Kilroy Realty Corporation

Good morning, everyone, and welcome to the KRC 1Q24 earnings conference call. My name is Angie, and I'll be coordinating your call today. During the presentation, you can register to ask a question by pressing star followed by one on your telephone keypad. If you change your mind, please press star followed by T. Please be reminded to limit your time to one question and one follow-up only. I will now hand you over to your host, Bill Hutcherson, Senior Vice President of Investing Relations and Capital Markets. Please go ahead.

Thank you, Angie. Good morning, everyone. Thank you for joining us. On the call with me today are Angela Amann, our CEO, Justin Smart, President, Rob Peratt, our Chief Leasing Officer, and Elliot Trencher, our CIO and CFO. At the outset, I need to say that some of the information we will be discussing during this call is forward-looking in nature. Please refer to our supplemental package for a statement regarding the forward-looking information on this call and in the supplemental. This call is being webcast live on our website and will be available for replay for the next eight days, 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 available on our website. Angela will start the call with a strategic overview and quarterly highlights. And Elliot will discuss our financial results and provide our updated 24 guidance. Then we'll be happy to take your questions. Angela?

Thanks, Bill, and good morning. On our last earnings call, I summarized some initial takeaways from my first couple of weeks as CEO, including Kilroy's strong portfolio positioning, the underlying strength of our talented team, and the quality of their relationships with our tenants, and a clear trend of improving fundamentals within our markets. As I have settled in over the last three months, my initial takeaways continue to be reinforced. The quality of our portfolio and platform uniquely positions us to benefit from the recovery we are beginning to see take hold in our market. I'm happy to report on a very active first quarter for Kilroy. Leasing volumes were strong. We enhanced our liquidity profile and extended debt maturity. And last night, we raised both same property NOI growth and FFO guidance. During the first quarter, we signed approximately 400,000 square feet of leases. which represents Kilroy's highest first quarter leasing volume since 2017, and a 40% increase relative to the first quarter of 2023. We saw strength in our Southern California markets and across multiple industries, including gaming, professional services, finance, and technology. Some specific leasing highlights include. First, as previously discussed, we signed a 77,000 square foot renewal with Riot Games for Riot's Arena, a unique event space in the heart of their West LA campus. Second, we signed 70,000 square feet of new and renewal leases across our Del Mar portfolio in San Diego, resulting in a 98% lease rate in that submarket. The San Diego market in general, and Del Mar specifically, has been the strongest region in our portfolio, with physical occupancy approaching 90%. High physical occupancy rates have given companies certainty around their space needs and confidence to make real estate decisions, which has translated into strong results for our portfolio. And finally, we signed our first new lease at West 8th Street in Seattle, where an AI company took a partial floor. AI demand is notable in both San Francisco and Seattle, where the aggregation of top tech talent is most pronounced. We fully expect that the growth in AI over the next several years will lead to accelerating demand in our markets from both big tech platforms and startup companies alike. Our forward leasing pipeline also remains strong. In particular, at Kilroy Oyster Point phase two, Tour activity has meaningfully accelerated during 2024, with several large-format user tours occurring over the last six weeks. We also remain on track to deliver our spec suites in one of the three Phase II buildings in October, and we'll be ready to capture demand from smaller users with requirements for move-in ready space as we approach delivery. We remain excited by the uniqueness and quality of this project and its long-term competitiveness within the South San Francisco Submarket. Shifting to the fundraising environment, we are starting to see some green shoots, suggesting capital flows are improving in the technology sector. During the quarter, Stripe, our tenant at KOP Phase 1, raised a round of private funding at a $65 billion valuation, representing a 30% increase in valuation from just a year ago. Additionally, Reddit, our tenant at 303 2nd Street in San Francisco, successfully completed their IPO at a $6.5 billion valuation, the high end of its indicated range. Blue chip tech companies are demonstrating access to capital, which bodes well for the broader tech ecosystem and ultimately for real estate requirements. As it relates to life science, after record years of venture capital deployment during the height of the pandemic, the pace has decelerated to more normalized levels. That said, 2023 saw over $30 billion of activity, significantly higher than any standalone pre-pandemic year. And 2024 appears to be on pace for similar levels. As the population continues to age, Healthcare costs continue to increase, and novel drug approvals continue to proceed at an accelerated pace. The stage is set for continued growth in the life science sector, and we believe that our portfolio is extremely well positioned to benefit from these long-term trends. Turning to the transaction market, we are starting to see some signs of life. Sellers for quality properties are beginning to softly test the market. The wide bid-ask spread that has been observed over the last several quarters persists, and debt financing is challenging to secure, so overall transaction volumes remain low. We are hopeful that will begin to change over the coming quarters. As we navigate this environment, we will be patient and continue to adhere to our three core pillars, high-quality properties, strategic capital allocation, and a fortress balance sheet. Ultimately, we expect to be both an opportunistic buyer and a strategic seller when market conditions permit. Making decisions based on real estate fundamentals and risk-adjusted returns not based on capital needs, as we have maintained exceptional liquidity and financial flexibility. We are proud of the company's capital allocation track record and are confident that we will identify meaningful opportunities to create value for shareholders moving forward. Before turning the call over to Elliot on behalf of the entire management team, I want to thank our Kilroy colleagues who have continued to execute so effectively across all disciplines. I've been extraordinarily impressed with the quality and commitment of this team. specifically their motivation, creativity, and collaboration. And I look forward to what we can deliver together over the coming year. Elliot?

