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spk06: Good afternoon, and thank you for attending today's KRC 2Q24 earnings conference call. My name is Sam, and I will be your moderator for today's call. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. If you'd like to ask a question, you may do so by pressing star 1 on your telephone keypad. I'll now turn you over to Taylor Friend, Senior Vice President, Capital Markets and Treasurer. Taylor, the floor is yours.
spk14: Good morning, everyone. Thank you for joining us. On the call with me today are Angela Ahman, CEO, and Elliot Trencher, EVP, CIO, and CFO. In addition, Justin Smart, President, and Rob Perotte, EVP, Chief Leasing Officer, will be available for Q&A. At the outset, I need to say that some of the information we'll be discussing during this call is forward-looking in nature. Please refer to our supplemental package for a statement regarding the forward-looking information on this call and in the supplemental. This call is being webcast live on our website and will be available for replay for the next eight days. Our earnings release and supplemental package have been filed on a Form 8K with the SEC, and both are also 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 you with updated 2024 guidance. Then we will be happy to take your questions. Angela?
spk10: Thanks, Taylor. It's great to have you on the call this quarter. I'm pleased to report another strong quarter of results that reflects the hard work and dedication of the entire Tilroy team and underscores the recovery that continues to take hold across our portfolio. While this recovery will at times be uneven, we are seeing encouraging signs in all of our markets that reinforce our conviction that the trend line is moving in the right direction. From a market perspective, we are seeing particular strength right now in San Diego and Bellevue, Washington, both of which continue to benefit from broad-based demand across a wide range of industry categories supported by higher physical occupancy rates. In San Francisco, total tenant demand in the market has doubled over the course of the last 18 months, and leasing volumes are slowly but consistently improving. supported by growing demand from many new-to-market tenants, including those in the AI sector. And while the South Lake Union submarket in Seattle and our submarkets in Los Angeles have been slower to recover, we are making headway. In particular, in Seattle, the previously noted strength of demand in Bellevue, combined with a limited amount of Class A vacancy in that submarket, is starting to have important spillover benefits for South Lake Union, an encouraging dynamic as we near the completion of our major repositioning project at West AIDS. A major benefit to Kilroy during this recovery has been and will continue to be the indisputable slight to quality that we are seeing play out in our sector and specifically in our markets, which has been a driving factor behind virtually every conversation we are having with existing and prospective tenants alike. These tenants are singularly focused on the quality and amenitization of their space and the capabilities and financial wherewithal of their landlord. And we have no doubt that the focus on quality and sponsorship will only become more attenuated in an environment of virtually no new supply. Over the last 60 days, we've been particularly encouraged by a number of discussions with potential new tenants with space requirements over 100,000 square feet. In addition, recent high-profile return to work announcements by major employers and a newfound focus on the enforcement of new and existing mandates underscores the recognition that in-person connection is critical to the long-term success of both employees and organizations. During the second quarter, we signed approximately 235,000 square feet of leases with a weighted average lease term of about five and a half years and cash leasing spreads of approximately minus 4.5%. Excluding one retail lease in San Francisco, our leasing spreads were roughly flat. Leasing activity accelerated as we moved through the quarter, a trend which continued into July where we signed an additional 184,000 square feet of leases, including a 118,000 square foot multi-year early renewal with SAP at Key Center in Bellevue. Shifting to Kilroy Oyster Point, tenant discussions on phase two remain active. During the last earnings call, we referenced a pickup and touring activity, which has continued. And as we approach project completion, prospects are now able to fully appreciate the tangible merits of our campus, which include expansive water views, conferencing facilities with indoor and outdoor meeting spaces, multiple upscale food service offerings, a well-appointed fitness center with outdoor fitness patio, on-site Bayfrontage trails reserved for walking and biking, and importantly, the optionality inherent in Kilroy's ability to accommodate future growth on the site. Our spec suites, which we'll deliver in the fourth quarter of this year, are generating interest from multiple early-stage life science companies, while later-stage life science companies in addition to more traditional office tenants, are expressing interest in the balance of the project. While the continued acceleration in tenant interest is an affirmation of the quality and relevancy of what we have built, the job is not done until the project is leased. This is a top priority across the organization, and we are laser focused on execution. From a capital allocation standpoint, we have seen an improvement in both the quantity and quality of office and life science offerings that have recently come to market. We're spending more time evaluating transactions and we'll be ready to execute when we see values that are appropriate relative to the risk environment and our cost of capital. As always, we intend to be disciplined and ensure that any acquisitions we pursue will be value enhancing for shareholders. As it relates to dispositions, last quarter we mentioned that we were in the process of evaluating the highest and best use of various sites in our future development pipeline. we have concluded that several of the sites have an optimal use that is no longer office or life science. And feedback we have received from multiple market participants has further validated this view. We're actively working on transactions for a few of these parcels and contemplating a variety of potential structures to maximize value. While the ultimate realization of proceeds may take time, as parcels are re-entitled for alternative uses, we believe that these transactions will represent a significant well-priced source of dry powder for the company to participate in an increasingly active acquisitions