Hello and welcome to the Q4 2021 Kilroy Realty Corporation Earnings Conference Call. My name is Alex (ph) and I'll be coordinating the call for today. [Operator Instructions]. I will now hand over to your host, Michelle Ngo, Chief Financial Officer. Over to you Michelle..

Good morning, everyone. Thank you for joining us. On the call with me today are John Kilroy, Tyler Rose, Robert Paratte, Eliott Trencher, and Bill Hutcheson, Senior Vice President of Investor Relations and Capital Markets. Our recent addition to the team, welcome Bill.

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 telecast live on our website and will be available for replay for the next eight days, both by phone and over the Internet. Our earnings release and supplemental package have been filed on a Form 8-K with the SEC and both are also available on our website.

John will start the call with highlights from 2021 and where we stand today, then move to operational and strategic activities going forward. I will discuss fourth quarter financial results and provide you with initial earnings guidance for 2022. Then we'll be happy to take your questions, John..

First, complete the lease or our remaining in-process development projects, as we prepare for new development starts when appropriate, including Santa Fe Summit. Secondly, continue to maximize the value in our operating portfolio, proactively managing lease explorations and boosting sustainability and wellness.

Third, look for unique external growth opportunities, as we monitor market dynamics and evaluate our capital allocation decisions. Fourth, maintain our conservative financial foundation with sufficient liquidity from various sources to allow us to grow.

And fifth, continue to work with government agencies and others to positively influence public policy. Once again we are entering a new year that it's sure to be filled with unique challenges and opportunities.

We are well positioned to capitalize on opportunities that arise and continue to build a strong, flexible organization capable of delivering long-term value for our shareholders. That completes my remarks. Now I will turn the call back over to Michelle..

Thank you, John. FFO was a $1.05 per share in the fourth quarter which included a negative $0.11 of early debt redemption costs and positive $0.06 of one-time items related to real estate tax adjustments, repayment of owed rents, and the lease termination fee at 12400 High Bluff drive in San Diego that we discussed last quarter.

Adjusted for this net $0.05, our fourth-quarter FFO per share of a $1.10 is $0.12 higher than last quarter, largely driven by the acquisition of West eight and revenue commencement at Kilroy Oyster Point Phase one. This adjusted FFO per share is a 12% increase year-over-year.

On a same-store basis, fourth-quarter cash NOI was up 9.8% and 6.1% adjusted for $5.5 million of one-time items related to repayment of owed rents and lease termination fees. The positive growth is driven by higher rents on commenced leases and the burn-off of free rent.

GAAP same-store NOI was up 10.5% or 3.5% adjusted for $6 million of one-time items in the fourth quarter and $3.5 million of COVID-19 related charges in 2020. At the end of the fourth quarter, our stabilized portfolio was 91.9% occupied and 93.9% leased.

Turning to the balance sheet, after the sale of Sabre Springs Corporate Center for $37 million, our liquidity today stands at approximately $1.4 billion, including $290 million of -- in cash and full availability of $1.1 billion under the revolver.

Our current in-process development and redevelopment program, along with the soon-to-commence Santa Fe Summit is funded through year-end with cash on hand and projected dispositions. Our net debt to Q4 annualized EBITDA was 5.8 times. Lastly, as John mentioned, our expirations of the next five years remain modest.

Specifically, in 2022, we have approximately 585,000 square feet, or 4% of lease explorations remaining. We had a 145,000 square foot tenant in San Diego vacate its space at the end of January. In the third quarter, we have a 65,000 square-foot exploration in Los Angeles.

It is too soon to tell, whether this tenant will renew for a portion or all of the space or vacate entirely. In 2023, the largest exploration is that, our recently acquired West 8th project in Seattle, where we underwrote both a renewal and of vacate scenario, more to come. Now, let's discuss our '22 guidance provided in yesterday's earnings release.

To begin, let me remind you that we approach our near-term performance forecasting with a high degree of caution. Given all of the uncertainties in today's economy, our current guidance reflects information and market intelligence as we know it today.

Any COVID-related impact or significant shifts in the economy, our markets ' tenant demand, construction costs and new supply, going forward, could have a meaningful impact on our results in ways not currently reflected in our analysis.

Productive revenue recognition dates are subject to several factors that we can't control including the timing of tenant occupancies. With those caveats, our assumptions for 2022 are as follows. As always, we don't forecast acquisitions. We assume $200 million to $500 million of disposition proceeds.

Cap interest is expected to be approximately $70 million to $80 million. G&A is expected to be approximately $82 million to 87 million. Same-store cash NOI growth is expected to be between 4.5% and 5.5%. We expect year-end occupancy of approximately 91% to 92% for the office portfolio, and north of 90% for the residential portfolio.

Our guidance assumes a steady increase in transient parking revenues starting in the summer. As we've said on prior calls, we expect to pick up about a million dollars of revenues a month when we get back to pre-COVID levels. We expect to commence revenue recognition for the following office and life science projects within the following time frames.

At 333 Dexter, we expect the remaining 51% of the 635,000 square foot project to come online by the third quarter. At 2100 Kettner, we're expecting leasing activity on half the project or approximately 100,000 square feet by year end.