Thank you, Angela. The first quarter represented a good start to the year, with FFO of $1.11, or three pennies above the fourth quarter. The increase was predominantly due to lower straight-line rent reserves and lower G&A, partially offset by lower occupancy and higher net interest expense from our recent bond deal. On the same store basis, first quarter cash NOI was down roughly 7%. As previously noted, the prior period included $12 million of restoration payments, making the first quarter of 2023 a difficult comparison. At the end of the quarter, our stabilized portfolio was 84.2% occupied and 85.7% leased. The decrease from the prior quarter was due to some move outs, mainly in Los Angeles, partially offset by a move in at Indeed Tower in Austin. Of note, one of the move-outs during the quarter was Box, who gave back roughly 50,000 square feet in Redwood City. However, this space is already backfilled with a long-term lease to a best-in-class law firm who we expect to move in by year-end. Turning to the balance sheet, net debt to trailing 12-month EBITDA was in the mid-six times. As you may have noted, we are now disclosing this information on pages 3 and 29 of our supplementals. As Angela referenced, on the capital market side, it was a productive quarter. In January, we raised $400 million of 12-year unsecured bonds at a coupon of 6.25%. An opportunistic transaction we feel even better about today given the changes in the interest rate environment over the past several months. We elected to use a portion of the proceeds to pay down $200 million of our $520 million term loan and simultaneously executed a 12-month extension for a $200 million tranche of the remaining $320 million, bringing the maturity date for that portion to 2027, including extension options. In March, we were thrilled to announce the recast of our line of credit, extending the maturity date by three years to 2028 while maintaining total capacity at $1.1 billion. We are appreciative of the partnership and support demonstrated by our bank syndicate and believe that these two transactions highlight that lenders and fixed income investors continue to support the credit of best-in-class sponsors across the office and life science sectors. Finally, in March, we announced the refreshment of our stock buyback and ATM programs. While we have not been active on either front, we believe it is important to have all tools available to the company, particularly in light of the current volatility in the marketplace. As a result of these transactions, our liquidity remains robust. As of quarter end, we had over $2 billion of available liquidity comprised of $950 million of cash and marketable securities and $1.1 billion available on our line of credit. Our projected uses of capital for the remainder of the year are between $550 and $650 million broken down as follows. Roughly $400 million of debt maturities and $150 to $250 million of development spend. Before we get to guidance, we wanted to point out some enhancements we made to the supplemental this quarter. Some of these changes include on pages 20 and 21, we expanded our list of top tenants from 15 to 20 and added information around tenant industry classifications. On pages 27 and 28, we added more disclosure around our debt capitalization stack and annual debt maturities. Finally, on page 17, we bifurcated our first generation CapEx into two buckets, one for development and redevelopment projects that have been moved to the stabilized portfolio, and the second one for major repositionings, which consists of projects undergoing value accretive material renovations. For the reported period, the only meaningful project in this bucket is West 8th Street in Seattle, which, as many of you know, is undergoing a sizable renovation after Amazon vacated early last year. We hope these additional disclosures are beneficial and demonstrate our desire to proactively provide enhanced transparency to the investment community. Now let's discuss our updated 2024 guidance. No acquisitions or dispositions are forecast, though as Angela discussed, we will remain opportunistic on both fronts. As previously mentioned, the remaining development spend for the year is anticipated to be between $150 to $250 million, which when combined with the first quarter spend represents no change to our original full year guidance of $200 to $300 million. G&A is still expected to be between $72 and $80 million. G&A in the first quarter was low due to timing of when we incurred certain costs. Straight line rent is projected to range between negative $5 and $6 million. Our average occupancy estimate of 82.5% to 84% has not changed. Cash same store NOI is projected to be between negative 3.5% and negative 5.5%, a 50 basis point increase at the midpoint, mainly due to better parking income and fee income in the first quarter. In summary, our updated 2024 guidance is projected to range between $4.15 and $4.30 with a midpoint of approximately $4.23 or a $0.05 increase at the midpoint. This increase is due to better NOI from recurring and non-recurring items and slightly lower net interest expense due to lower than anticipated deferred financing costs and higher interest income. On a quarterly basis, Guidance implies FFO for the balance of the year will be about $1.04 or $0.07 lower than the first quarter. The bridge to get there can be broken down as follows. Subtract two pennies for lower occupancy, which factors in our move-ins and move-outs. Subtract four pennies for lower interest income as our cash balance declines over the course of the year. Subtract one penny due to timing of G&A spend. To conclude, we are pleased with the results from the quarter and believe the increase in guidance correlates with the improvements we are seeing in the portfolio. We have set up the balance sheet to be flexible and resilient and believe our robust liquidity sets us up to have multiple avenues to create and enhance shareholder value in the coming years. With that, we're happy to take your questions. Angie?

