starts, but it is happening. And a final comment on sustainability. In GRESB rankings, we have been named number one in sustainability across all publicly traded companies across all asset classes in the Americas for the eighth year running. That completes my remarks. Now I'll turn it back over to Michelle.
spk00: Thank you, John. FFO was 98 cents per share in the third quarter. Quarter over quarter, the 10 cent increase was largely driven by the acquisitions to date, NOI contribution from our OnePaseo office, and our residential projects, as well as a penny and a half of lease termination fees. On a year-over-year basis, as a reminder, the sale of the exchange had an impact of approximately 13 cents of FFO per share. On a same-store basis, third quarter cash NOI was up 16.6%, reflecting strong rent growth and a $17 million cash termination payment. Gap's same-store NOI was up 3.2%. This termination payment is related to the new 12-year lease we executed at 12400 High Bluff for 182,000 square feet of space. On an earnings basis, approximately $7 million which is a net amount after lease write-offs, will be amortized over the next three years. $700,000 of it was included in the third quarter. Adjusted for termination payments, same-store cash NOI was 3.7%, and same-store gap NOI was up 2.2%. At the end of the third quarter, our stabilized portfolio was 91.5% occupied and 93.9% leased. Third quarter occupancy was down 30 basis points from the prior quarter, driven by approximately 90,000 square feet of move-outs, offset by the West 8th acquisition and the cytokinetics lease at KOP1, which was added to the stabilized portfolio at the end of the quarter. Revenue recognition for 100% of this 235,000 square foot building commenced October 1st. Turning to the balance sheet. After funding the West 8th acquisition for $490 million, issuing $450 million of green bonds, which closed October 7th, and the redemption of $300 million of 3.8% bonds, which was completed earlier in the week, our liquidity today stands at approximately $1.5 billion, including $390 million in cash and full availability of the $1.1 billion under the revolver. We have no material debt maturities until December 2024. Our net debt to Q3 annualized EBITDA was 6.7 times pro forma for the bond activities noted above, which should decline as we continue to deliver our lease development projects, all else being equal. Lastly, our expirations over the next five years remain modest, with an annual average expiration of 7.2%, excluding any impact from direct TV. We do not have an update to provide on the direct TV matter at this time. In 2022, we only have one lease expiration greater than 100,000 square feet in San Diego. This tenant is likely to, this tenant is expected to vacate in early 2022. Now let's discuss our 2021 guidance provided in yesterday's earnings release. To begin, let me remind you that we approach our near-term performance forecasting with a high degree of caution, given all the uncertainties in today's economy. Our current guidance reflects information and market intelligence as we know it today. Any COVID-related restrictions or significant shifts in the economy, our markets, tenant demand, construction costs, and new supply going forward could have a meaningful impact on our results in ways not currently reflected in our analysis. Projected revenue recognition dates are subject to several factors that we can't control, including the timing of tenant occupancies. With those caveats, our assumptions for 2021 are as follows. Cap interest is expected to be approximately $80 million. Same-store cash NOI growth is expected to be between 5% and 5.5% for the year. We expect year-end occupancy of approximately 95%. of approximately 91.5% for the office portfolio and north of 80% for residential. Our guidance does not assume a material increase in transit parking, but as we've noted on prior calls, we expect to pick up a million dollars a month when we get back to pre-COVID levels. With respect to the three San Diego life science transactions, we will be adding them to the redevelopment portfolio and capping interest in phases as follows. On average, we are modeling six to nine months of redevelopment, which are estimates based on what we know today and could be impacted by a variety of factors, including tenant modifications. At 12,340 El Camino Real, which is 100% leased to DermTech, we expect to add this 96,000 square foot building to the redevelopment pipeline this quarter. At 12,400 High Bluff, which is approximately 85% leased to Tandem Diabetes, we expect to add 75% of this 182,000 square foot lease to the redevelopment pipeline in late 1Q next year. At 4690 Executive Drive, which is 100% leased to Sorrento Therapeutics, we expect to add this 52,000 square foot lease to the redevelopment pipeline in two phases, half in late 1Q next year and the remainder in early 2023. We do not have any additional acquisitions in our forecast. Taking into account all these assumptions, we project 2021 FFO per share to range between 374 to 380 with a midpoint of 377. This updated midpoint is the same as our prior guidance, even after including the debt redemption cost of 11.5 cents in the fourth quarter. This is largely driven by the acquisition of West 8th, which contributed 6 cents to our results, an earlier revenue recognition of cytokinetics, and better operating results, including a penny and a half of lease termination fees, all totaling 5.5 cents. Excluding the 11.5 cents of debt redemption costs, the midpoint of our guidance would have been up 3%, or $3.89 of FFO per share. That completes my remarks. Now we'll be happy to take your questions. Operator?