Across our three life science redevelopment projects, we expect about 250 of the total 330,000 square feet to come online by early fourth quarter. We anticipate development spending of $550 million to $650 million on our in-process development and redevelopment projects, including the commencement of Santa Fe Summit.

Taking into account all these assumptions, we project 2022 FFO per share to range between $4.35 to $4.55 with a midpoint of $4.45. This midpoint would imply a year-over-year FFO increase of 13%, when you add back the debt redemption costs and one-time items in 4Q 2021. This increase is the second highest earnings growth across the past ten years.

To help walk you to this $4.45 midpoint, we start with our adjusted fourth quarter FFO per share run rate of a $1.10 or $4.40 on an annualized basis. We subtract $0.12 of NOI from the midpoint of our projected dispositions in 2022 and the sale of Sabre Springs Corporate Center in December of 2021.

We have $0.13 from development and redevelopment projects coming online. And lastly, we expect a net positive $0.04 from various items, including pickup from our stabilized portfolio and lower G&A. That completes my remarks. Now we'll be happy to take your questions, Operator..

Thank you. We will now proceed to the Q&A. [Operator Instructions] Our first question for today comes from Nick Yulico from Scotiabank. Nick, your line is now open..

Thanks. Hi everyone. Maybe question for John or Rob. Could you just talk a little bit about latest on tenants returning to your portfolio? Parts of the West Coast have been slower than some other cities because of tough decision-making or government mandates.

Maybe you could just talk about what you're hearing from tenants on that side and then also how it's affecting leasing activity in your markets..

[Indiscernible] you want to take that one?.

Sure. Hi Nick? How are you? Let me hit on three macro points related to your question because there are various moving parts to it.

I'd say for the first time since the pandemic started and the conversations we're having with executives and business leaders, large employers have really started to communicate formalized plans for people to return to the office and they've communicated that to their employees in writing as well as in town hall type meetings.

And if you look at some of the big tech examples, Amazon, Microsoft, Meta, they have various models of how people are going to come back. But they are basically -- despite Omicron, they're basically talking about components of the workforce coming back in mid-to-end February, March, and April.

And they're saying that with more conviction than they have at any time in the past, at least in the conversations we're having. And frankly, interestingly, I think some companies have given up predicting and it's probably a wise thing to do. And rather than predict, they just start talking to their teams about bringing them back.

I think secondly, in the conversations we're having, a lot of the executives were talking to have conducted internal surveys with their workforces and have determined that there is a clear difference between the attitude and productivity of employees that have come back versus those that have not.

So, they are working toward making their office space more attractive to bring those in and get them over that hump of not coming into the office.

Gensler just conducted a workplace survey of 575 companies and I think what's interesting in that is that 2/3 of the companies surveyed are saying they're going to have flexible work policies but only 9% of those 575 are going to give total control to the employee in terms of where they work and how long they are working from home.

And I think the third point I'd like to make to address your question is, we're embarking now on what I would call is, the great experiment between work from home and the office.

And what we're hearing from our clients, as well as prospects is, that the majority of employers that we're talking to are not talking about a reduction in footprint despite work from home, despite some functions that may be able to work from home, and definitely, they're predicting either a stable footprint or growing footprint.

They're focused on providing hospitality like amenities, as we've discussed before. And I think it really comes down to the core, actually John's philosophy on development, you are seeing a flight to quality and that flight to quality is happening not only in our portfolio, but nationally.

For example, 400,000 feet with creative artists in Century City consolidating into new development, Sephora and Yelp consolidating into our 350 mission sublease space that sales force had the market -- had on the market that's over 300,000 feet.

With that backdrop, I'd say, we are encouraged about what we're seeing in terms of activity and the conversations we're having. Omicron, no doubt, did slow down tour activity but things are picking up in Q1 already..

Okay. Thanks, Rob, that's helpful. The second question is just going to the guidance for occupancy. And if you just look at the range, it's -- in the midpoint, there's a slight drop in occupancy this year. We talked about that and the San Diego move out is one factor.

I guess, is there a way to just give us a feel for how you're thinking about the lease number in your portfolio meaning that should we assume that you have more confidence in the leased rate growing this year by some magnitude even if the actual in-place occupancy doesn't?.

Let me try to address that in two ways. One, let me just talk about the last quarter. And this is really interesting. Goes back to some of the comments I made earlier.

At the end of the last quarter, and this is really from Thanksgiving through the end of December, we signed three -- what I think are significant leases, we signed 80,000 feet with a media company in Southern California. We signed a 71,000 square foot lease with a major technology company.

We signed a 38,000 square foot lease with a life science company in the Bay Area.

and we signed our first two leases in Austin at above our underwriting. And that literally, Nick, is from November to December in the midst of Omicron. I'm encouraged that that momentum has continued.

I'm encouraged by the amount of activity that we have across our platform right now, including Austin, where it seems like every week we're getting RFPS and requests for information on the building.

But we have a fairly significant amount of leasing activity proposals, that sort of thing, that we're working on right now and have been working on in January. So I do think as momentum picks up, as some of the factors I addressed earlier take hold, we'll see that pick up throughout the year.

And then, of course, there's always the lag between a lease -- sorry the last thing I'd say is, you know, there's that lag between a lease being executed and then physical occupancy of the space..