Thank you. Hello, everyone. If you would like to ask a question, please press star followed by one on your telephone keypad now. If you change your mind, please press star followed by two. As a reminder, please limit your time to one question and one follow-up only. We'll pause here briefly as the questions are registered. The first question is from Blaine M. Heck with Wells Fargo. Your line is open.

Great, thanks. Good morning. Just wanted to touch on the 116,000 square feet of short-term leases signed this quarter. Can you just talk in general about those situations? Are these tenants that are just unsure of their business and don't want to commit to longer terms? Or should we think of this as more of kind of swing space while other space is being built out? And then how do you feel about your ability to turn any of those into longer-term deals?

Yeah, thanks, Blaine. Good morning. I'll go ahead and take it, and Rob can jump in if there's anything he wants to add here. I would just say, you know, we did some short-term leasing last quarter, which was predominantly renewals. And I would say those renewals kind of fall into the two buckets you mentioned, right? It's people, you know, sort of delaying making decisions or, you know, needing the space a little bit longer temporarily in advance of whatever their longer-term plan really is. This quarter, as you know, we signed about 116,000 square feet of short-term leases. About 30,000 square feet of that was short-term renewal, so a relatively immaterial amount. And again, on the short-term renewal side, we're not putting any capital in. Those are good deals just to preserve occupancy a little bit longer and get some additional revenue in the door. We also signed 86,000 square feet this quarter of short-term new leases. Excuse me. The bulk of that was made up really by one tenant who took that space on an as-is basis. We put no capital into that deal either. And we are, as you sort of indicated, cautiously optimistic we may be able to convert that tenant to a long-term tenant within our Los Angeles portfolio. You know, our view right now is all leasing is good leasing. Certainly all positive net effective rent leasing is good leasing in this environment. And I'm actually really pleased by the efforts of the team here at Kilroy to be creative and to meet tenants sort of where they are in the market and to find ways to really prioritize occupancy stability and growth over the next several years.