spk10: We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. The first question comes from Nick Uliko from Scotiabank. Please go ahead.
spk03: Thanks. Hi, everyone. Maybe just first question, if Rob could perhaps go through some of the leasing dynamics you're seeing in your markets.
spk08: Sure. Hi, Nick. And hello, everybody. Let me start with some highlights that I think may address questions that others have. And there are four key ones I'd like to make. What we're seeing on the ground, and this isn't necessarily just strictly our five markets, our five markets that we operate in, I think it's a national trend, but the office will remain the center of the work ecosystem. It may change in its configuration, but it's going to remain the place where people come to conduct meetings and collaborate. And we're seeing companies, both our clients and others, spending a lot of money on their office space. So I think that's one important point. Hybrid work is going to be a given. We know that. The third point I'd make is that the net impact of hybrid work, we think, is going to be minimal in terms of space demand reduction or footprint shrinkage. Recently, CBRE conducted a survey nationally of 185 companies, and only 9% of those surveyed expect to experience a decrease in square footage. So I think that's really telling. And as John alluded to in his comments, Health, safety, and wellness are going to continue to be of very high importance to employees, so you will see a flight to quality, as we've talked about, to buildings that provide that sort of outdoor space, stairwells where you can walk rather than take elevators, et cetera. Going into the markets, just some overall general, again, highlights. Tour activity across our five markets has continued to increase, particularly in San Restaurants, retail, and hospitality are visibly improved in terms of just sheer numbers of people in the streets and bars and restaurants. Driving in this week to San Francisco, it's truly amazing at 8 or 8.30 in the morning seeing the number of people that are in coffee houses and coffee shops gathering and enjoying one another. Our parking garage here where John and I office at 101st two months ago was relatively empty, and today and yesterday they already had the full sign out. So traffic is back, and we're starting to see a major increase in parking occupancy. What I would say, another interesting note is that despite all of the work from home and postponement of people coming back, in conversations with many of our clients, a large majority of them have opened up offices on a voluntary basis to people, and you can see that. in the lobbies of various buildings, particularly in San Francisco. With relation to office occupancy, Austin is probably the leader in the country with almost 50% occupancy. San Francisco and San Jose are trailing other metro areas at roughly 20%. But those two markets are increasing fairly quickly, primarily because San Francisco relaxed its mask mandate on October 15. The last thing I'd say as general commentary is that real estate executives are focusing on two primary things today when they're doing their planning. It's what will hybrid work models look like, and what will these work models mean in terms of future space requirements and needs within the office environment? And then I'll just touch on our markets quickly, and then if you have more questions, go ahead. San Diego, let's start at the south and work north. San Diego's large tech and local VC-backed companies are extremely active right now. To be honest, fire category and legal requirements are slower to emerge, but we're starting to see an uptick. I know people have questions about 2100 Kettner. We've seen a pretty significant uptick in activity. In fact, last week we had three tours alone. We received a RFP yesterday And we are pursuing a multi-tenant strategy at the project based on the activity we're experiencing today. In Los Angeles, more positive news, and I think it's really focused in the Culver City, Hollywood, and West LA portions of the market. We're seeing a reduction of space on the market as sublease space is either leased or taken off the market, particularly in West LA. Continued expansion of gaming, media, and technology companies are focused on West LA, Culver City, and Santa Monica. And there's demonstrated proof just by the absorption. Recent new significant deals in the market are Apple, Roku, Hulu, Activision, Snap, Riot, Sony, and Amazon. And that's very encouraging compared to where we were a year ago with particularly the West Side, where there was more sublease space on the market than had been there for quite a while. Quality assets, and I would say this is sort of a general comment in our markets, quality Class A assets that are well located are able to hold rates. Here and there, there may be some added concessions, but generally there is a flight to quality and landlords are able to maintain rates. San Francisco, again, we are hoping that