market, while also continuing to prioritize the balance sheet and maintain the company's substantial liquidity profile. Before turning the call over to Elliot, I'd also like to discuss some of the organizational changes we announced last night. One of my key objectives since joining the company has been to ensure that we have appropriate resource levels across each functional area. reflecting both the opportunities and challenges of the environment in which we are operating. As mentioned on previous calls, I have been blown away by the talent and professionalism of this organization, and in particular by the engagement and willingness of the executive and senior leadership teams to embrace change in order to optimally position the platform for success going forward. First and foremost, I'd like to thank Elliot for his partnership over the last six months and his combined CIO and CFO role. Elliot has been truly invaluable to me as I've gotten up to speed at the company, and I'm very much looking forward to continuing to partner with him on all of our capital allocation objectives going forward as he focuses on his chief investment officer responsibilities. In addition to leading our efforts in the transactions market, the investments team under Elliot's leadership will also oversee long-term asset level strategic planning, working even more closely with our leasing and property management teams going forward. As a result of the refinement of Elliot's role, we will be bringing a new CFO on board. I've had the pleasure of working with Jeffrey Keeling in a number of different settings already, and I know that his deep skill set in finance, accounting, asset management, and technology change and innovation will serve the company extraordinarily well going forward. I'm also thrilled to announce the promotion of Lauren Statler to EVP General Counsel. Lauren has been with Kilroy for over 10 years, most recently serving as SVP Corporate Counsel. She brings significant legal and institutional knowledge to her new role, as well as impeccable insight and judgment. I'm excited to welcome both Jeffrey and Lauren to the executive team. On the leasing team, we also announced that Michael Schmidt will be joining Kilroy as SVP leasing for the Northern California region. And we're looking forward to welcoming Michael, who will be joining an outstanding team of leasing professionals that are ready to capitalize on the continued recovery in our space.
spk09: Elliot? Thanks, Angela. I appreciate the kind words. It's been a rewarding experience being the CFO the last two and a half years, and I look forward to focusing on the CIO role going forward. With that said, let's get into the quarterly results. The second quarter represented another solid performance, with FFO of $1.10, or one penny below the first quarter. The decrease was predominantly due to lower interest income from lower cash balances and higher G&A due to the timing of spend. On a same-store basis, second quarter cash NOI was roughly flat. a substantial improvement from last quarter as we no longer had meaningful non-recurring items in the comparative period. At the end of the quarter, our stabilized portfolio was 83.7% occupied and 85.4% leased. The decrease from the prior quarter was due to some move outs, mainly in Los Angeles, partially offset by some move-ins in San Diego. The spread between our leased and percent occupied is now 170 basis points, the largest it has been since the second quarter of 2023. Turning to the balance sheet, net debt to trailing 12-month EBITDA was in the mid-six times, and our liquidity remained robust. As of quarter end, we had over $1.9 billion of available liquidity comprised of $835 million of cash and $1.1 billion available on our line of credit. Now let's discuss our updated 2024 guidance. No acquisitions or dispositions are forecast. Remaining development spend is anticipated to be $100 to $150 million, which when combined with year-to-date spend represents no change to our original full-year midpoint of $250 million. Our uses of capital for the balance of the year include the $125 million of development spend and a $400 million bond maturity in December. We intend to fund both with cash on hand. No change to our G&A guidance of $72 to $80 million. Straight-line rent is projected to range between negative $7 and $8 million. Average occupancy is projected to be 82.75 to 83.75 with no change to the 83.25% midpoint. As a reminder, we continue to anticipate three large move outs totaling 350,000 square feet in the back half of the year. Salesforce in Seattle will leave in the third quarter and Capital One and Microsoft in the Bay Area are expected to move out in the fourth quarter. Cash same-store NOI is projected to be between negative 3 and negative 4 percent, a 100 basis point increase at the midpoint due to higher net reimbursements, better parking revenue, and some non-recurring fee income. In summary, our updated 2024 guidance is projected to range between $4.21 and $4.31, with a midpoint of $4.26. or a roughly $0.04 increase at the midpoint, predominantly due to better operating performance from higher net reimbursements and better parking revenue. On a quarterly basis, guidance implies FFO for the balance of the year will be about $1.03, or $0.07 below the second quarter. The bridge to get there can be broken down as follows. Subtract 2.5 pennies for lower occupancy, which factors in our move-outs and move-ins, Subtract three pennies for lower interest income as our projected cash balance and reinvestment rate decline over the course of the year. Subtract a penny and a half due to the timing of G&A spend. To conclude, we are pleased with the results from the quarter and that we are able to increase FFO and same-store NOI guidance for the second time this year. We continue to be vigilant about the balance sheet and are anticipating opportunities to put it to good use when appropriate. With that, we're happy to take your questions. Sam?
spk06: Great. Thank you. If you'd like to ask a question, you may do so by pressing star 1 on your telephone keypad. As a reminder, if you're using a speakerphone, please remember to pick up your handset before asking your question. In the interest of time, all questioners will be permitted one question and one follow-up. Our first question is from the line of Nick Uliko with Scotiabank. Nick, your line is now open.
spk17: Yeah, thanks. I guess in terms of the new hirings that were made, maybe you could just talk a little bit more about the reason, I guess, for the CFO hiring and the split of the CAIO, CFO role, and then as well on the G&A side. I know the guidance didn't change, but can you talk a little bit more about how that could affect the run rate G&A, maybe it's a 2025 issue?