The only thing, Blaine, this is Rob Peratt. The only thing I'd add to what Angela said is that if you look at 2020, you know, at the start of the pandemic, you recall we did short-term leasing there, but that was largely because tenants were uncertain about the future. Today, it's a different sort of metric. You still have tenants that are uncertain about the future, but you have new company formations that are happening. And so that latter component for a segment of the market And it's not just limited to San Francisco, it's also happening in Seattle and parts of LA. Those tenants want plug and play, immediate space, and they are taking short-term space because they intend to grow. And as Angela's point is, we're here to make money, and we're being very selective about who we take, and we're also being vigilant about the capital, and we are making bets on some of these companies that they will grow. and become large tenants in the portfolio down the road.

Great. That's really helpful, Keller. I guess just to follow up, are these short-term deals something you think could continue to be a relatively sizable part of your quarterly leasing in the near future? I think the perception is it brings volatility to the leasing rate and might be artificially inflating that number. I guess if you're able to continue to bring in these short-term tenants, it could be a little bit more stable.

Well, I mean, it's hard to say sort of exactly where things go. I think the short-term leases you saw, particularly that one new lease this quarter, was a pretty unusual situation, a pretty special situation, which, again, we hope ultimately doesn't lead to volatility in the leasing number because we're able to convert them to a long-term tenant. But I would say that's more the focus, the conversion to long-term tenancy. as opposed to continually signing new short-term leases to prevent volatility in that short-term leasing number.

Thank you. The next question is from Camille Bonnell with Bank of America Merrill Lynch. Your line is open.

Good morning, everyone. I wanted to start with better understanding the drivers behind the guidance raise. First quarter looked like a good beat on core, but I can't seem to reconcile that with the full year breakdown you provided, Elliot. So can you clarify how much of the core versus non-core items drove the increase?

Yeah, so I touched on two components to the increase in my remarks, the core portfolio and then the interest expense slash interest income. Roughly split 50-50 between those two buckets. And then within the core bucket, again, that piece roughly split 50-50 between the parking, which I referenced, and then the fee income.

That's helpful. And as my follow-up, yesterday one of your public peers commented on looking at some strategic alternatives with spinning off parts of its business. So question for Angela. Would you consider or at what point might you consider pivoting the strategy given how challenged supply is in the office and life science for the medium term? Thank you.

Yeah, I mean, you know, I think we're being thoughtful and creative about everything. I think there's a lot of good synergies between our office portfolio and our life science portfolio. You see that in a project like Kilroy Oyster Point in phase one, where we have both a combination of life science tenants and office tenants. So I don't think, unlike certain other situations where there's, you know, clearly a business that's distinct, and different from the core business or the primary business of the company. That's not really the situation we have here. I think there are a lot of good synergies and certainly a lot of platform synergies across the leasing and development teams as well. So while we'll consider everything and we'll always be looking to maximize value for shareholders in any way that makes sense, I do think there's good synergies within our business that prevent a spinoff from making a ton of sense.

Thank you. The next question is from Michael Griffin with Citigroup. Your line is open.

Great, thanks. I want to go back to kind of the leasing outlook for a second. On the RIOT renewal, you know, looking through the SUP, it looked like it was about a three-year renewal to 2026. I think you've still got, you know, some leases that are expiring for them this year. I guess, how should we think about maybe locking a tenant down like that for a longer-term lease? And I would also ask probably the same around LinkedIn, just given they have some states expiring this year, but the big chunk of that is in 2026.

Hi, Michael. It's Rob Peratt. I can't get into a lot of detail about the conversations that we have with either Riot or LinkedIn, but I think that it's safe to say, again, as I said earlier to Blaine, we're – being very strategic, and as these companies are looking at their strategic sort of layout for the firm, we're trying to accommodate that. And Riot, as you know, has a very critical infrastructure here with us, with their arena, but they also have other headquarters buildings here that they're using. So it remains to be seen, but we have active conversations going on, and with LinkedIn, you know, you recall we did in Q4 in the campus over 150,000 foot conversion of a sublease tenant to a direct tenant. And with the 599 Matilda, which is where LinkedIn is, we're working on a, you know, renovation plan and marketing plan and we'll be ready when that lease expires.

That's appreciate the color there, Rob. And then just On the development pipeline, leasing demand, can you give us any color, particularly on KOP phase two, what you're seeing there? Are there any big tenants that you're seeing down in South San Francisco? And then just maybe finishing up on Indeed, I realize it's stabilized now, but still has some vacancy in there. So just how is demand tracking for that as well?

