Kilroy Realty Corp Q4 FY2022 Earnings Call

Good afternoon. Thank you for attending today’s KRC 4Q, 2022 Earnings Conference Call. My name is Tamia, and I will be the 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. It is now my pleasure to pass the conference over to our host, Bill Hutcheson, Investor Relations and Capital Markets. Please proceed.

Thank you, Tamia. Good morning, everyone. And thank you for joining us. On the call with me today are John Kilroy, our Chairman and CEO; Tyler Rose, President; Justin Smart, our incoming President and current President of Development and Construction Service; Rob Paratte, our Chief Leasing Officer and Senior Advisor to the Chairman; and Eliott Trencher, our CIO and CFO. At the outset, I need to say that some of the information we will be discussing during this call is forward-looking in nature. Please refer to our supplemental package for a statement regarding the forward-looking information on this call and in the supplemental. This call is being 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 SEC and both are also available on our website. John will start the call with third quarter highlights, and Eliott will discuss our financial results and provide you with our 2023 earnings guidance. Then we will be happy to take your questions. John?

Hey thanks, Bill. And hello, everybody. Thanks for joining us. 2022 was the year of transition, as evidenced by substantial increases in interest rates that impacted the economy and the capital markets. But as we enter 2023, there are signs of inflation cooling, the Federal Reserve slowing down the pace of interest rate hikes, and a resilient consumer. Kilroy is focused on things we can control. Our portfolio is top-notch. Our balance sheet is strong, and we are patiently waiting for opportunities to allocate capital. That theme of transition can also be seen in the office market as more companies are adjusting to post-pandemic life, and many are reestablishing in-office policies. Disney, Paramount, Netflix, First Republic, Salesforce, Starbucks, and Twitter are among some of the most recent to mandate a return to the office several days a week. This follows Microsoft and Apple, who have been leaders among such tech companies in returning to in-person work. Tim Cook, the CEO of Apple, stated you collaborate with one another because we believe that one plus one equals three. We have all heard the recent announcements regarding corporate layoffs. While layoffs are never a good thing for office companies, we believe that they have and will continue to drive an increase in physical office occupancy. For many of the biggest technology companies, headcount exploded during the pandemic, growing upwards of 50%, while office space grew only 10% according to JLL. The recent layoffs are only a small fraction of those hired during the last few years and seem to consist of many folks that never went into an office nor had any office space dedicated to them. The well-reported flight to quality trend continues to get more pronounced, with trophy rents generally holding and commodity rent softening. According to JLL, newer buildings generated a 60% premium in rents compared to commodity properties. The endless premium has the potential to grow even larger, with the vacancy rate for older space in markets like Seattle and Silicon Valley nearly twice as high as the vacancy rate on newer buildings. In addition, there is and will continue to be a scarcity factor that exists with quality space. As new supply is flowing for JLL, square footage under construction fell by 7.5% quarter-over-quarter and 15% year-over-year, and we suspect the new construction in 2023 will fall even further. Over multiple cycles, Kilroy has strategically assembled a portfolio in premier markets that have the talent base and infrastructure to continuously pursue innovation. And innovation is alive and well. As an example, in San Francisco and Seattle, there have been compelling breakthroughs in artificial intelligence and machine learning, punctuated by the recently reported Microsoft cumulative investment of $14 billion in ChatGPT, a local San Francisco company. The Bay Area remains the largest market for venture capital and represented over 30% of U.S. funding in 2022. As this or other innovations translate into demand, we believe our portfolio is well-positioned to capitalize on this growing technology sector. As we highlighted at our investor event in November, our portfolio is young, well-located, amenitized and attractive to many of the best companies in the world. A flight to quality dynamic has never been more pronounced and should drive outsized market share for Kilroy in the years to come. Turning to recent highlights, we signed approximately 460,000 square feet of leases since the end of the third quarter with an average term of approximately seven and a half years. Some highlights include a five-year, 65,000 square foot lease with MediaTek, USA, a semiconductor company in San Diego, a five and a half year, 50,000 square foot lease with Redhat, a technology company in San Francisco, a seven and a half year, 35,000 square foot renewal in San Francisco with NBC Universal, a premier broadcasting company, and over 70,000 square feet of leasing in Indeed Tower in Austin, with Paige Sutherland and HNTB Corporation bringing the project to 71% leased. This year, we anticipate some challenges in office leasing. As you likely saw in our earnings release, our occupancy will be lower in large part due to a move out at our West 8 property in the Denny Regrade sub-market of Seattle. We planned for this possibility when we bought the building in 2021 and began implementing our plan to re-capture the project and roll up the rents to market. We believe West 8 is very well positioned in the market. It occupies nearly a full city block in a centralized location, and it’s surrounded by lots of amenities making it appealing to many types of companies. Turning to life science, which now makes up over 15% of our NOI demand continues to be resilient. We have multiple prospects interested in Kilroy Oyster Center phase two, which consists of three buildings totaling 875,000 square feet. Upon delivery of this project, our life science NOI will grow to more than 20% of the company total. And over time, we expect this number to grow to over 30% as we deliver future life science projects currently in our pipeline. Our retail and residential portfolio, which comprises approximately 5% of our NOI has been steady. Residential occupancy is approximately 94% with rents increasing meaningfully compared to last year and limited new supply expected to deliver in our sub markets. The investment market remains spotty and we continue to be patient and disciplined. We have yet to see meaningful opportunities of interest, and in 2022 we paused the start of new speculative developments, thereby reducing our near-term future commitments by over a billion dollars. However, there will be a time to play offense, and having substantial liquidity will be key. In summary, our strategy is based upon three key tenants; best-in-class real estate, disciplined capital allocation, and a fortress balance sheet. The simple but effective approach is cycle-tested and proven to work in various environments. On the people front, in December, we announced that Tyler Rose will be leaving at the end of this month. I want to thank Tyler for his 25 years of service, and I know all of the Kilroy team joins me in wishing him the very best. Justin Smart, a nearly 30-year veteran at Kilroy and currently president of development and construction will be assuming the role of president effective March 1. We know all of us, I know all of us are excited to work with Justin in his expanded role. I would also like to acknowledge Rob Paratte’s expanded role of Chief Leasing Officer and Senior Adviser to the Chairman. Rob has been with Kilroy for nine years and is not just an excellent deal maker but also a leader within the company and a trusted adviser. As Bill mentioned in his introduction, Eliott Trencher has been serving as our interim CFO for nearly a year and was named our full-time CFO effective as of yesterday. I’m delighted to have Eliott be our permanent CFO. The Kilroy ventures are deep and talented and cycle-tested. In conclusion, I want to congratulate Justin, Rob, and Eliott on their added responsibilities. And I also want to thank the entire Kilroy team for its hard work and dedication. For all of our listeners, we at Kilroy are back in the office. That completes my remarks. Now I’ll turn the call over to Eliott.