we've plateaued and started to see a slight decrease in sublee space. We're down to 7 million from 9 million square feet. We have in Q3, which is pretty encouraging, 2.25 million square feet of lease deals signed, which brings us to a total of 3.9 million for year-to-date. That's the highest level of activity since Q4 of 2019. So we're watching this very closely and hoping that we're turning the corner here. Right now, today, there are seven tenants in the market over 100,000 square feet. One thing I'd like to finish with San Francisco because, again, it probably out of our markets has the most sublease space and has been the focus of many questions and that sort of thing is that the city really is going to moving into a haves and have-nots. And to illustrate that point, I'd point out that for trophy buildings, Most landlords, on average, have increased their asking rates to an average of $98.36 a foot on a fully-serviced basis. And when you contrast that with Class B buildings, they've been lowering their asking rates to $72 a foot. So there's a real disparity between Class A trophy and Class B space, and sublease space would fall into that latter category. And that data is borne out by JLL. Again, we're watching that closely. Luckily, we don't have a lot of space available right now, and so we see continued improvement in San Francisco. Again, as I said earlier, hopefully we're plateauing. South San Francisco is a great story. I could go on and on, but we're very pleased with the activity we have. We have just started our phase two at Kilroy-Oyster Point. We're seeing very strong demand. When we deliver in and around 23, we think the window will be optimal, given that there's very little product competing with us at that time. And the last thing I'd say about South San Francisco is projects that are vertical, meaning they're under construction and starting to appear in the skyline, are either fully leased or the space is largely committed. So again, we're feeling very good about not only the absorption of space, but also what we see happening with rental rates. in San Francisco. Moving to Seattle, again, just a very good story, particularly for a year and a half, we talked about how strong the Bellevue market is. But the CBD of Seattle is really coming into its own. Sublease space has continued to decline. We've seen rental rates tick up slightly in Class A. Again, Trophy, well-located product. The Rainier Square, new product that Amazon has been subleasing. In the CBD, the traditional CBD continues to have a lot of activity, and it's leasing up. And so we think that bodes really well for our recent West 8th acquisition, which is in the most highly amenitized modern portion of the market. And we also are noticing that that shift toward this modern amenity base in and around the West 8th area, where our 6-0 project is creating more interest from companies even outside of the Seattle area. So more to come on that, but Seattle is really coming into its own. The last market I'd probably want to focus on is Austin. We're very pleased, as John said, with what we have going on in Austin. We have over 200,000 square feet of activity at our building right now in some stages of documentation. I don't want to make any promises about Those companies sort of run the range from professional services to tech. And the last thing I would note is that there are two pending, I think I've said this before during BAML, there are two large pending transactions that total over 900,000 square feet that are eminent in the CBD, and that bodes even better for our Indeed Tower. There also was one large transaction, tech transaction, that closed in the domain sub-market. It was over 300,000 feet. So all in all, that's the wrap-up on the markets, and we're feeling better about everything we're seeing in each of the sub-markets.
spk03: Thanks. That was very helpful. Just on Oyster Point, can you remind us, I guess, two things. One, can you just give us a feel for where market rents are right now? And then separately, remind us how on Phase 1 the rest of the NOI is going to flow in from a gap standpoint over the next couple quarters?
spk08: Yeah, Nick, I'll handle the first one. I don't want to pinpoint because the market's moving and it's moving in the right direction, but safe to say I think rents are achieving $7 net right now and will exceed that just based on the absorption that's going on and the activity.
spk00: Yeah, and Nick, with respect to KOP Phase 1 and the remaining two revenue commencement. We said cytokinetics commenced in early October, and Stripe, who occupies the remaining two buildings, will come online in November.
spk03: Okay, great. Thanks, everyone.
spk10: The next question comes from Manny Korchman with Citi. Please go ahead.
spk11: Hey, everyone. Maybe as you expand the development pipeline, have you seen any issues with the supply chain disruption or especially since it feels like some of it's coming a little bit faster than you expected?