Yeah, I mean, I think those are important questions. I mentioned in my prepared remarks that while there's no leasing activity to report at this point at KOP2 that we have seen a material uptick in tour activity, you know, over the last, certainly over the last two quarters, but even really over the last six weeks, and that has included several large user tours. You know, that doesn't mean you're going to see executions, you know, certainly in the very near term, but you certainly can't sign leases without tour activity accelerating, so we're really encouraged to see that. The other thing I mentioned at KOP2, which I think is really important, is that we have taken one of those three buildings, as I think everybody is aware, and gone multi-tenant, and we're building out spec suites. And while there really haven't been any lease executions in that South San Francisco sub-market over the last quarter or so, where we do think we're going to see demand first is in smaller format users that are looking for move-in ready space. And where we have lost deals over the last quarter or two, it's really been because we can't meet that immediate need. So when we deliver that space in one of those three buildings at KOP2 in the fourth quarter, as we approach that date, we'll be much more competitive for those smaller format users that are looking to take space, ready space, pre-built lab space immediately. So I think we're well positioned there. working very hard to make sure we're capturing all the demand that is in the market and very encouraged by the fact that at least at a preliminary level, tour activity is accelerating. At Indeed, I think we're around 78% leased at this point. We continue to chip away at that as well. We're seeing good activity there and I think we have more activity working right now than we have remaining vacancy in the building. That's coming from new users and interestingly also one existing tenant in the building that's looking to expand.

The only thing I'd add on to Angela's comments, Michael, are that just some color on life science in the Bay Area and South San Francisco. Right now we're tracking two and a half million square feet of demand. That's up 25% from Q4. So that's a good bump and Q4 was pretty flat throughout the year in terms of demand. being roughly around 1.8 to 1.9 million square feet. Bay Area VC funding in the first quarter was about $2.5 billion. That's a 30% increase over Q4. And when that funding starts increasing, there's usually a six- to nine-month lag between the funding and then tenant requirements popping up. And then the last point I'd make is that three Bay Area companies had successful IPOs. in Q1. So we think the fundamentals in the market are improving. And as Angela said in her remarks, our project is unlike any other in the South San Francisco market. We've got the bay, we've got the bike trails, we have the amenities that are really showing well now because tenants and prospects can walk through pretty much every built space in the project, and we're starting our landscaping now. So it's really, really turning the corner. And I agree with Angela and Austin. You see a lot of big numbers about Austin and sublease space, but you have to look at Indeed Tower. It's the best building in the CBD, and we have a finite amount of space left. And the professional services firms in Austin as well as firms outside of Austin are looking and giving us the traffic we need to convert to leases.

Thank you. The next question is from Steve Setwell with Epicor ISI. Your line is open.

Great. Thanks. I know you're not budgeting for acquisitions or dispositions, Angela, and you're talking about being sort of opportunistic. I'm just wondering, A, what are you seeing out there and kind of where are the hurdle rates for you in order to kind of pull the trigger on an acquisition today, given kind of where the stock trades?

Yeah. Yeah. Thanks, Dave. Those are good and important questions. I mean, the fact is, we're just not seeing much at this point that's really come to market that's of the quality that we're really looking for. So it's been a bit of an academic exercise to date. As I mentioned in my prepared remarks, we do think there's more market testing going on and that ultimately will lead to more transaction activity over the next six to 12 months. And so the team is certainly ready and you know, capable of underwriting a lot more transactions than we've seen over the last 12 months and trying to find interesting opportunities that we think we can really bring something special to the table and drive better outcomes than the market at large. You know, in terms of underwriting, which sort of, you know, gets to your question about hurdle rates and the cost of capital, I mean, one of the challenging things right now, particularly if you're looking at, you know, assets that we might view as high quality from a physicality perspective or a sub-market perspective but have vacancy or need to be repositioned or something like that, It's a question of really making sure we understand how much capital needs to be deployed into those transactions to reposition those assets. And as importantly, the expected timeline in order to stabilize. And those are big variables, I think, as you think about expected IRRs in the current environment. You know, again, sort of it's a little preliminary to talk about exactly what a hurdle rate is, you know, based on the fact that we just haven't seen much in terms of transaction activity to begin with. But we're very cognizant of where our cost of capital is and certainly think that, you know, on an IRR basis, on an unlevered IRR basis, we'd have to be kind of in the low double-digit range to get really excited about a transaction based on realistic underwriting.