Thank you, John. FFO was $1.17 per share in the fourth quarter, similar to the third quarter. On a same-store basis, fourth quarter cash NOI was down roughly 1%. There were several one-time items in the prior period from termination fees, tenant catch-up payments, and real estate tax true-ups. Excluding non-recurring items, same-store would have grown roughly 2.5%. For the full year, cash same-store NOI was up 7%, ahead of our increased guidance of 5.5% to 6.5%. At the end of the quarter, our stabilized portfolio was roughly 91.5% occupied, slightly ahead of our full-year guidance. The portfolio remained roughly 93% leased. Toward the end of the quarter, we commenced revenue recognition for the Indeed lease in Austin. As a reminder, this lease began in the third quarter of 2021, and we have been receiving cash rent since the first quarter of 2022. For modeling purposes, it is important to note that the space put into service this quarter also stopped capitalizing interest. At the end of the quarter, we came to a resolution with DirecTV and El Segundo. As part of the agreement, we took back approximately 150,000 square feet effective at the beginning of the year, and DirecTV continues to lease approximately 530,000 square feet. We are pleased with this outcome as it more closely aligns with the terms of DirecTV’s original contract. However, there will be an impact to occupancy and FFO in 2023. During the quarter, we moved a roughly 45,000 square foot building at our Mineral Park campus into redevelopment in order to add life science infrastructure. The location is appealing to life science tenants, and we already have several life science companies in other buildings throughout that complex. Looking at the balance sheet, we enhanced our liquidity during the quarter with our previously announced $400 million unsecured term loan. Post-quarter end, we exercised the $100 million accordion at the same terms of adjusted SOFR plus 95 basis points, increasing the total term loan facility to $500 million. Net debt to fourth-quarter annualized EBITDA remains about six times. We have no debt maturities until December of 2024 and limited interest rate exposure with all of our debt fixed or subject to caps. Now let’s discuss the 2023 guidance. To begin, let me remind you that we approach our near-term performance forecasting with a high degree of caution given all the uncertainties in today’s economy. Our current guidance reflects information and market intelligence as we know it today. Any COVID-related impact, significant shifts in the economy, markets, and demand, construction costs, and new supply going forward could have a meaningful impact on our results in ways not currently reflected in our analysis. Projected revenue recognition is subject to several factors that we can’t control, including the timing of tenant occupancy. With those caveats, our assumptions for 2023 are as follows. As always, no acquisitions are forecasted, and we expect dispositions to be between $0 and $200 million, weighted toward the end of the year. Similar to 2022, we do not have an immediate need for capital. So we will pursue dispositions if we believe they are beneficial to shareholders. 9514 Town Center Drive and the balance of Indeed Tower are scheduled to come into service in the fourth quarter of 2023. The balance of our life science redevelopment at 4690 Executive Drive is scheduled to commence revenue recognition by the third quarter of 2023. We anticipate drawing down the remaining $300 million from our term loan throughout the first three quarters of the year. Development spending for the full year is expected to be $450 million to $550 million, mainly driven by KOP Phase Two. We have the capacity to fund our 2023 spend through cash on hand and proceeds to be drawn from the term loan. As a reminder, we have a $1.1 billion line of credit that remains fully available if needed. We expect occupancy for the full year to average between 86.5% and 88%, a 400 basis point decline from the fourth quarter. Most of this decline can be attributed to the Amazon and DirecTV move-outs which occur in the first half of the year. Same-store cash NOI is expected to grow between 0% and 2%. The decline from 2022 is driven by the lower portfolio occupancy from the move-outs previously discussed. G&A is estimated to range between $82 million and $90 million. Putting this all together, the 2023 FFO guidance is projected to range between $4.40 and $4.60 per share, with a midpoint of $4.50 per share. To provide further clarity, annualizing our fourth-quarter number translates to $4.68 per share. To get to our $4.50 midpoint, we subtract the net $0.10 per share due to the lower 2023 occupancy, which factors in our move-outs, move-ins, and development contributions. We then subtract $0.08 for various other items, most notably higher interest expense from our term loan and the planned dispositions. In terms of sequencing throughout the year, the second half of 2023 is expected to be lower than the first half due to the West 8 move-out at the beginning of the second quarter and the full drawdown of the term loan by the end of the third quarter. That completes my remarks. Now we will be happy to take your questions.