spk10: Yeah, sure, Nick. I'm happy to take both of those questions. The decision in particular on the CIO and CFO split was really just a recognition that, particularly in this environment, those are two independently full-time jobs. Ellie has been doing a beautiful job over the last couple of years of wearing both of those hats, but as we look into the environment going forward, I would say we're excited. As you heard from both Ellie and I in our prepared remarks, about transaction activity picking up or evaluating more things as we go forward. And I think his time and attention on the investment side will really be the company's benefit over the longer term. I would say, as you think about all of the organizational changes we announced last night, I just make a couple comments. As I mentioned earlier, I think one of the most important things in an environment that's as challenging and dynamic as the one we're operating in is that we've got the right level of resources across every part of the business. So you saw some changes as it relates to sort of the executive leadership team, the leasing team, just making sure that across all the parts of the business we have the right resources to meet the environment. That said, we are going to be, have been, and will continue to be extraordinarily disciplined with every dollar of G&A spent. And that reflects not just the total amount of GNA that we incur going forward, but also making sure that every dollar of that GNA is responsibly allocated across the platform. So while certainly, you know, sort of what you saw in the announcement last night are some ads that do represent areas of the business where I saw a need to invest in, we've been able to more than offset that by additional savings and efficiencies in other areas of the business to fund those investments. from a run rate perspective. Obviously, you know, we've left the GNA guidance range a little wide this year, given timing and other things that could impact 2024. But as you think about it on a stabilized basis, you know, you should expect that we see as a result of all the organizational initiatives, you know, modest net savings going forward.
spk17: Okay, yeah, thanks. Thanks, Angela. And then second question is just on, you know, Oyster Point phase two. If you could just talk a little bit more about The types of tenant demand you are seeing, are these expanding tenants in the market? Are you trying to move tenants from other buildings in the market? And I just wanted to be clear on, as we think about that project and the cost that's listed in the supplemental, if full TI build-out is at this point still reflected in that cost, and then on the free rent side, how we should think about that because I don't know if there's an issue where you're trying to grab tenants that have expirations a couple years out and to be competitive and you may have to offer more free rent. How should we think about that decision making?
spk10: Yeah, I'm going to let Rob tackle some of the specifics around the demand we're seeing and deal economics and things like that, but I would just make the The point up front that, again, echoing my prepared remarks, we've seen pretty broad-based demand in different size categories and companies in the life science space that are at different stages. And our ability to accommodate sort of each and every one of the RFPs or level of interest we've seen in the market reflects the very strategic decisions the company made over the last couple of years to go multi-tenant, inspect some suites in one of the buildings, while holding the other two buildings available for some of the larger format tenants that would really want to customize their own space. So I think that the project is exceptionally well positioned to meet all of the areas of demand we're seeing in the market. And I referenced in my prepared remarks as well that it's not just life science companies, but we have had inbound interest from some more traditional office users as well as we have in phase one of the project also. So we're really encouraged by where things sit, but I just want to emphasize that you know, our ability to meet that demand is a result of how this project's been positioned from a development standpoint over the last couple of years. Rob?
spk16: Sure. Hi, Nick. Let me just give you a little bit of a backdrop. As Angela said, you know, I actually think this couldn't be a better time to be delivering in the environment we're entering into where VC funding is improving, demand is improving measurably. So at the beginning of the year, we had 2 million square feet. We're now up to 2.8 million square feet of life science demand. and that's translating into activity we're having at Oyster Point. And our activity has moved sort of the natural progression from touring activity into more detailed paperwork, I guess I would say. I'm not going to go into a lot of detail and give color, but we're very pleased with that activity that coincides with the delivery not only of the spec lab space in October that Angela mentioned, but also the landscaping and the amenities and all the things that really distinguish our project from other projects in Oyster Point. And the demand we're seeing, I would say, I won't go more into it than Angela did, a little bit of it is exploration-driven, but interestingly, the bulk of it is funding-driven, meaning they've raised money or they have products nearing production and commercialization. So things are really shaping up nicely, as I said.
spk06: Next question is from the line of Michael Griffin with Citigroup. Michael.
spk02: Great, thanks. I just wanted to turn to leasing for a first question. Angela, I think you referenced in your prepared remarks you're starting to see tenants greater than 100,000 square feet enter the market. Can you give us a sense? Are these tech firms looking to commit to more space? Is it just, you know, them testing the market to try to find a good deal? Or is there maybe some increased confidence that these bigger leases are coming down the pike?
spk10: Yeah, I think it's a combination, right? And you're seeing sort of broad-based demand. So some of it, yes, is markets like San Francisco, you're seeing some relatively new-to-market tenants with big expansion plans that are looking at bigger square footage requirements based on how their businesses have evolved over the last year or so, which is really encouraging. In other markets outside of San Francisco, it's been much broader-based. And, you know, for more traditional kind of office tenants, not just in the tech space, but really across the board. So I think every case is a little bit different. I know one of the tenants I'm sort of alluding to in those comments, you know, it's really about a recognition that they need to get more people back in the office, which is great to see and encouraging to see that as a trend throughout the portfolio as well.
spk16: I could add a little more.
spk02: Great.
spk16: That's helpful. I hope you're well. Oh, sure, Rob. Okay. No, go ahead if you're satisfied with that.
spk02: No, no, no, you can go ahead. I'd be curious to get your insights as well.