Okay. And second question, which again, may be a little further out on your maybe to do list, but you guys obviously have a lot of land, uh, that, you know, was purchased over the last several years for projects that you may or may not get over the finish line. I guess, how much time have you spent sort of evaluating those and, and, you know, thinking about kind of the value they're sitting on your books for today and, you know, whether, you know, you need to think about taking any kind of impairment on those or just how do you think about that? Uh, and maybe shifting kind of where they're, you know, whether it's office or mixed use or, you know, even converted into residential?

Yeah, we are spending a fair amount of time on that, right? We have a significant amount of capital, you know, tied up in that future development pipeline. And, you know, thinking about and really evaluating, you know, where we are today from a market perspective relative to where we were when some of those parcels were acquired and stepping back and really thinking through what's the highest and best use for every parcel in the future land bank right now, and how do we maximize that value? So we are spending a lot of time on it. We're thinking about it. The team, I think, has such depth of experience in terms of exploring different alternatives and being creative to look at different outcomes in order to drive value. So our focus is really on just maximizing value on every single parcel in there. And, you know, it is top of mind for us just given the capital commitment we have there today. But nothing to report at this point.

Thank you. The next question is from John P. Kim with BMO. Your line is open.

Thank you. Angela, you talked about green shoots mostly on the tech and biotech side. I was wondering if you had seen anything similar in L.A., if there's anything driver on demand on the horizon. New documents in the mid-70s in your portfolio, which is not unique, but I was wondering if there's anything that could turn it around.

Yeah, I mean, I would say, interestingly, our first quarter activity and even into the fourth quarter, our April activity, we had lots of activity in the LA portfolio in a range of different sizes of uses. So we are seeing some some momentum there, but to your point, we have a fair amount of vacancy that needs to be addressed, so we need to see that momentum pick up. But I'll let Rob talk a little more specifically about it.

Hi, John. So just to give you some color, year-to-date, we've done 20 deals that total just about 285,000 square feet in our LA portfolio. Just another piece of color, year-to-date had 40 tours that total over 320,000 square feet. So the way to fill the vacancy is by getting people through the buildings and start negotiating and talking. I think if you kind of segment the markets further, Hollywood's been quite active after a long period of being fairly dormant, and Long Beach has been very active as well. So again, LA is a very broad, big market, and we have to really segment the sub-markets to really understand what's going on with demand and vacancy.

Can I just ask, on your leases executed during the quarter of 283,000 square feet, how much of that leasing was done for addressing 24 expirations or existing vacant space? And if that's already reflected in your occupancy and expiration stats. And also, if there's an update on your leasing pipeline. OK.

So I'll start with the first half, but in our press release, we really tried to break this out to be more explicit. So you can see we said 161,000 square feet of leasing on previously vacant space, 79,000 square feet of new leasing on currently occupied space, and 160,000 square feet of renewal leasing.

And on the leasing pipeline, John, you're talking about L.A.? ? portfolio I'll just talk about the portfolio I mean across the board we're seeing an uptick in activity I mean Angela pointed to the fact that we're 98% leased in San Diego we've had tenants contacting us both in San Diego and Austin about expanding so you know our pipeline is actually better than it has been a long time with more, I think, definitive decision-making going on in the tenant conversations we're having.

Thank you. The next question is from Caitlin Burrows with Goldman Sachs. Your line is open.

Hi, good morning. Maybe the flip side of Steve's question earlier, you've mentioned before that you could consider monetizing. monetizing stabilized high quality assets, lower quality assets, and or land parcels. So I'm just wondering what type of asset do you think we could see you sell first? How big of an opportunity could it be? And is it something that you're already kind of working on behind the scenes?