Okay. Thank you..

Thanks, Nick..

Thank you Nick. Our next question comes from John Kim from BMO Capital Markets. John, your line is now open..

Thank you. I'm looking at your lease explorations for '22 and you have a footnote that you have 215,000 square feet that have already been addressed through leased and signed.

Are any of those going to be occupied this year in contributing to FFO or are those of 2023 commencement dates?.

Yes. The roughly 200,000 that's leased but not yet occupied will likely come in towards the end of the year, the fourth-quarter..

Okay. That's helpful. John, you mentioned where you're -- one of your objectives for the year is to look for unique external growth opportunities.

I want to ask if you could elaborate on that? Whether that means complex development opportunities? Or when you mentioned it's unique, is it a new market, new asset type? Just any comment that you can provide..

A lot. We always look at -- said we calls before we look at a variety of different markets, we don't have any out sights on anything specific right now. We did grow in dollars to [Indiscernible] this last year, we're very pleased with what we acquired. We've been very actively looking for the next act in Austin.

I think we'll have something to address with all of you within the next quarter or two. If you take a look at what our pattern was, and I referenced the comments between San Francisco and Seattle and Hollywood and so forth, typically, what we did was we went in and we bought a building.

Maybe we bought a couple of more buildings and bought buildings where we could add value but where we have the scale to support the organization of people that will allow us to grow the enterprise and what you should -- what you'll be seeing with Kilroy is a similar pattern for Austin.

We've made some big moves with regard to the people that we're going to have in that market will be announcing more on that, in the next quarter, will be a development company there as we are in all of our other markets. And I think you'll probably see our next act there be a development opportunity.

We like that market a lot that all the growth and so forth that we love and is in full display there. So, we're looking at a lot of opportunities in that market. And I think that's where [Indiscernible] our next announcement will probably come..

Thanks for the color..

You're welcome..

Thank you, John. Our next question comes from Manny Korchman from Citi. Manny, your line is now open..

Hey, it's Michael Bilerman here with Manny. John, I wonder if you can just step back a little bit and just think about capital raising plans, as you move forward with sort of sites on additional external growth and you think back the last two years, that February 2020 well-timed offering at $86 gave you $500 million in liquidity.

And then over the course of the pandemic, you use the asset sale market to produce even more liquidity, which has allowed you to do a number of the developments and acquisitions that you've talked about. So I'm curious how going forward you think about your capital raising plans. I know Hutch (ph) is now around the table.

Hi Hutch (ph), it's good to see you there. Has that changed at all? As you look at the capital markets now, you've put some of them places in that seat IR and capital markets.

Has your thinking evolved around capital raising and how you want to execute it? Whether it will be more self-funding? Or whether you think about raising leverage? Whether you think about raising more equity? Just how your thoughts have changed?.

Well, yes, those are all good points, Michael and hello and Happy New Year. We are happy to have Hutch onboard, we figured it'd be a great addition, certainly provides a lot of additional character to the organization. We're not interested in selling stock at the share price that we have today.

We do think we're going to see a recovery in share prices as the back-to-work accelerates so this COVID starts to diminish in people's minds. All signs seem to indicate that there are those things are going to be happening. But I don't see selling stock. In terms of leverage, I'm a big leverage guy if you know.

We put -- forecasted $300 million to $500 million of asset sales. I think that that's imminently doable and we always look at what product that might qualify for that, where we -- we're either where it's non-strategic or where we may not be able to add a lot more valuable -- value, sort of like we came to the conclusion for the exchange.

So, we're going to stay in a very conservative leverage position. We will be very prudent with regard to any equity that we issue in the future. And I think there's plenty of ways to look forward with what our funding requirements will be, some more to come..

And then John, how do you -- putting in place for the first time, [Indiscernible] you left 20 years, you haven't had a proper capital markets [Indiscernible] position, it was always wrapped up with the CFO and the treasurer.

What led you to bring that into the fold today? And what do you expect to get out of it over the next 12 months?.

That's a good question too. We've been debating those for some period of time. Our enterprise has grown. We recognize that there are a lot more investors out in the read (ph) space. Some of them are dedicated, some of them are not. Maybe we think a lot of the analysts (ph) have a lot more to do than they used to. They're covering a lot more companies.

We obviously have greater geographic region now. And so that generally means that there's increased communication requirements. And by having Hutch, I think we end up with individual that not only knows the industry very well, knows the markets very well, knows many of the investors extremely well, but is a great communicator.

And I think what we can do -- or what we intend to do is to be in front of people more, explaining our story and making sure that people have a complete understanding of the things we're doing. We're pretty excited about all the opportunities we have, some of which we can't really talk about on these calls.

And I think that will be a great ambassador [Indiscernible]..

Great. See you next month in Florida..

Okay. Great. Well, thank you..

Thank you Manny. Our next question comes from Steve Sakwa from Evercore ISI. Steve, your line is open..

Yes, thanks. Good morning out there. John, I guess first question, San Francisco's certainly been probably the slowest large city that to get back to the office and crime and homelessness have certainly become a bigger problem.

I'm just curious, the discussions that you're having with city officials to improve quality of life there in order to make the RTO process more memorable to people..