spk16: Sure. What I would say, if you look at both the Pacific Northwest and San Francisco, you're seeing a real uptick in the demand from AI companies. So in San Francisco, year-to-date, about 15% of all transactions that have happened in the market are by AI, and that's about 400,000 feet. There's about 600,000 feet more of deals that are expected to sign that are in active kind of last-stage discussions. So AI is really ramping up. And when you look at Seattle, it is having a spillover effect in that we are talking to some AI companies as our other owners. And largely that's because of the great workforce that's up in the markets that we operate in, and Seattle being probably the second most developed attractive market from an AI technology perspective. And as Angela said, some of the other users, it really is driven by the need for space and bringing people back from home to the office. And so in general, leasing activity is accelerating, and it's looking good across our platform. We have a couple of markets that are a little slower, but generally the pace is picking up.
spk02: Yeah, I mean, just following up kind of on that AI demand, Rob, I mean, I feel like we've been hearing about that for a while, but just given the elevated vacancies, particularly in San Francisco, I mean, how much do you think that demand from this subgroup is going to be able to move the needle?
spk16: You know, it's a good question, and the numbers belie what goes on behind the scenes, but if you look at it right now, we're still tracking at 6.9 million square feet of demand in San Francisco, which is getting close to pre-pandemic levels of demand that were typically around 8 million square feet. And I can just give you color that we see and what we respond to. But right now, there are 16 tenants in the market that are over 100,000 feet in San Francisco. And if you look, again, I always use the pie chart. If you look at the pie chart for demand that I just described, over 50% of that is technology related. And then there's a percentage of that that is AI. So I guess I would say big picture that sublease space, although you hear about Twitter and they're putting space on the market, but sublease space that's quality space is slowly becoming less. So we're down to about 8.5 million square feet of sublease space now. But as we've said on numerous calls, this is going to take time to chip away at that. But we're pleased by the demand that we're seeing. And I guess the last thing I'd say about Twitter is they still intend to keep 300 people in San Francisco, so they're only going to sublease a portion of what they lease.
spk10: Yeah, I mean, I think as you're hearing from Rob, there's no question that AI demand is really making an impact in San Francisco, and we're seeing it in the broader market statistics, but also very much seeing it on vacancies we have across the portfolio or will have in the second half of the year. In addition, we're seeing some of that spillover demand, as Rob mentioned, from AI companies that are primarily based in San Francisco, you know, looking at other markets like Seattle and to some degree San Diego, just trying to get access to tech talent that's resonant in other markets as well. So it's primarily a dynamic we're seeing in San Francisco, but it's certainly not limited to San Francisco either.
spk06: Next question is from the line of Camille Bunnell with Bank of America Merrill Lynch. Camille?
spk11: Hello. Hello. Angela, you called out how LA is recovering more slowly, so I wanted to dig in a bit further into the demand you're seeing at a sub-market level. Can you talk to the size of the tenant and the areas you're seeing signs of recovery versus weakness?
spk10: Yeah, I mean, we're seeing, you know, decent traction kind of across the portfolio, but it has been the dynamic I referenced in my prepared remarks about the larger format tenants coming back, that dynamic isn't yet fully taking hold. in the LA market, really in any of the sub-markets. We do think that some of the strongest sub-markets in Los Angeles are sort of nearing relatively full occupancy and hope that we're going to see some spillover benefits, not unlike what I described between Bellevue and South Lake Union in the Pacific Northwest, but seeing some spillover benefits that will benefit our portfolio, particularly in West LA. you know, demand continues to be, you know, relatively broad-based, primarily kind of professional services and those kinds of uses, but we just haven't seen the return of some of that larger format demand like we've seen in other places. Rob?
spk16: Yeah, hi, Camille. You know, the challenge in West L.A. we're, you know, we're closest to is really Playa Vista, which is a different submarket, and that's a larger format market in general anyway, and so you've seen some space givebacks by, meta, et cetera. But interestingly, YouTube, which is a meta company, just extended for 10 years and a hundred thousand foot lease out there. So as Angela said, it's sort of there, you know, nothing is static, right? It's changing within the sub markets and the offerings we have in our portfolio are suited to smaller users. And the bulk of users right now in the market are around 20,000 feet. If you look at, you know, where our West side media center, project is, for example. And then Hollywood, where we have assets and vacancy, also has had an uptick actually in activity. It's just sort of the general comment I'd make is that activity is picking up, but the pace of transactions is still slower than we'd like.
spk11: Okay. And in some of your markets, we've been seeing leasing activity from the growing tech companies. being focused on sublease space. So I wanted to better understand how much space within Kilroy's portfolio is being sublet versus a year ago, and how much of your pipeline is back-selling true vacant space versus refilling already occupied space. Thanks.
spk09: Hey, Camille. It's Elliot. So as we sit here today, it's about 11% or 12% of Kilroy's portfolio is available for sublease. If we look back a year ago, maybe that was So, it's moved a little, but not all that meaningful. And then, you know, we've tried to start giving breakdowns in our press release of how our leasing breaks out between spaces vacant and spaces currently occupied. So, for the quarter, we had 122,000 square feet of the 235 that was new leasing on previously vacant space, 55 on new leasing that's occupied, and then 58 of renewal.
spk06: The next question is from the line of Blaine M. Heck with Wells Fargo. Blaine?