I mean, there's nothing that's at a stage that I really think is appropriate to talk about at this point or report on. You know, you're right. So we laid out different buckets of potential sources of capital that we could harvest across the portfolio on the call last quarter. I think you laid out the buckets or reiterated the buckets pretty well. We're just always going to be looking to raise capital in places we think it's most attractively priced within the portfolio. So that may be in the future land bank. It may be in assets where we have a different point of view about the future trajectory of that asset. And it might be in higher quality assets where we just don't feel like there's a lot of additional value creation potential at those assets as well. So how those all price on an implied IRR basis could all be well below our current cost of capital as implied by our stock and implied by where we can raise debt today. So the goal really, again, is just risk adjusted returns and trying to find places to raise capital as attractively as possible.

Okay. And then I guess more broadly, there is a lack of debt availability for office, as I think you even mentioned earlier. And so you have peers on the East Coast that are taking advantage of this to deploy capital alongside partners through debt funds. So have you considered MES or preferred equity investments in attractive buildings that you would be willing to own if it came to it?

This is Elliot. We've certainly thought about that. We like to think that we're going to be creative and look at where the opportunities are. And as you said, there is a lack of financing for that type of product. I think the challenge for us is there has to be a clear path to ownership. Our core competency is buying, operating, building office and life science buildings. And if we can't see that, then it isn't something we would seriously consider.

Thank you. The next question is from with Green Street . Your line is open.

Good morning. Thanks for taking the question. I guess, you know, we noticed that a few of the land parcels added disclosure to suggest that residential development might be best or highest and best use of some of these land parcels. I guess as you sort of think about the portfolio composition today, You know, I think it's 65% office, 25% life science, 10% mixed use. And as you look across at your acquisition and disposition opportunities, I mean, is it the expectation that, you know, any and all assets are up for sale and that you're willing to sort of underwrite across those three asset classes or how should we sort of be thinking about that?

Yeah, well, I'll say a few things. One, as it relates to the development disclosure, and as you noted, you know, there are additional disclosure around potential residential multifamily units at East Village in San Diego and 6-0 in Seattle. That was more of just a clarification from a disclosure perspective than anything else. That's been, you know, a component of potential expectations for those properties for quite a while. And, you know, we were TBD, I think, on At least East Village, we thought the additional disclosure was helpful for people understanding the potential value in those parcels. The company, I think, does have a really strong track record in developing and managing and maximizing value across office, across life science, and across mixed-use projects like One Paseo. I think we have the expertise and the capabilities to play in any of those asset classes. As it relates to ground-up development and some of the parcels, in the future land bank. I think it's reasonable to assume at this point that to the extent that the primary or in some cases, the only use for that parcel is outside of our core competencies that a path of execution or likely path of execution would be a sale of the parcel or joint venture or something like that. But we're gonna look at each and every opportunity as it comes up on a standalone basis. And again, really focusing in on risk adjusted returns

where our capital is best deployed and where the capabilities of this platform are best deployed thanks thanks dylan thank you the next question is from i'll pull rana with keycar your line is open good morning thank you for taking my question um angela you know

So last year, you know, we saw about 25% of office leasing in San Francisco to be AI related. I'm curious how is this tracking for this year and, you know, how do you think that kind of trends going forward?

Yeah, I mean, I'll let Rob talk a little more specifically about it, but we do think, and I mentioned in my prepared remarks, we do think this is a real driver of leasing activity, you know, in San Francisco. I also mentioned that the first lease we signed at West 8th in Seattle was an AI company, so we are seeing AI migrate. to Seattle as well, again, I think really driven by where, you know, top technology talent resides. And so we think that's going to be a driver in that market as well. But Rob, do you want to?

Sure. Yeah, just a little more color on San Francisco. As you recall, in Q4, there were three very large transactions that happened that, you know, pushed the leasing up over 750,000 feet. They were Anthropic, OpenAI, and Hive in our 101st buildings. I can't talk in detail, but one of those companies is looking at expanding significantly beyond what they've already taken, so that's being watched very carefully. In Q1, already we have almost 500,000 feet of leases that have either been signed or pending, meaning the lease is out for signature, and two of those are AI-backed companies. We see, you know, we're very encouraged by what we see going from Q4 to Q1. It seems the trend and momentum is building. And we're also seeing, as I said earlier or implied earlier, a lot of new company formation in the smaller end of the business. If you, you know, in years past or a quarter's past, we've always talked about sort of the demand in San Francisco is 35% professional services, law firms, et cetera, and 35% tech. That's switched now to about 54% tech today. And the balance is life science, professional services, and government services. So there's been a significant move up in tech demand. So all of that bodes well for not only AI, but it bodes well for the technology and market in San Francisco.