Well, I figured somebody would ask this question and I always have an opinion about politics and politicians and so forth. I think we're making progress Steve.

It sometimes look slow but if we take a look at the root cause of a lot of this stuff, it's both in Los Angeles and in San Francisco and it's prevalent in some of the other big cities in the country in which we don't operate.

We have district attorneys that came in talking about reform and what they have done in the case of San Francisco with Chesa Boudin and in the case of Los Angeles with George Gascon who by the way, happened to previously be, the District Attorney for San Francisco.

So in both cases, we have people that are not enforcing the laws, we have people that are allowing that they're should be smashing, grab things where you can go in and steal under $900 and they won't prosecute you, so the stores don't even try to prevent it, we've just created a terrible situation and we have the sale of drugs and the use of drugs, as well as certain other things that are illegal happening on the streets in a number of areas above those [Indiscernible] cities.

And people are fed up. So you have to have folks that unite together to fight these people and they recall campaigns for both of these District Attorneys, both Chesa Boudin in San Francisco and George Gascón in Los Angeles.

And it is a massive coalition of homeowners, small business people, larger businesses, existing politicians, former members of their staff, the sheriff going away in the case of Los Angeles, and a number of city council people, all of whom have come out against these characters.

So we have a recall campaign in both cases, Kilroy is involved in that as are many of our peers, as are many others from other businesses, homeowner groups etc. And we're going to clean this up, we're going to throw these bums out and at least that's what we hope to happen.

So, I think the thing that's really very, very positive is that, this isn't a democratic effort or republican effort or an independent effort. It is an effort by a broad coalition of people, who want lawfulness, they want the laws to be enforced.

And I'm convinced these two will be thrown out and if they're not thrown out now, they'll be thrown out in the general election when it comes up the recall that's qualified in San Francisco. The election will be in June. The job approval rating or chested Bourdain is under is -- he has job approval a negative of 67% the last time I looked.

Gascón down in Los Angeles has been a very similar situation. So market forces are dealing with this. It's not as efficient as we'd like. We are seeing, in San Francisco and in LA, an improvement in the homeless situation in many communities but it needs to go further. So that's what's happening.

I'm spending a fair amount of time on this as are my counterparts and some of the other public real estate companies and private real estate companies but I have to say, this is a very broad coalition of business homeowners, in some cases, religious groups, it's just people are fed up..

I appreciate that long answer, John.

I just wonder if maybe if you or Rob could just comment on the -- given the current situation today, to what extent is that impacting the leasing discussions that you're having so that -- there seems to be promise down the road, but if some of these things don't really get cleaned up till the middle of the year, that just might slow the pace of leasing until the second half, or possibly in the next year.

So do you -- just worried at delays of the recovery on the leasing front in downtown San Francisco?.

Well, let me give you a couple of points there [Indiscernible] so, fill it in. I'm going to go between the two cities, [Indiscernible] gain, which is our new 20-some story luxury apartment building, which is part of the Netflix camp as we call [Indiscernible] in Hollywood.

We projected that would be 20% occupancy by the end of this year, it came on-spring mid-year. It's now 85% the highest rents ever, and it's right in the thick of all that, I'm not saying it doesn't influence leasing, but without notwithstanding that we're making good progress.

Rob, would you talk to the bigger point and specifically the San Francisco with Steve?.

Sure, Steve. We are seeing momentum picking up on the leasing front. As I mentioned earlier, Sephora and Yelp subleasing at our 350 Mission space, that's -- those are two -- 300 -- totaling 300,000 foot deals. The Chime deal at 101 California happening at the end of last year.

No doubt the question you raised and John's answer are very serious matters and considerations. But thus far, it hasn't slowed deal momentum. In fact, I think on the last investor call we had with you, you had asked about Autodesk and their announcement in January of this year that they were vacating a 117,000 square feet at 300 Mission.

Apparently right now that space is fully committed to another tenant, so that's a 100,000 feet that's in play, literally two to three weeks after a tenant announces they're not going to be occupying the space.

We're definitely not out of the woods but it's feeling like momentum is picking up and again, speaking with our competitors that have view space, quality space, top four space on the Bay, they are actually starting to talk in proposals, the 10% to 20%, over pre-COVID rates for that trophy quality space.

So, in a very tight segment of the San Francisco market, I think it's pretty encouraging if you're in a class B, C situation where you don't have the amenities, you don't have the common areas, that space is not moving or if you have a lot of second-generation space, it's not moving.

The tenants are looking for plug-and-play and they're looking for quality..

Great. And then just one cleanup item for Michelle. Thanks for all the detail on the guidance. I guess the one number that I didn't hear was your expectation for straight-line rent and FAS 141 income within the guidance for 2022.

Do you have a range for that?.

Yeah, I think for straight-line rent, it will be somewhere between $40 million to $50 million. And I think on FAS 141, it shouldn't be too dissimilar to our 2021 range..

Great. That's it for me. Thanks..

Thank you, Steve. Our next question comes from Jamie Feldman from Bank of America. Jamie, your line is now open..

Great. Thanks for taking my question. Just listening to the comments on the call, and hearing how tenants want new high-amenity, whether it's new development or redeveloped, I'd like to get your thoughts on -- assuming we make it past COVID here, and things do reopen.