spk06: Yes, Manny, this is John. We obviously have a group that monitors all of that stuff and there are some disruptions for sure. We made a decision at Kilroy couple of years ago that we were going to reduce our dependence upon offshore suppliers as much as we could possibly do. And we have, but we are still dependent because, you know, steel, we don't fabricate any steel in China, but you have to buy the bulk steel and bring it here. We're very focused on what we can control. And so, as you probably know, there's a lot of ships that are at anchor waiting to unload at all of our ports. And we've been very focused on making sure that the stuff we have coming from offshore is going to ports that don't have the jam-up that L.A. has, as an example. In regards to delivery of things, we forecast everything to take longer. And with regard to construction costs, we've been forecasting, you know, anywhere from 5 to 6 percent per annum increases across the board. and costs, and we've done better than that. Everything that we have under development right now has been bought. The things that we are going to start, we will buy. We've had pretty good luck in that regard. We've been able to deliver everything at or below what we forecasted, but we're keeping a close eye. We've had to make some selections of alternative materials in a few cases to make sure that we don't have a supply problem. So that's kind of the general comments and, you know, more to come, but we do have a pretty robust risk management function within our construction development activities.
spk11: Thanks, John. And Michelle, going back to your prepared remarks, you spoke about one large vacate in, I think you said early 22. If I look at your expiration schedule for 22, if that vacates in the first quarter, it seems like those rents are sort of well below the rest of your portfolio, and I'm wondering if this tenant falls into that or otherwise if you could just give us some more details on the move out. Thanks.
spk00: Yeah. Rob, I don't know if you have any color on the move outs, but I guess with respect to market rents, I'd say last quarter, we said across our portfolio, rents are about 15% below market. I think in looking at 22 expirations, it's in that 20% to 25% below market range.
spk08: Yeah. Manny, this is Rob. Just a little more color. We've anticipated this vacate. We've been talking to the tenant off and on. Some of their work is related to the government and contracting. And so we are pursuing and have activity sort of in a wide variety of sizes, somewhere from 50,000 feet to in excess of 100. So given we haven't gotten the space back yet, we're already working on some things and feel pretty good about it. There's a lot of activity, as John said in his comments, just a lot of activity out in that corridor right now.
spk11: And Michelle, just from a modeling perspective, can you be more specific on the timing? We should assume for next year.
spk00: It's in the first quarter.
spk11: Thank you.
spk10: The next question comes from Jamie Sideman of Bank of America. Please go ahead.
spk05: Great. Thank you. Just to confirm, what was the size of the San Diego move out?
spk00: It's about 125, 130,000 square feet.
spk05: Okay. And then I guess thinking about next year, it sounds like you think nothing else sizable?
spk00: No. That was the only sizable one.
spk05: Okay. You know, looking at, first of all, I like the revised supplemental, so thanks for freshening it up. It's great. Page 30, you have the future development pipeline. I'm just curious what your thoughts are, given the multi-year lead times. to get something built. What are your thoughts on starting incremental projects now? It seems like you guys think the markets are starting to recover.
spk06: Well, this is John. As I mentioned in my comments, we will be starting the first phase of the two phases that remain at Santa Fe Summit. That's about 300,000 square feet. So we have two phases there for 600,000 feet. It could be that we start both if we have if we've leased one of the phases. So that's going to commence next year. We've got a few other things that we're looking at, but nothing to announce at this point. From an entitlement standpoint, we did receive all our entitlements now for the flower mart. We were able to revise the phasing and whatnot on that project. to be roughly plus or minus 500,000 square feet per increment, which is very good. But we don't have any plans to start that right away. We want to see the market solidify here in San Francisco. And then we have our 6-0 project up in Seattle. But that, I think, is about a year away from being able to start. Oh, we do have a little project I failed to mention that is on 26th Street in Santa Monica. It's an existing building of about 40,000 square feet that will be remodeled and then about another roughly 100,000 square feet plus or minus in two adjacent buildings that we're receiving approval on. And that'll be sort of a low rise, very modern campus. And we could end up starting that next year, which we'd be inclined to do because we already have pretty strong demand for it. So that's sort of the development. view that we have right now. We are readying phase three and four of Kilroy Oyster Point. We're not ordering material, but we want to be in a position to start that as soon as we made some leasing progress at KOP2. Okay.
spk05: And the announcements of expansion in Austin just continue. Any latest thoughts on how you can grow there beyond Indeed?