spk05: Great, thanks. Just to follow up on the personnel announcements first, can you talk about the process behind selecting Jeffrey for the CFO position? Did you run a broader process, or was this just, you know, a prior relationship that kind of stuck out as a good fit? And then, you know, after these changes, how should we be thinking about the current senior management team that's in place and the structure of the management team. Angela, I guess, have we reached what you see as an optimal team now? Are there any other contemplated or considered possible additions or changes we should think about going forward?
spk10: Yeah. Thanks, Lane. I appreciate it. I would say as it relates to the CFO search and process, I've spent a lot of time over the last six months really just getting my arms around this organization. and what I felt like it needed. And part of that identification was recognizing the need for full-time focus on the chief investment officer side, which freed me up to think specifically about what kinds of skills and what background I thought would be best suited for the CFO role here, in particular, given where we are from a business perspective, but where we are in terms of the platform perspective as well, and some changes I'd like to see over the next few years in terms of business process improvements continued investment in technology and data analytics and things like that. I have worked with Jeffrey at two different companies over time. I know his skill set very well. I think he's going to be a great fit, not just from, you know, exactly sort of the work that I see the CFO role doing over the next few years, but certainly from a cultural perspective, I think he's going to be a great fit with the rest of this executive team and, you know, with the accounting and finance functions that he'll work most closely with. So that was kind of the thought process there. Look, I tried to really underscore this in my prepared remarks. I've been really blown away by the talent and professionalism of this entire team. And as we've navigated a dynamic business environment, but also this CEO transition process, the willingness of everybody to really embrace change and help me get up to speed and all of that. So I'm very pleased with where we sit today from an executive leadership perspective and ready to continue to focus on the opportunities and challenges in front of us.
spk05: Okay, great. That's really helpful. Switching gears to capital allocation, can you guys just give an update on your thoughts on share repurchases, just given where the stock is trading and whether they might be an attractive kind of alternative use of funds as you guys remain on the sidelines with respect to acquisitions and development?
spk10: Yeah, I mean, I'd say a few things. You know, you might have seen, I think maybe it was not long after I joined, we refreshed both our buyback program and our ATM program to make sure that we have, you know, all tools available to us as we navigate what will continue to be a pretty dynamic capital markets environment. So we're certainly, you know, able and prepared to do that to the extent it makes sense. I don't think you should expect us to see us execute on a buyback program in a way that takes leverage higher. So it would only be with an identified source of proceeds. And we'd have to be looking around at all of the investment alternatives that are available to us at that point in time. As I mentioned, I do think through the rationalization of the future land pipeline that we will have some nice proceeds that we'll want to reinvest in the most economically attractive way. But as I tried to underscore my prepared remarks, it's going to take us some time to realize those proceeds in order to maximize value on each of those parcels. So, you know, I think at that point in time when we get there and we have proceeds in the draft, you know, Elliot and I will be working through that conversation about what are we seeing in the transaction market, where is the stock at that point in time, and what's the best alternative when we're in that position. Anything you want to add, Elliot?
spk09: No, I think that pretty well covers it. I mean, near term we kind of highlighted what our priorities are for our capital, which is to ensure that the development pipeline is fully funded. And then I think beyond that, it's making sure that the balance sheet is in the right shape so that when we are ready to do something, we have all of our options in front of us.
spk06: The next question is from the line of Steve Sacqua with Evercore ISI. Steve?
spk12: Hi, Steve. Hi. Good morning out there. Angela, just sticking on the kind of new hires, Michael Schmidt on the leasing side, to come in and compliment Rob, does he have background in life science leasing? Is it more office leasing? Just wanted to kind of get your feel on kind of the team and the depth of the life science leasing and how that could help in an improving leasing environment.
spk10: Yeah, I mean, as you can appreciate, the Bay Area overall is a very big market for us. We have somebody on the team there who's doing a great job at servicing that market as well. But Michael Schmidt coming in will take a key role in continuing to build out our practice overall in the San Francisco market and Bay Area. And I think it's going to be a really great addition to the team and somebody that Rob can get a lot of leverage from in that market. I do think, as we probably talked about before, you know, we're continuing to evaluate our needs across the broader lease platform. And all of my comments around making sure that we have the right resources in the right place is really underscoring that, that we have a lot of challenges and opportunities in front of us from a leasing side. And I want to make sure that we have all of the resources we need for that function to really be successful at continuing to capture outsized market share going forward. So, you know, stay tuned. There might be some additional You know, hires on the leasing side to just support our efforts, you know, across the portfolio. I think it's a very reasonable question to point out life science and to ask if you'll see some additions there. You know, I'd prefer to wait to announce anything, you know, when we have somebody teed up, but we're continuing to evaluate our needs in all parts of the business.
spk12: Okay, and then secondly, on kind of coming back to the L.A. market, I guess just given all the challenges that we're seeing across all the streaming platforms and kind of the cable companies and just the issues all going on in kind of the media sector, I'm just wondering how you're thinking about the L.A. footprint in total and whether you are kind of moving maybe some more of those assets and submarkets potentially into the disposition bucket.