What do you think the development cycle looks like across your markets? And do you think there's going to be -- it could be even more opportunities than in the past given tenants just want new unique buildings? Just trying to get your thoughts on what's maybe in store? And I know Kilroy is always been ahead of the curve on those types of assets, so would love to get your thoughts..

Well, Jamie, it's a little too early to make those kinds of predictions because there has been such volatility and we've had the reversals with the various variations of COVID and so forth.

I think what's encouraging now as people are really stepping it up and making some big commitments on significant space, I believe that that bodes well for us given our development prowess and some of the land positions we have and whatnot.

I think we'll see a continued desire to be in the -- they don't necessarily have to be brand new buildings but they have these [Indiscernible] that have location, the physicality and amenities and so forth that people want. So it could be converted some self-worth.

But we're seeing a lot of pressure in our markets, whether it's in Bay Area, whether it's in San Diego. As two good examples of the -- we've talked about this before of the competition between life science and technology. They want the same kind of building and locations and they have the same need for amenities to attract and retain.

So if you think about our project down at Oyster Point, we've had -- we continue to have tech interested in it. We have life science interested in it. We're the largest entitled properties I think in the state with regard to what we can deliver there. We think we're a really great position. It's a perfect environment for outdoors and so forth.

And so, I think there's going to continue to be a trend of having space that people can control and where they have those outdoor amenities and so forth, whether they're vertically, or whether they're horizontal, but where they can be assured that they have the environment that works for their purposes.

We hear a lot about wellness now, and you've probably read -- there has been articles, including some that were out this morning, about how companies are so focused now about wellness. Well, Kilroy owns more well buildings than anybody in the world except for the United States government. There's nobody that's even second, close to second.

So we saw that trend and what we're seeing now is it sustainability, it's wellness, it's greater ceiling heights, it's all these things. And if you are an owner of a building where you don't have that stuff, you should be really concerned.

And so the obsoletion, the up -- the being obsolete in our -- in the office space is something I've been talking about for 10 years. And it's accelerating at a significant rate now. So I do think it will translate into more modern space being built because well see a bifurcation. Buildings that work and buildings that don't work.

And if they don't work, they just don't work. Some can be revised, many cannot. So I think you will see more development..

And when you think -- that's very helpful.

When you think about your markets, are there some that you think have more commodity or more obsolete space than others?.

Well, I think they have -- you've not seen us by one building north of markets in the 12 years we've been in San Francisco. You've not seen us do that. You've seen us appeared ourselves more towards the not as tall buildings with much higher ceiling heights and all the amenities that we've talked about over the years.

I do think the area in Central SoMa where the Flower Mart is and where others have projects will become the next big thing in San Francisco and by no means, predicting that those projects are warranted right now because I think we need to get through this over the next year or two for the dust to settle a little bit in San Francisco.

But we're already having discussions. We have a building that we're going to build in Santa Monica that we just got approved. It's little, it's 100 and -- I don't know, 150,000 or 175,000 feet. It's actually two or three buildings. We're not even marketing it.

We haven't even told many people about it and we already have three or four people that want it and they're all tenants that are in older office buildings in that area. They want to be in the area. They just want to be in the new modern stuff. So I think -- we're going to see this -- I think we're going to see that in Austin as well.

Austin obviously, has a lot of folks have been moving into it. It has some good buildings, has lot of older buildings. I think there's going to be an opportunity there and make a bigger play. And I think you're going to see it nationally.

If you think about what are the buildings that are leasing in New York? As if I would just back there last week, and I was going through Hudson Yards, and One Vanderbilt, and all the rest.

It seems to me that people are voting there to be in the modern, latest, and greatest buildings because they want to attract and retain their most important asset, which is their people..

I thank you for that. And if I could just ask a follow-up on San Francisco. It looks like your percent leased declined to 93.9% from 96.6% this quarter. You've got next year about 3.5% of your revenues expiring in San Francisco.

I just want to get your thoughts on a -- that seems to be kind of a deterioration in the percent leased there and then how comfortable are you with the explorations coming next year given market conditions?.

Jamie, I can start on the percentage leased in San Francisco, I think in the fourth quarter that declined because there was a tenant that terminated its lease early, that was attributed -- that contributed to some of the one-time income that we picked up, but that was one specific tenant related to credit..

And we're in renewal [Indiscernible] [Indiscernible] that Bob won't back. grew and work..

Okay.

And then the 23 explorations, I know it's a way out, but any discussions already of potential move outs or nothing to report just yet?.

Again, the 23 --three, go ahead..

-- move out for --.

Go ahead John..

Go ahead Michelle. Go ahead..

I was just going to say, the 23 explorations, the largest one is related to the West 8th acquisition in Seattle. And like I mentioned in my comments, it's too soon to tell whether or not they will renew or stay. But we did underwrite both scenarios and we're comfortable with both..

Sorry, I was just -- I was focusing specifically on CBD (ph) San Francisco.

It looks like you're getting 3.5% of your revenues in '23 expire in San Francisco?.

There wasn't anything that's large. I think it's all 25,000 to 50,000 square footers. But Rob, I know you and the team have been working to early renew..

Yeah, we have discussions going on, Jamie, on a good portion of that '23..

Okay. Great. All right, thank you for the color..