spk06: I don't want to share them publicly for competitive reasons because it is a competitive market, but Elliot and his team have been working on a number of things there, and we're hopeful that we're going to be able to, you know, complete some other things maybe as early as this quarter, but maybe it'll be next year. But you're quite right. I mean, what we see there is that, you know, it sort of reminds me, Jamie, of when we bought Oyster Point and Cambridge was at, you know, sort of $90 triple net. And Oyster Point area was sort of at $55, $56, $57 triple net. And we said, you know, we think these are the same tenants. They're going to end up paying more like Cambridge prices in due course. And that's exactly what's happened at Oyster Point. And now Cambridge is, you know, as well north of $100 triple net. And it's the same tenants that are paying high rents around the world that are moving into Austin, at least in the big tech. I think there's going to be a lot of lift. We're not really interested in older product that doesn't meet the demands and needs of the modern tenant, unless it's an old building with a lot of floor height that we can convert. So we are scouring the market regularly. We're in negotiations all the time. Nothing now to report, but hopefully something will break loose here. in the next few quarters.
spk05: Okay. Thanks for your thoughts.
spk10: You're welcome. The next question comes from Derek Johnston with Deutsche Bank. Please go ahead.
spk02: Hi, everybody. Thank you. L.A. L.A. remains a bit of a hole in the portfolio and really what otherwise is pretty well occupied. I think it's around 87%. What do you see going on in that market? And what's it going to take to get back to the 90s or maybe even 95 or higher, basically in line with your other core markets?
spk06: Yeah, this is John. I'm going to turn it over to Rob here in a minute. But if you look at LA, there are a lot of big tenants and there are a lot of small tenants. And small tenants have lagged in this pandemic area For obvious reasons, it's easier for them to move into the home or move into wherever they're moving. There are more of those kinds of spaces available. But we are seeing really strong signs of life. The big users, as Rob pointed out, are making moves forward. We're seeing a lot more requests for proposals. We've done an awful lot of little deals recently. And Rob, you want to add a little bit more color on that? Yeah.
spk08: I guess what I would say, Derek, is that L.A. is such a large market when you really look at it considering it can run from Long Beach all the way up to Thousand Oaks and Carlsbad, excuse me, and Calabasas. And so it is a function of very many submarkets. We don't focus on downtown L.A. West L.A., as I said in my comments earlier, did have quite a bit of space on the market between 2100 Colorado and Santa Monica Business Park and the Water Garden. But particularly at Santa Monica Business Park and Colorado, they've had significant absorption. And the gaming industry is actually coming out of sort of from the background, now competing with tech companies for space on the west side. We're seeing, I guess I would say, Culver and Hollywood have been fairly stable throughout the pandemic because of all the film production. And those locations are just attractive to the media companies. And I think what's happened is that West LA, and particularly deeper into the west side, like Santa Monica, you're starting to see that increase in activity. And it's starting at the big tenant level, like the names I went through. But to John's point, smaller. sized firms are now starting to, you know, starting to surface. They really didn't, you know, when you look about it, if the city's shut down and you're not going into the office and you don't have to do something with a lease, you're not going to do it. And they haven't for about a year and a half. But we're starting to see more activity in that smaller frame.
spk06: Well, you look at, as an example, our Tribeca West project, which is very much geared towards shorter term production, you know, directors, all that movie content stuff. A lot of those people couldn't go to work last year. Now all of a sudden our occupancy is increasing substantially. So as things loosen up, people get back to work, they need space to work and they, you know, they leave space. So that's a good trend. That's what we're seeing.
spk02: All right. Great color. Thank you. Last one. So looking at some office companies that have already reported so far, they seem to have been able to drive longer-term commitments from the tenants. I know you guys were always a little lighter on term historically, but is this like a California thing or a tech issue? And could you share any insight and when you think your lease terms will return to like the 7- to 10-year level?
spk06: Well, I don't know how you're getting that statistic, and Michelle or Rob, you can help me, but I think Kilroy has had amongst the longest-term leases because we do so much with big companies, and those are generally anywhere from 10 to 16, 17 years. So I'm not quite sure where that's coming from.
spk04: Derek, this is Tyler. I think what you're looking at is the lease term on some of our renewals high four-year range. But if you take into consideration the leases we signed in San Diego, which are not in that category, those were averaging over 11 years. So the average lease term for what we actually leased last quarter was 9.5 years. So it's still in line with what we've been doing. It's a little hard to follow in those numbers. Hey, thanks for clarifying. Thanks, guys.