We will now begin the question and answer session. The first question comes from Nick Yulico with Scotiabank. You may proceed.

Thanks. Hi, everyone. So maybe first question is on the occupancy guidance. Eliott did provide some color around that on the move outs. But can you maybe give us a feel for what, as well, you’re thinking about what that factors in on a retention ratio? And as we’re thinking about a new leasing volume this year, maybe in perspective to recent years.

Yes, sure. So the retention is obviously going to be on the low end relative to our history. Historically, we’re plus or minus in the 50% range. We’re going to be quite a bit below that and it gets skewed because we have a few of the large move-outs that we referenced. As far as new leasing, we do expect some. But as far as the translation to occupancy, it's not going to be that meaningful because when you just think about the sequencing of it all, the timing for new leasing to happen and occupancy to actually take effect, it's going to be weighted towards the back half of the year.

Okay. Thanks. And then I guess second question is, as we think about big tech and the impact on the West Coast or it's sort of hitting the leasing market right now, not as much activity, I guess what do you think changes that? Because it does feel like there is a, in some ways, a slow return to the office happening increasingly out there, yet it's not really translating into leasing activity. So, any thoughts on that would be helpful. And congrats on the promotion to everyone as well.

Thanks, Nick. This is Rob Paratte. Let me highlight five points that I believe address your comment. The first point is that, as John has mentioned many times, there is a time to act and a time to pause, and right now, tenants are mostly in a pause mode, which has impacted demand. Secondly, current demand is mainly influenced by lease expirations and the ongoing trend towards quality spaces. Additionally, what was referred to as the great resignation after the pandemic has transitioned into the great rebalancing; layoffs are influencing the employer-employee relationship, shifting more leverage to landlords. We are observing clear evidence of this as national office occupancy continues to rise. Hybrid work is established as the primary model moving forward, with most employers now requiring employees to be in the office three to four days a week, and some even mandating four days. We anticipate this trend will persist. My final point, which aligns with some of John's remarks, is that there is a divide in the market between successful and struggling properties. Obsolete office spaces will face challenges in leasing, regardless of tenant type. Currently, we are experiencing a competitive race for amenities, as tenants strive to secure the best spaces to attract and retain employees, leading to investments in their own office designs. Landlords are also investing in enhancing amenities. This last point plays well for us at Kilroy, given our young portfolio and our long-standing commitment to enriching our buildings with improved lobbies, a hospitality-like atmosphere, and outdoor terraces. I hope that addresses your question.