Thank you, Jamie. Our next question comes from Blaine Heck of Wells Fargo. Blaine, your line is now open..

Great, thanks. Good morning out there. Maybe for John or Rob, it's great to hear that the discussion seemed very positive with your tenants but I wanted to see if you can talk specifically about lease negotiations and any differences you might be seeing in your lease contracts relative to what was being negotiated and agreed on prior to the pandemic.

Are there additional expansion or contraction clauses? Any additional optionality on early terminations or extensions or even differences in the lease term that tenants are willing to agree to?.

Hi Blaine, this is Rob. It's interesting we're not seeing much discussion or change in terms of things like contraction or terminations. We typically avoid those in our leases and are known for that. And I think especially if you have ground-up development, that's just not a wise path to go down. And I think others -- other owners feel that way as well.

It's interesting in certain discussions we're having, timing is probably the most important point that's raised by the tenant, meaning they want to be in their space, and they want to be in it soon.

We have a deal we're working on now where we're using our development construction team to really help expedite permitting and that sort of thing, so this tenant can be in place by September. The deal's not signed yet, but that's the focal point.

It's not so much what's the rent? Or, what's my term? I think the other component that comes up, particularly if you have a standalone building is, okay if I lease in your building, how do I grow? Where do I grow? If I outgrow that building, if I take the whole thing, what do you have around me where I can expand? And that trend started a little bit in 2019, but it seems to be popping up in various -- again, depending on the size of the space and the tenant you're talking to.

The tenant improvement -- because of cost escalation and that sort of thing, the tenant improvement discussion is really one component of an overall negotiation that's going to be driven by, okay, then what's the corresponding rent for that sort of capital investment and luckily in the markets we're in, we have the ability to have our rents correspond to or exceed what the price increases we forecast are..

Okay, great. That's helpful color.

John, can you just talk about the dispositions you guys have targeted and whether there's any color you can give us on which properties they are -- or whether there are any common themes, like selling out of a particular submarket, or selling lower-quality assets? And then any guideposts around pricing would be helpful as well..

Yeah. I'm not going to tell you which buildings, but there has always been a theme with Kilroy and that is, if you did, you would be non-strategic, then by definition, it's a candidate.

And in some cases, we have said, okay, we really can't add value to a building that is fabulous and otherwise strategic and that would be -- at that extreme would be the exchange which we saw last year.

We regularly go through the portfolio and determine which assets we think are candidates and Elliot can speak to that process but he's not going to speak to the specific assets.

We don't like to tell people what assets we're thinking about selling until we've made a decision to sell them because you can imagine it impacts -- their relationships impacts are on the student body and so forth. But we -- Elliot I don't know what do you want to add to that.

In terms of guidelines on pricing, obviously we can't -- until we determine which asset it's going to be, we can't really talk about pricing. But pricing tends to be pretty strong in all of our markets.

Eliott, you want to any color to that?.

Not much more to add beyond that. We are looking at things across several markets. So there's nothing particularly -- you're not going to see us wholesale get out of anyone market or not. It's just selectively looking at things. That makes sense for the reasons John outlined..

Yes. There if you look at Sabre Springs projects that we sold that -- sorry, that's Sabre Springs project we sold out on fifth -- around the 15 and it was a property that was until the bowling was nice, that wasn't really the [Indiscernible] building that we -- that we specialized in anymore. We didn't see how it added much to us.

The people that bought it I'm sure are going to do well with it. But it's a smaller asset, but a good example of something that just wasn't really any longer in Kilroy 's wheelhouse..

Okay, great. That's helpful. One more quick one if I can.

Can you guys give an update on your estimated mark-to-market for the entire portfolio and maybe even on a market-by-market basis, if you have that detail?.

Yes. Hi, Blaine. So similar to the third quarter, we're estimating the portfolio is roughly 15% below market. And by market, San Diego's about 20% below market. LA's about 15, and San Francisco and Seattle are about 10% to 15% below market..

Great. Thank you all..

Thank you. Our next question comes from Craig Mailman from KeyBanc Capital Markets. Craig, Your line is now open..

Hey, everyone. Just a couple of quick ones here. Just Michelle, maybe following up on the disposition question.

Could you give us a sense of that 12% drag from dispose? What would that be either on like a timing or cadence or if you have an annualized number of what that $0.12 would be?.

Yeah, we assume the midpoint of that in the mid-year..

Okay.

And that includes Sabre Springs also?.

Yeah. And Sabre Springs, we sold towards the middle of December so that would have -- it was roughly a $0.02 impact for 2022..

Thank you, and then just the last one from me. As we think about occupancy, I know you mentioned a 145,000 square foot tenant that vacated. So should we think about it that 1Q kind of dips to the midpoint of your guidance and then stays there, as the 500,000 or so trickles through the portfolio.

Or do you have any other like, smaller known move-outs to add up that will impact given quarters?.

Yeah, I think you're right. The first quarter will dip due to the San Diego exploration. And then we have some development project coming online in the third quarter that I mentioned with 333 Dexter. And then some of the small move-outs that I mentioned in LA, will be dip again also further impacted by 2100 Kettner coming online..

Okay..

Okay. Perfect. Thank you..