spk10: The next question comes from Steve Sacqua with Evercore ISI. Please go ahead.
spk01: Yeah, thanks. I guess still good morning out there. I was just wondering maybe, Rob, if you could maybe touch a little bit on the life science demand specifically in South San Francisco. You know, I realize that, you know, KOP2 doesn't have steel coming out of the ground, but, you know, maybe what are your expectations on timing and And maybe you or John could just address, you know, the broader infrastructure issues in South San Francisco and how you guys sort of think about mass transit, getting everybody that's going to be coming to that entire area as Genentech, you know, looks to double their footprint in you and many of your peers look to continue to add density to South San Francisco.
spk08: Yeah. I look at this a little bit as fly fishing, Steve. You've dangled the fly out there, but I'm not going to snap at the fly. with respect to timing and what we're doing and when we'll be able to announce something. But I would say that demand in the market, even though there's been tremendous absorption in the market today, demand is still tracking at about 4 million square feet. So as space gets absorbed, there's new demand appearing. So that's a very positive sign. As I mentioned earlier, rental rates are on the move, and we're very pleased by that. So, you know, and then with respect to the second part of your question, we are in a lot of discussions with not only our existing tenants but potential tenants and others that are our neighbors on a variety of transportation solutions and ideas. And so, you know, it's something that everyone in Oyster Point, and frankly, everyone in an urban area is going to have to address at some point, is circulation and moving people around. But I think one of the best assets we have is the bay. And Genentech, as an example, has a very significant, robust ferry service that they run throughout the bay area.
spk01: Okay. And, you know, maybe piggybacking off one other question on on austin and just your you know desire to grow down there i guess john have you you know gotten closer to formalizing or finalizing who might be running that region and and sort of how you think about whether it's an internal external candidate and yeah uh we have uh
spk06: We have identified and it's somebody from within that will be running it from an asset management standpoint. From a leasing standpoint, obviously Rob has the ultimate responsibility and has a very firm handle on that. We have one of our top leasing people from this area here in San Francisco who is responsible for the leasing currently at Indeed Tower. As we expand our platform there, we're obviously going to need more bodies, and we're working on that. We've been going through that process. Nothing to announce right now. But we're very actively looking not only to have the management team that we want, and we have some really good candidates. We've been interviewing candidates now for several months, right, Ron? Yes. And we're down to a couple, three, that we think could end up being very senior to our efforts there. The underwriting with regards to all the math, the investment leads, and so forth, that's Elliot and his team. Jeff Chestnut, one of his young superstars, is very involved in everything to do with Austin. So we're going to have a great team, and we're going to have the kind of team we've had in our other areas, which is capable of acquisitions, you know, dispositions, if and when that becomes appropriate, obviously development, and then managing. And we're spending a lot of time with our tenant base, many of whom are in Austin and growing in Austin and have future plans to grow in Austin about what we're doing and so forth. And I think that's encouraging. So more to come.
spk01: Okay, thanks and then maybe just last question john on the flower Mart I know there's some flexibility on that site, but you know how do you sort of think about the toggling between office and residential and. You know, would you look to maybe shrink the office component add residential to maybe jumpstart that project or you know how do you sort of think about that moving forward.
spk06: Yeah, well, our basis is pretty attractive. And I've always said that we're not going to be doing stupid things in the short term that impact negatively the long term. You're quite right. We can do residential. The key was to get the entitlements for the office. And we now have the largest entitled property, I think, in recent history, if not ever, in San Francisco for office, you know seven acres roughly two and a half million square feet You can you can go from office to resi you can't with prop in go from resi to office so we sort of have a an ideal menu if you will and we have a big enough site and you know three major streets so we can we can slice and dice as we want to as I started to say earlier the There's been a lack of clarity, for sure, with regard to when things are going to roll back. In San Francisco, we're seeing the apartments come back with a vengeance. And my understanding is they're getting record rates. And once again, it's tough to find apartments. And one of the things that's happened in apartments is that sometimes the kids were loading up three or four people to a two-bedroom. They don't want to do that anymore. They want greater distance. So what Rob talked about, greater amount of square feet per person in office, it's sort of the same thing happening in residential. So, you know, we're going to see how this plays out here probably over this next, you know, there's no timeline, but over the next several quarters, and we'll make a decision how we want to do things. But we like optionality. And whether it's our property up in the 6-0 up in Seattle, or whether it's the Flower Mart, or whether it's the two blocks we own in East Village in San Diego, we have the ability to go office, we have the ability to go residential, we have the ability to go some combination thereof, and we have the ability to add retail if we want. So we have lots of flexibility.