Yes, that's helpful. Thanks Rob.

Thank you. Our next question comes from Camille Bonnel with Bank of America. You may proceed.

Hi. Following up on the previous occupancy question, I think you mentioned new leasing would be more meaningful towards the back half of the year. So, can you speak to the occupancy trend over the next few quarters? Are you expecting it to improve in the back half?

So, the way to think about it is we're going to see occupancy dip in the first half of the year because that's where the majority of the large move-outs happen, and then we think it will stabilize towards the back half of the year. And then the other piece to remember when thinking about the sequencing of occupancy is that our Indeed Tower project starts coming into the numbers in the fourth quarter of 2023 as we mentioned. So, that is factored into our occupancy projection.

Helpful. And can you speak a bit more about what you're seeing in the financing environment? And what further financing activity, if any, apart from the outstanding term loan is reflected in your guidance, just given your capital needs this year?

So, there's nothing else factored into our guidance on the financing side other than what we've laid out to the term loan and then the dispositions. As far as the sources and uses go, we don't need to sell those assets in order to fulfill our funding plan. We can do all of that with the cash on hand and the proceeds from our term loan. And as far as the financing environment, I think we have found the most effective source of capital has been the term loan market, which is why we've pursued that and to be able to get debt at SOFR plus 95, we think is pretty attractive. We know others may take a different approach and everyone's got to do what works best for them. It does seem like the markets are opening up, the financing markets, at least early this year, have opened up a little bit more relative to last year. but we're pretty comfortable where we sit.

Thank you for taking my questions and congrats on the promotions, everyone.

Thank you. The next question comes from Blaine Heck with Wells Fargo. Your line is open.

Great. Thanks. Good morning out there. John, there's a slide on capital allocation and your typical investor presentation deck that goes through your net investment decisions during economic contractions and expansions. And really shows that you guys have been counter-cyclical investing in contractions and selling into strength. Like you said, 2022 was a relatively light year for acquisitions, dispositions and development starts, but as you look into 2023 and even into 2024, how do you think you guys are kind of positioned to take advantage of the weak market from a capital allocation perspective?

Well, it's a good question, and it's one that will play out over time. That slide that you mentioned, I think everybody on this call has seen it knows it's one of my favorites because it does show there are times when you want to buy aggressively, times when you want to sell, times you want to develop and times when you want to just prepare for what's next. We're prepared. We are starting to see some assets that are coming to market or rumored to be coming to market. I don't know whether they'll transact, whether there's still price exploration; there are so few data points for quality assets that it's a little hard to know when it's going to open up. I think the comment that Eliott just made that the financing markets are beginning to open up for quality deals and quality borrowers. That will help stabilize things with the Fed backing off, reducing the rate of increase— that's a positive sign. So, at some point, we'll get to a more stabilized market where there are more buyers that are able to transact and probably more sellers are willing to transact. But that's a ways off. So, we're prepared. We're very active in knowing what's coming to market as people start thinking about it. But we don't have any specific assets that we're looking at buying right now. We're looking.

Okay, great. That's helpful. Second question, can you just talk about leasing progress at Indeed Tower? You guys increased the lease rate there to 71%, but you're facing some additional competitive space being delivered or subleased in the market in the near term. I guess, is there any sense of urgency to get leases done there before some of that new space is delivered?

Hi Blaine, this is Rob. Currently, we're at 71% occupancy at Indeed, and we have a strong pipeline. While I can't predict when we will finalize new leases, we anticipate that this leasing percentage will rise. Austin continues to be an active market, more so than many other parts of the country, as companies are eager to find space and attract local talent. I want to mention that while there has been talk about new sublease spaces hitting the market, particularly larger ones, it often takes the sub-lessors time to figure out how to make those spaces work for them, as it's not their main focus. In contrast, owner-developers like us handle this regularly. So, while there have been reports about sublease spaces becoming available, I don't see it as an immediate concern since those companies have other priorities to address.

That’s helpful. Thanks guys.

Thank you. The next question comes from Michael Griffin with Citi. You may proceed.

Great. Thanks John, I think you started off in your prepared remarks, talking about a more concerted effort from business leaders to bring their employees back. And I'm just curious, in your conversations that you're having, how much could we really expect this utilization rate to increase? Is there a chance that it ever at some point gets back to that pre-COVID utilization rate? Or are we going to be stuck in this, call it low to mid-50% range? Any additional color there would be great.

