Release Date: August 01, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Strong quarterly results reflecting the recovery across Kilroy Realty Corp (KRC, Financial)'s portfolio.
- Encouraging signs of market strength in San Diego and Bellevue, Washington.
- Increased tenant demand and leasing volumes, particularly from new-to-market tenants.
- Successful leasing activity with approximately 235,000 square feet of leases signed in Q2 and an additional 184,000 square feet in July.
- Positive outlook for Kilroy Oyster Point with active tenant discussions and interest from both life science and traditional office tenants.
Negative Points
- Occupancy rate decreased to 83.7%, with significant move-outs in Miami and Los Angeles.
- Leasing spreads were negative, with a cash leasing spread of approximately -4.5%.
- Challenges in the South Lake Union submarket in Seattle and submarkets in Los Angeles, which have been slower to recover.
- Anticipated large move-outs totaling 350,000 square feet in the second half of the year, including Salesforce, Capital One, and Microsoft.
- Higher G&A expenses due to the timing of spend, impacting financial results.
Q & A Highlights
Q: Can you discuss the rationale behind the CFO hiring and the split of the CIO/CFO roles? Also, how will this affect G&A expenses moving forward?
A: Angela M. Aman, CEO & Director: The decision was driven by the recognition that both roles are independently full-time jobs, especially in the current environment. Elliott has done a great job wearing both hats, but focusing on the investment side will benefit the company long-term. We are ensuring appropriate resource levels across all parts of the business while maintaining discipline in G&A spending. We expect a modest net savings in G&A going forward.
Q: Can you provide more details on the tenant demand for Oyster Point Phase Two? Are these expanding tenants or new market entrants?
A: Angela M. Aman, CEO & Director: We are seeing broad-based demand from different size categories and stages of life science companies. Our strategic decisions over the past few years have positioned us well to meet this demand. Rob Paratte, EVP & Chief Leasing Officer: Demand is improving, with 2.8 million square feet of life science demand, up from 2 million at the beginning of the year. The demand is driven by funding and product commercialization.
Q: What is driving the increased tenant interest in spaces over 100,000 square feet?
A: Angela M. Aman, CEO & Director: We are seeing broad-based demand, including new-to-market tenants with expansion plans and traditional office tenants. Some tenants recognize the need to get more people back in the office. Rob Paratte, EVP & Chief Leasing Officer: AI companies are driving significant demand, particularly in San Francisco and Seattle, due to the strong tech workforce in these markets.
Q: Can you elaborate on the demand dynamics in the Los Angeles market?
A: Angela M. Aman, CEO & Director: We are seeing decent traction across the portfolio, but larger format tenants have not fully returned to the LA market. We hope to see spillover benefits from stronger submarkets. Rob Paratte, EVP & Chief Leasing Officer: Westside Media Center and Hollywood are seeing increased activity, but the pace of transactions is slower than desired.
Q: What are your thoughts on share repurchases given the current stock price?
A: Angela M. Aman, CEO & Director: We have refreshed our buyback and ATM programs to ensure we have all tools available. We would only execute a buyback with an identified source of proceeds and after evaluating all investment alternatives. Our priority is to ensure the development pipeline is fully funded and maintain a strong balance sheet.
Q: Can you provide an update on the known move-outs and backfilling progress?
A: Angela M. Aman, CEO & Director: We have three significant move-outs totaling 350,000 square feet, including Salesforce in Seattle, Microsoft in the Bay Area, and Capital One in San Francisco. We have already seen some backfilling activity, particularly in Seattle. Rob Paratte, EVP & Chief Leasing Officer: We are actively touring these spaces and expect more progress soon.
Q: Are you seeing more high-quality assets come to market, and are sellers' expectations more realistic now?
A: Angela M. Aman, CEO & Director: We are seeing higher quality assets come to market across various markets. Sellers are more open-minded, and we expect the bid-ask spread to compress over time. Elliott Trencher, EVP, CFO, CIO & Treasurer: Owners are seeking liquidity after a few years, leading to more market testing and realistic pricing.
Q: What are your plans for expanding in the Austin market given the new supply coming online?
A: Angela M. Aman, CEO & Director: We are optimistic about the Austin market and our Indeed Tower asset. The new supply dynamics could present acquisition opportunities as financing structures stabilize. We will continue to evaluate opportunities to grow our portfolio in Austin.
Q: Can you discuss the potential monetization of land parcels and the entitlement process?
A: Angela M. Aman, CEO & Director: We are evaluating each parcel to maximize value, including re-entitlement for alternative uses like residential. The process varies by market and can take time, but we believe it will provide attractive capital for future acquisitions or other capital allocation alternatives.
Q: How are you approaching potential opportunities in other parts of the capital stack, such as mezzanine positions?
A: Angela M. Aman, CEO & Director: We are open to creative opportunities but prefer scenarios with a clear path to ownership rather than just lending. Our expertise is in buying, operating, and leasing real estate, not in the lending business.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