Our next question comes from Vikram Malhotra, from Mizuho. Vikram, your line is now open..

Good morning. Thanks for taking the question. I just wanted to go back to the relative markets and your positioning, you talked about the quality divide quite a bit through all the markets. But just two specific questions.

One, can you talk about relative pricing power in each of your office locations? And related to that, is there something different about the San Francisco City / Peninsula recovery, this cycle versus prior cycles in your mind?.

Hi Vikram, this is Rob. Let me touch on the pricing power question first.

So clearly, probably the two -- three strongest submarkets for pricing power for us are the Bellevue-Seattle Market, the Oyster Point Life Science Market where John was mentioning our 50 acre site, 3 million square feet and then lastly would be -- actually I shouldn't exclude Austin either.

We have pricing power there and then lastly, San Diego because of the combination of life science and technology in that market. It's really San Diego, Austin, Oyster Point in the Bay Area and the Seattle-Bellevue Market. And then --.

And then just on --.

-- [Indiscernible] to the second part of your question..

Yeah. Just on San Francisco. I mean it's -- it's historically -- it's bounced back faster and quicker than I guess, other markets.

Is there something different in your mind about, specifically San Francisco, the recovery this time?.

Yeah. You're right if it's bounced back frequently and other downturns, I think the crux of -- the there's two points. I think one is that the city, more than any city in the country, we've said before was shutdown more so than other cities and longer. That's behind us now. Secondly, I think it's really been impacted by technology.

Employers, not really pushing their employees to come back to work or putting more formalized plans in place and as I said earlier, I think now that they're announcing plans and shortening the time-frame for people to come back that that will improve. But what's interesting, if you compare Silicon Valley.

Silicon Valley and San Francisco have often worked in tandem. So when you have large headquarter expansions in Silicon Valley, there's usually a subsequent spillover into San Francisco, just because there's so many employees that work in the city. In San Francisco, the cycle has lagged.

But I think it's because of the reason I mentioned earlier, being shutdown, and employers not really bringing people back in. But the last piece is anecdotal, but if you look at every bar and restaurant in San Francisco, they're jam packed and full. So I don't get why people can go out eating and drinking, but they can't be in the office..

Fair enough.

Maybe turning to Austin, you referenced potentially some opportunities in the next one or two quarters on the development side, can you maybe remind us of are there specific submarkets you're exploring within Austin? And maybe just remind us of the grand sort of vision over there in terms of how large would you want your portfolio over there to be?.

John, you want me to take that one?.

Eliott, you want to take that one? Yeah..

Sure. So Vikram, there's no magic number for how large we want to be. We want to do deals that we think are smart deals. And if that means we're 2 million square feet, great. If that means we're 3 million square feet, that's great too. We're not going to anchor ourselves to a particular number.

As far as the parts of the market that we're focused on, obviously the CBD, we're in D Tower and the surrounding areas around the CBD. And then we also like the area in and around the domain, as well as some others..

Okay, great. And sorry, just one last clarification.

Michelle, maybe the mark-to-market you referenced, I just want to confirm that's a cash mark-to-market?.

That's correct, yes..

Okay. Thank you..

Thank you Vikram. Our next question comes from Michael Carroll of RBC Capital Markets. Michael, your line is now open..

Thanks. Can you guys give us some color on your life science views in San Diego? I know a number of your projects are just north of the traditional core markets and you're indicating that the market is starting to move upwards given the tight market overall.

I mean, how quickly is this migration occurring and how attractive are these submarkets today?.

You want to take that one?.

Sure. I can start with pitch-in, John. So, as we've said before, Torrey Pines was the initial life science submarket in San Diego, and that quickly filled up. That's traditionally been the basis of life science.

The UTC submarket sprouted relatively recently, and because it's such an attractive location in terms of housing, as well as just access and amenities it became attractive to life science because it was the next, natural geographic spot to locate. But it also came -- became very attractive to technology.

And I would say that to your question, the migration is happening very quickly. We have seen a lot of life science, as we've mentioned in our Del Mar Heights and Del Mar One Paseo office campus. And that trend is continuing.

And as John has mentioned before, you're seeing it out into the I-56, I-15 corridor because on the West Coast, you have really -- the Oyster Point location as the life science hub, and you've got San Diego as a life science hub, and both are thriving.

So I think you're going to see a lot of expansions in new moves into submarkets within San Diego, where there's housing, where there's amenities, and where's the type of projects that these companies want. I think the last I thing I'd say is that tech is really adding pressure to life science to act more quickly.

Life science typically has been slower to act and other companies leasing space just by nature of their character..

Yeah, this is John. Del Mar has always been a life science market. There just hasn't been any space in Del Mar, Carnival Valley, it's also called. That's where our office is, that's where One Paseo is. We announced last quarter, I think it was that we converted, we signed leases for 300,000 feet of life science down San Diego, most of that's in Del Mar.

Taking buildings that worked very well for conversion from office space to life science, and we moved the rents up. I think they were double or whatever.

And now that's pushing out one of the tenants that's here in Del Mar is moving up to the 56th of the new 1/2 million square foot building that's under construction or Santa Fe so much right after that.