spk01: Great. That's it for me. Thanks.
spk10: The next question comes from John Kim with BMO Capital Markets. Please go ahead.
spk09: Thank you. I wanted to follow up on Derek's question on lease terms because if you look on page 18 of your supplement on leases executed, most of these leases were new leases and the average lease term is about 4.3 years. So I was wondering if leases have come down on term, if there's been any month to month that's in there that's driving that number down.
spk04: Again, the redevelopment leases that we sign in San Diego are not in that category. So those are the leases in our stabilized portfolio. So when you add in the leases that are not in that category, it's nine and a half year average.
spk00: Yeah, and just to clarify, so the lease numbers include the redevelopment leases but the lease economics that you see in the weighted average term does not reflect the term of the three redevelopment leases, which are on average about 12 years.
spk09: Right. So you have some redevelopment and life science leases that are long-term, and then you have others that are, you know, the tenant is committing at a shorter-term basis? Right. That's correct. Okay. Rob, you mentioned in your prepared remarks, or sorry, in an answer, the bifurcation between trophy and Class B performance. I know most of your portfolio is Class A and trophy, and that's what we focus on, but what percentage of your portfolio do you think is in that other category?
spk08: I don't think we have any. I'm drinking the Kool-Aid, but I don't think we have any B or certainly no obsolete projects. As John said, we've got probably the youngest portfolio in the REIT industry, so I don't think we have any.
spk09: Can you also comment on sublease space in your portfolio? I know you talked about the market overall, but what's in the Kilroy portfolio?
spk08: Yeah, probably the largest piece of sublease space is the 350 Mission Salesforce sublease. A good portion of that has recently been absorbed and they're continuing to market the balance of the space. I'm not sure today whether they intend to take some of that off the market and occupy because they're, as you know, they're downtown campus here. Right outside John's office, multiple buildings have a lot of people back in at work. And we know they've also started bringing sales teams back in on a mandatory basis here and there for meetings. So more to come on that. But that's the largest.
spk09: Great. Thank you.
spk10: The next question comes from Blaine Heck with Wells Fargo. Please go ahead.
spk07: Great, thanks. Just one for me, probably for John and Rob. During the pandemic, obviously, office leasing activity was down everywhere, but maybe focusing on the Bay Area, it seemed like the Valley did a little bit better than San Francisco CBD, where you saw, obviously, a lot of the sublease space flood the market. You guys talked about the CBD market showing some encouraging signs lately, which is great, but You know, how do you think about any differences in the recovery in the Valley versus San Francisco CBD in particular?
spk08: Yeah. Hi, Blaine. We're actually really, you know, the Valley is very interesting because there's been a tremendous amount of activity. And again, it's one of the themes that we've said continually on our calls and investor meetings is that there's the haves and have nots in the Valley. And it really depends where property is located and proximity to both the major freeway arteries that run to San Francisco, but also Caltrain. And there are some really significant transactions that have happened in the last three to four months. Apple being probably primary at over 500,000 feet of new absorption. But there are other FANG companies that are expanding significantly there. Sony has done another large requirement in the Valley, and at least our experience with the Valley and as it relates to San Francisco is these markets sort of operate in tandem, and what's happened in past cycles where there's been major absorption in the Valley, there is a spillover effect to San Francisco, and so we're starting to watch for that now in the CBD of San Francisco. You know, the Valley, if you just take a step back, San Francisco was more shut down, as I've said before, than any city in the country. It's starting to open up. The Valley was nowhere near as restrictive, and so demand and activity have continued to increase.
spk07: Great. That's helpful. Thanks, Rob.
spk10: This concludes our question and answer session. I would like to turn the conference back over to Michelle Ngo for any closing remarks.
spk00: Thank you for joining us today. We appreciate your continuing interest in KRC. Goodbye.
spk10: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
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