spk10: Yeah, it's a good question. I mean, obviously, you know, particularly in the sectors you referenced, there are a lot of cross-currents right now. And, you know, it's certainly a place we're spending a lot of time and focus to really make sure we're on top of and understanding, you know, what's happening, particularly in our Hollywood portfolio. I just underscore how high quality our assets are in Hollywood and how well leased they are and how, you know, the credit profile, et cetera, of what we have. in that market, so we feel pretty good about it right now. Overall, I do think, you know, excuse me, L.A. in general is a very big market with lots of very distinct submarkets, and I think as we consider, you know, our footprint in L.A. longer term, it's very reasonable to ask if there is some, you know, submarket positioning that we'll continue to think through as we move forward. But the dynamics you mentioned are certainly ones that we're taking into account. We do feel good about the portfolio we have that's exposed to those kind of sectors today.
spk06: The next question is from the line of Upal Rana with Key Corp. Upal?
spk13: Great. Thanks for taking the question. Angela, of the land parcel rationalization that you mentioned on your prepared remarks, could you give us some color on what some of those parcels are and what's the best use case of some of them now if it's not office? And, you know, would you consider, you know, structuring a deal where you may participate in any of those land parcels?
spk10: Yeah, I think those are all good questions. I'm going to defer conversations about specific parcels until we're closer to execution and we can be more specific about exactly what the plans are there. But as I think you've heard me say, both of my prepared remarks and in Q&A here, I'm very excited about our future prospects at KOP, so we can kind of put that to the side. I think our ability to continue to build out KOP over time in a way that's driven by tenant demand and where we take appropriate levels of risk as we continue to phase out that project will make a ton of sense for the company. And I'm really excited about our ability to do it. It's only going to enhance the value of what we have in phase one and phase two as well. Other parcels across that future land bank, we've got a range of sizes in the future land bank, and there are clearly parcels in there that were bought at one point with the assumption that They would be office or life science projects where the markets just shifted or sub market dynamics have just shifted. And we now think highest and best use is likely something other than office and life science. I would say primarily those other uses are going to be residential or residential related. Though there is maybe one parcel in that future land bank where we're considering more of an alternative use than residential. You know, I just, again, underscore what I said in my prepared remarks, which is that I'm really very encouraged by the level of activity and engagement we've seen on those parcels. And I think it's going to represent a really attractive source of capital for the company to continue to participate in the acquisition market going forward or look at all of our other capital allocation alternatives.
spk13: All right, great. Thank you. That was helpful. And then, Elliot, could you give us an update on your known move outs and backfilling progress, you know, there's still a decent chunk in the back half and wanted to get a better sense on visibility of occupancy into year end.
spk09: Yeah, I'll start with the move outs and then, Rob, if you want to give any market commentary on them. But we touched on three in the prepared remarks that total about 350,000 square feet. That's about 60 plus percent of what we've got expiring over the balance of the year. And those three, we have Salesforce in Seattle, We have already had some activity there, and some of that space is actually already backfilled. That's going to happen in the third quarter. And then in the fourth quarter, Microsoft has some space in the Bay Area, about 75,000 square feet. And then Capital One has a little over 150,000 square feet also in San Francisco.
spk16: And Rob, if you want to... Yeah, I really don't have much more to add to what Elliot said other than we've been touring those known vacancies already. So more to come.
spk06: Next question is from the line of Kaitlyn Burrows with Goldman Sachs. Kaitlyn?
spk01: Hi there. Maybe a quick one on the you guys ended the quarter with over $800 million of cash. It sounds like the plan for that is to fund development and pay down the December bond maturity, but I guess at what point would you look to re-access the unsecured bond market, or do you expect this to be more of like a permanent debt pay down?
spk09: So, Caitlin, I think it's a good question, and from our perspective, the thought process is not just what's going on in the unsecured bond market, which has obviously gotten a little bit more attractive over the recent weeks and months, but what would the use of proceeds be as well? We're in the fortunate position where after our December 2024 maturity, we don't really have anything until October of 2025. We will have to address that. Our track record has been that we are proactively getting ahead of those maturities. We think that if we can see an opportunistic time to raise some capital, that's a logical use of that capital. But we're also going to keep our eyes open for other uses, as Angela touched on, be that acquisition opportunities or whatnot. As we're doing all of that, we need to be very mindful that the leverage is not ticking up, though. So if we're going to the bond market, the most likely use is to repay future debt.
spk01: Got it. Okay. And then maybe just back to the leasing side, seemed like the second quarter activity was relatively softer, but then July was strong. So it also sounds like the larger deal market is not necessarily as strong. So that would suggest they're more smaller deals. But I guess going forward, kind of how's the leasing pipeline and outlook for the remainder of 2024 looking and also that mix of small versus large users. Thanks.
spk16: Hi, Caitlin. As you kind of probably inferred from my comments, I mean, the pipeline is looking good. I mean, we've already, since the quarter, you know, the third quarter, we've signed 183,000 square feet of leases, and we have more in the pipeline in various stages of discussion. So it's feeling like, you know, Q3 and Q4 could finish strong, and that is consistent with what we're seeing in the markets that we operate in where, you know, demand continues to increase and expectations are that small and larger transactions are going to happen. And I wouldn't say that it's all small tenant activity. We have some larger tenants, as Angela alluded to earlier, that were tenants that we're talking to. So you're just not seeing the size and volume of large tenants that you saw in 2017 or 18. we're also coming out of something into an improving environment.