If you look at the demographics of where people live, where they want to be and so forth, reserving the sweet spot and like Rob said traditionally, it was storing clients in a good UTC, then it jumped to freewill, a little bit for secondary locations where people really want to have -- when they want to have the quality of location, they quality of product, the campus, etc.

it's got to push up East now. And that's what's happening..

Okay, great. And with regard to Santa Fe Summit, I know this is a near-term start in the first half of this year, I believe you guys are targeting.

Can you talk a little bit about that as what are you waiting for to break ground? Are you looking for some pre -leasing? Some entitlements? Or just getting things ready to break ground right now?.

Yeah, we're ready. We were negotiating the contracts that will be under construction. I think it's next quarter. We have the permits in hand. We'll start with a guaranteed max price on the contractor. All the architecture is done and permitted. So we're full steam ahead..

And are the underwritten rents similar to the coresome (ph) markets, just given what you're indicating that people are moving north?.

Well, I'm not going to get into what the rents are and give out that information to brokers or whatever. But let's just say, that it is a better value than what leases are going for in the core of Torrey in UTC. But it is also going to produce a much better yield and developers are getting there..

Okay great thanks, John..

Your welcome..

Thank you, Michael. Our next question comes from Caitlin Burrows from Goldman Sachs. Caitlin, your line is now open..

Hi, good morning there. Maybe just following up on the point from earlier that some office buildings won't make it.

When you think about the vacancy in lower quality properties in San Francisco or otherwise, what do you think ultimately happens to this product? Does it remain office with low rents? Does it get converted or does it get redeveloped? And if so, do you think that's something Kilroy would be interested in participating in?.

Yeah. I'm not going to say this, John. I'm not going to say never because I've learned that's a bad thing to say but a lot of the stuff that's over -- for example, the north side of market. A lot of that is just dark, smaller floor plate, lower ceiling height, space in an area that isn't always the best amenitized.

And I think, does it become residential? I think that's probably what will happen. Or does it become some kind of boutique office space with smaller tenants? If that could be the case, I don't really worry about it too much because we're not actively seeking to be there.

But I do think there is a real bifurcation and I've been talking about this for 10 years. And now -- what's funny is, for the last 10 years I've been talking about -- not to the entirety of the year, some of its newer.

I've been talking about the obsolescence of office space in the country, what the modern office building is going to look like, what kind of amenities and so forth is going to have, sustainability, wellness and all these things are now we're hearing about like they just came up.

Some people have been talking about it for sure, and a lot of people are just now discovering them.

But these trends have been going on, and if you just look at them, if there are fewer and fewer people, I mean, ultimately there's going to be a discussion and they are starting to be right now about electric vehicles versus gasoline powered vehicles, right? And so people are making big bets on electricity because they're saying that, Hey, gasoline is killing the environment.

So where do you want to make your bet? That does not say the gasoline powered cars are going away anytime soon, but they are diminishing. And there is the political and public policies that are encouraging that. And if you think back now and taking that same sort of Met -- methodology or thinking to office space.

I don't want to invest in things that are going to go bad. I want to invest and things that are going to get better.

I want to invest in the markets where there are, where there is the energy and the creativity and the multiplication of employers and so forth and therefore greater demand, greater rents, and I want to have the kind of assets that people will be in and I want to have the kind of team that allow people to feel comfortable that we'll grow with them, and we'll be able to deal with their growth and scalability and so forth.

And to me that's a virtuous cycle, to get involved. Anybody might get involved in something here or there. That is out of that description.

But by and large, I think if you start looking at some of these older buildings, why you should really buy them at a big discount, and you have a plan to convert them to housing or something, it would not be interesting to me..

Got it. And then maybe just a question on lease execution volumes, as you mentioned. A lot of the trends in tenant demand do seem to be towards the higher-quality, newer, highly amenitized buildings. But it does look like Kilroy 's execution volume is still below the 2017 and 2018 average levels.

So just wondering, is there something that's causing that? And could you go through your expectation for how and when it could recover?.

Rob, it's you?.

Yes. So Kaitlin, as I indicated earlier, our activity for the first quarter so far January is picking off the momentum from the last month of '21. So I feel very good about where we are and what's ahead of us. 2017 and 2018 were really extraordinary years.

2017, '18, '19 were really the ramp up to a peak in all of our markets and then unfortunately the pandemic hit us which virtually put a stop to leasing in 2020. We slowly picked up out of '21 and I think we finished very solidly in the fourth-quarter. And I expect more activity in volume as I've said, for a variety of reasons, in different market.

San Francisco bringing people back to work, life science and technology in the San Diego markets competing for space often. Because new companies continue -- the two companies I announced that we sound leases with, are moving into Austin, I've never been there before. So we're seeing continued activity there.

Seattle and Bellevue continue to remain very attractive. I would say that as an example, Bellevue now has because the market in Bellevue is so tight, you're seeing tenants starting to look in the CBD of Seattle.

I think a lot of fundamental strength is coming throughout our markets, it's just going to take time throughout this year for that to manifest itself in leases..

All right. Okay. Thank you..

Thank you, Caitlin. This concludes today's Q&A session. I will hand back over to Michelle Ngo for any closing remarks..

Thank you for joining us today. We appreciate your continuing interest in KRC. Goodbye..

Thank you for joining today's call. You may now disconnect..