Great. That was helpful. And then, you know, one last one for Elliot. You know, there was a decent amount of increase in tenant reimbursements this quarter. You know, how much of that was seasonality or time-related versus a true increase? And how do you see that trending going forward?

Yeah, I think if you're comparing it to the prior period, I think you have to recall that last period we had material amounts of real estate tax refunds, and that impacted the numbers. So, Nothing all that unusual in the first quarter. It's really more the fourth quarter.

Thank you. The next question is from Victor with Scotiabank. Your line is open.

Hi. Good morning, everyone. In terms of KOP, the development phase two, Can you just remind us how much square footage is going to be delivered on the spec suite basis and remind us the timing for that later this year? And I just want to be clear as well, is if you're delivering that spec space and you've got a lease done end of year, would that be something that could commence right away under that situation, or is there still some sort of delayed revenue that would happen?

Thank you, Rob. Hi. So we have two floors that we're doing, so it totals roughly just a little over 80,000 square feet. They will deliver in October of this year. We've already had, as we talked about earlier between Angela and myself, tour activity and people looking at them. And yes, that could be immediate occupancy upon completion.

And that's where a lot of the demand has been. I mentioned activity has been really light in the whole sub-market in Q1 or year-to-date, but even in Q4, you know, most of the activity we saw was people looking for sort of to fill immediate needs. So we do think that once those spec suites deliver, you could see occupancy. To the extent we have the lease signs, you'd see a commencement pretty quickly.

Okay, thanks for that. And then just to follow up is on, sorry if I missed this, but in terms of the Hollywood portfolio, what drove the lease rate down in the quarter?

We had a couple of move outs at Sunset Media Center. Nothing particularly chunky, just a few 20,000 square foot move outs.

Thank you. The next question is from Pete with Jeffrey. Your line is open.

Thank you. Yes. I just want to go back to some of Rob's comments before about the life science market. So you mentioned a six to nine month lag between funding and leasing decisions. From what you're seeing in the market right now, I think historically that seems to be the rule of thumb. Has it changed at all or kind of been extended by, you know, some of the funding issues or just some macro uncertainty or is that generally still kind of what you look at as the timeline of a demand recovery?

Yeah, it's a good question. First of all, it depends on the immediacy of the tenant. If they have something that they're feeling very positive about in the FDA, for example, then that could drive immediacy on the tenant's part. But as a rule of thumb, it's typically six to nine months. That's the same with office. I would just caveat that by saying there's still this... lot of scrutiny by boards and by you know as a lease potentially floats up through senior management there's a lot of examination and re-examination that goes on so it's it's potentially you know could delay that a little bit but we are seeing tenants acting with conviction so overall it's feeling like there's more certainty out there in terms of closure okay that's helpful

And another one on the life science market. I know you don't have any huge vacancies. It's much smaller spaces that you're dealing with, but you gave some helpful figures on South San Francisco in terms of demand that you're tracking. Just curious if you could give kind of the same in terms of the pipeline and the general outlook in San Diego.

Yeah, the San Diego market is, you know, there has been some, again, I think it's three or four fundings of companies in the UTC and Torrey Pines submarkets that are encouraging. You know, honestly, in San Diego, the large format users haven't come back yet, but we are seeing, you know, an increase in tour activity. We don't have any vacancy, but just, you know, we do track tenants and we're always trying to talk to them about other opportunities we have outside of Torrey Pines. So I think Torrey Pines and UTC are in a, you know, recovery mode as well, but just large format users, which are typically down there, haven't surfaced in a meaningful way.

Thank you. We currently have no further questions, so I will hand back to Bill to conclude.

Thank you, Angie, and thank you, everyone, for joining us today. We appreciate your continued interest in KRC.

Thank you, everyone. This concludes today's call. Thank you for joining.