spk10: Yeah, I think that's exactly right. As I said in my prepared remarks, this is the first time we've really seen recently a sort of re-acceleration in demand from users that are looking for over 100,000 feet. So not some of the mega deals maybe, but certainly a strong improvement in the average deal size in the forward pipeline that we think is really encouraging. That's true both on the renewal side and and on the straight new leasing side as well. So, any comments in Q&A, you know, about a lack of returnable larger deals was sort of more sub-market, you know, or market-specific, particularly in Los Angeles, but across the entirety of the portfolio, we're definitely seeing things move in that direction.
spk06: The next question is from the line of Dylan Brzezinski with Green Street Advisors. Dylan?
spk07: Thanks for taking the question. And so I just wanted to go back to your comments on seeing assets or higher quality assets coming to market at a faster pace. I mean, are there certain markets where you're seeing a larger quantity of assets come to market? And then I guess as a follow up to that, is your sense that these sellers are having more realistic expectations versus where, you know, we heard of assets coming to market, say, last year, 18 months ago?
spk10: I think that's a really important question, Dylan. I think in terms of just where we're seeing the activity on the higher quality assets, I think it has been relatively distributed across markets. We've evaluated things in, I think, almost all of our markets that we would categorize as higher quality than what we've seen come out over the last couple of years. So that part of the equation at least is pretty broad-based. But based on what I said earlier, we're waiting to execute for an environment where we feel pricing does reflect the overall risk environment and our cost of capital. And we certainly haven't seen things get all the way there, which is why you just haven't seen executions from us yet. But we think that this environment where we are seeing more market testing from potential sellers and more market testing of assets that would at least be a fit for us from a quality and long-term growth standpoint is very encouraging. And we think more market testing will lead to the compression of that bid-ask spread as we move forward.
spk09: And Dylan, this is Elliot. I just add to that that when you think about some of these owners, you know, they've lacked liquidity for a few years. And so now that they're getting to a point that, you know, it's been a while, they may have other needs in terms of how they allocate their portfolios. It's logical that they're going to come out and sort of be a little bit more open-minded when testing the market. And so, you know, we think that this is a trend that can continue.
spk07: That's helpful commentary. And then one more follow-up, if I could. I guess, as you look at the portfolio concentration today, are there certain markets that you're more interested in growing over time?
spk10: You know, I think for most of our markets, it's a question of really understanding how sub-markets are sort of evolving and where we want to position ourselves from a sub-market perspective. We certainly want to continue to grow the Austin portfolio. As I think you're well aware, we We've got one very high quality asset in the Austin CBD and the development site near the domain, but certainly hope we can continue to expand that portfolio over time and in the right way. Outside of that, the only other comment I've made before and I'll make again here is that I think as we look at the portfolio, one of the other conversations we're having internally is just about relative market positioning as well. I think over time you will see our relative positioning to the Bay Area come down. There's probably a little bit of portfolio pruning there, but my broader hope is that, you know, really we're just growing the denominator in other markets like Austin and San Diego and the Pacific Northwest, et cetera, rather than, you know, significant sales out of the San Francisco market. We're very excited about what we're seeing in terms of the stabilization and recovery in San Francisco, and we certainly don't need to rush that relative exposure question given where we sit, you know, a market standpoint today, but I think long-term, you know, that's something you should expect to see us move in that direction methodically.
spk06: Next question is from the line of Pete Abramowitz with Jefferies. Pete?
spk15: Yes, thank you very much, and thanks for taking the questions. Could you just talk about DermTech? I know they filed for Chapter 11. back in June. Just curious how that's being treated, whether in terms of your FFO guide or how it's incorporating to your occupancy guide. And are they still in that space in San Diego?
spk09: Hey, Pete, it's Elliot. They are still in that space. They are still in occupancy. They have paid rent in July. As far as what's in the guidance, there's a range of outcomes, but you can assume that, as we typically do, we're pretty conservative with how we think about these things.
spk15: Okay, that's helpful. And then in terms of capital allocation, can you just talk about potentially other opportunities in other parts of the capital stack, whether it be mezzanine positions, things like that, and Is that something you've considered, something that seems attractive to you on a risk-adjusted basis, and if so, kind of what you're underwriting from a return standpoint?
spk09: Yeah, so we've touched on this in prior quarters. It's something that we haven't historically done, but we are open-minded about doing. I think from our perspective, we know that our expertise is buying, operating, leasing, you know, real estate. It's not lending on real estate. So, to the extent that we are going to go up higher in the capital stack, we want there to be a clear path to ownership and not just being in the lending business and kind of trying to replicate those as loans come due. That isn't our expertise. But we are going to try and be creative and open-minded and look for ways to create value.
spk06: Next question is from the line of Michael Carroll with RBC. Michael?
spk04: Yeah, thanks. I just wanted to follow up on the potential monetization of some of the land parcels. And I know that you said that there might be some alternative uses for the sites that you have. Can we assume that you're actively entitling these sites to fit those better uses? I think you said resi for most of them. Is that what's going on right now? And how long of a process does that typically take?
spk10: Yeah, in some of these cases, we are going through that process, you know, working with people who might be eventual, you know, buyers for those to make sure that the right things are getting entitled as well. So we're evaluating that and making sure things are moving, you know, in the right direction there. As I said, these things can take time and the amount of time it's going to take is going to be different by market and sub market. So it's not easy to generalize. I think, you know, a couple of the parcels could move a little bit more quickly than others. Even in the best case scenario, it will take a not insignificant amount of time to re-entitle for something beyond what they're currently entitled for.
spk04: Should we assume that you probably don't want to sell these parcels until you actually get them entitled because you just want to maximize your value to make sure that everything is suitable for the next developer?
spk10: Yeah, I mean, I think it's just a question of how do we maximize value on the parcels, right? And so I think Elliot and his team have run through a really thoughtful process of evaluating each of these scenarios, testing the market, and understanding, you know, if we sell them today, what's the value? If we hold them a little bit longer and entitle, what's the value then? And, you know, is there a wide enough gap between those two numbers to make continuing to carry the assets through re-entitlement attractive to us? And I think In effectively all scenarios, we do think that's the case, that the best outcome for shareholders is for us to hold them through re-entitlement. As long as we're confident that we can re-entitle them in the correct way to maximize value for the end buyer, that's the better outcome from just a valuation standpoint. But it really is just a question of understanding each individual situation and testing the market a little bit and understanding where values lie and making the right economic decision.
spk06: Next question is from John P. Kim with BMO. John?
spk08: Thank you. I wanted to ask about the $2.5 million lease termination fee this quarter. Was this factored into your guidance previously, or was it a new event? And also, any color on either the tenant or the market it's located in?
spk09: Yeah. Hey, John. So this was a tenant in Bellevue. It was not factored into our guidance previously. It has an impact on same store because it is a cash lease termination. It has a negligible impact on FFO. So when you think about how we talked about the drivers earlier, we made that distinction of one of the drivers of same store growth included some of the fee income, but that was not a driver in FFO growth. And as far as the market itself, we've touched on one of our stronger markets. And so it's one that we feel pretty good about the activity that we're seeing there.
spk08: Okay. And then just wanted to follow up on the SEP renewal and how much of a downsize that is. And also on the answer on known move outs. If you could give any known move outs that you expect in 2025.
spk16: Hey, John, it's Rob. So it is a downsize. It's probably over half the space. But we've got, you know, I don't want to get too much color to you, but it's, you know, we've got activity on the space. And Bellevue, as Elliot just alluded to, is one of the strongest markets in our portfolio.
spk10: And one of our strongest assets. So we feel good about releasing potential for that space.
spk09: And there is a sub-tenant. in place in a large portion of that space, which does help as you think about the risk profile there. As far as 2025, one of the things that we've pointed out in the past is we don't have any expirations above 100,000 square feet. So, as you think about the chunkiness to the rollover schedule or the retention, it's not something that should be as chunky in 2025. And so, of course, there'll be some tenants that say, some that go, but nothing is as meaningful as what we've seen in 2024.
spk06: Our last question today is from the line of Brendan Lynch with Barclays. Brendan?
spk03: Great. Thanks for taking my question. Angela, in the past I've heard you talk about being interested in highly amenitized A-plus assets with broken capital structures. I'm wondering if you're seeing any more of that type of opportunity or what your expectations would be for the future.
spk10: Yeah, you haven't seen that kind of distress really hit the market yet. I mean, when we were talking earlier about seeing some additional high-quality assets come to market, I wouldn't say that that there are any with really broken capital structures or any of those situations that are really being, you know, sort of forced into the market by the lender, as you might expect. I think in certain submarkets potentially or certain markets that we operate in where you have seen higher levels of overall new supply in the market, I think you might find, you know, us in this situation over the next couple of years where with construction loans coming due or something like that, there's some high-quality assets we could, you know, potentially look at from an acquisition standpoint that would be sort of facilitated by something going on in the capital structure. But most of what we're seeing to come to market right now is high quality assets with sort of good sponsorship, but people like Elliot alluded to earlier that just haven't had liquidity and are looking to sell the asset because maybe the ownership structure of the fund it was in or something like that, they were anticipating a liquidity event by now. And it makes sense to at least test the market and see where values lie.
spk03: Maybe just a related follow-up. You mentioned that you're looking to or interested in expanding in Austin in the future. That's a market that does have some supply coming online over the next couple years. Maybe just how should we think about the market and the opportunity to expand through that type of acquisition?
spk10: Yeah, I think that's a really good example of the dynamic I was just talking about. I would say as we look at what's happening in the Austin CBD, we've got Indeed Tower in that market, which is a very high quality asset where we're still in lease up, but feel really good about the demand prospects and how broad based that demand has been. So feel good about the market, the dynamics overall. It is a market that's being impacted by pretty significant levels of new supply right now, which isn't really impacting our ability to get indeed towerly stuff just based on the quality and how differentiated that asset is. But as we do think about continuing to expand in Austin over the next few years, I think that new supply dynamic certainly could be to our benefit in terms of our ability to acquire some high quality new assets where sort of the. The long-term financing picture for those assets as they stabilize is not what people might have originally anticipated. So it certainly might be an attractive way for us to continue to grow that portfolio, but certainly a little bit speculative today, and we'll continue to watch that market closely and evaluate opportunities as they come.
spk06: Thank you. That concludes our Q&A session, as well as the KRC 2Q24 earnings conference call. Thank you all for your participation on today's call, and you may now disconnect your lines.
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