Yes. Well, I happen to be in San Diego today, and San Diego, at least in our properties, the utilization rate is back up in most cases to what it was pre-pandemic. We're seeing that in Austin as well. I've seen — I made comments back at our Investor Day in November preceding NAREIT that in San Francisco alone, it more than doubled at Labor Day, and it's increased since then; similarly, in Seattle. In L.A., we're seeing more and more people back to work. Rob can give you what the numbers are there. We've had some vacancy in Hollywood near the El Centro building that's, I don't know, 70-or-so thousand feet. Don't hold me to that number, but Robert can give you the exact number, and we have quite a bit of interest from a multitude of companies. So, it's happening. It's not uniformly happening in each and every market, but it's happening. And I'm optimistic that we're going to see some big improvements over the course of this year. Like anything, good stuff generally takes longer; tough stuff generally, as everybody thinks about more quickly, it's more present in our minds. But I'm optimistic based upon what we're seeing. And we see it in our garage revenue. We've talked about that in prior calls. It's way up over the last couple of years. So, more would be seen, but — and does it get to your point, does it get back to pre-pandemic? The new occupancy is going to be a little bit different. There's a lot more open space and common area space and so forth, a lot less in the way of the work tables and whatnot. So, the actual occupancy in the same square footage of people, even when fully occupied is likely to be fewer people per square foot, if that makes any sense. So, that's kind of the trends we're seeing.

Great. That's certainly some helpful color. And then maybe real quickly on life science, particularly the redevelopment announced at Menlo Park. I guess why does this make sense now? And then could you give us a sense if you've identified any other buildings that could be candidates for a possible redevelopment like this?

Let me start with just the candidates. We always look at our buildings, whether they should be converted, whether they should be renovated, whether they should be some way repositioned, and we that's a normal course of our business. In 2021, we announced three renovations to our conversions on life science down in San Diego that were all leased, and Menlo Park is a complex where we have a lot of life science. So, we know what the demand is there. And Rob, if you want to give a little bit more detail, go right ahead.

Sure. Mike, the way I'd look at it is that by doing this life science conversion, we're effectively doubling the number of prospects that we can engage with. There's a number of office tenants that are in the market, but there's also pretty much an equal number of life science tenants in and around Menlo Park, Redwood Shores, and Redwood City. And so we looked at the overall market demand from both office and life science, and this project, given its design and being multiple buildings, we can answer to both needs, and we already have life science in the project. So, it just made a lot of sense.

Great. That’s it for me. Thanks for the time.

Thank you. The following question comes from Steve Sakwa with Evercore. You may proceed.

Yes. Thanks. Eliott, I appreciate all the detail you went through on the occupancy. I guess I'm just a little bit confused in the sense that you're saying Indeed Tower is paying rent, but yet the building and the occupancy stats don't kind of fully flow into your numbers until the end of the year. Am I sort of hearing you correctly or am I missing something?

No, you're hearing us correctly. I think typically, and we've done this in other instances, most notably with 333 Dexter, there's a difference between when revenue commences on a portion of the building and when the building has qualified for going into service. In the case of Indeed Tower, we are starting to get rent from Indeed; that starts the 12-month clock by which we can complete the lease-up. After the 12-month clock, it has fully finished being a development project and it goes into service for occupancy calculation. So, that's something that we've done in many other projects.

Okay. So, if I take kind of the move-outs that you described, DIRECTV and some other move-outs in January, plus the Amazon move out that's coming in April. If I do my math right, that kind of gets you to around the high end of your occupancy of about 88%. And you're sort of talking about a low end of being 86.5%. Is that kind of geared to anything specific? Or is that just sort of cautiousness or just uncertainty in the marketplace and giving yourselves some wiggle room on retention and slow new leasing?

I think that there are a lot of puts and takes when we think about how to get to a number, and we try to highlight the major factors. I think in two quarters ago, we referenced the Pac-12 move-out, which happens in 2023 as well. So, there are obviously a lot of moving pieces there, but we think we're pretty comfortable between 86.5% and 88%.

Well, Rob can give you the specifics on the market and what we've got going there. But I always go back to this, Steve, that all these companies have a lot of new products that they're dealing with. They've got to figure out where their energy is going to be spent and whether it's life science or others. Everybody is trying to figure out what their new footprint is going to be. And with that, Rob, if you don't mind going through just drilling down the responses or comments to the questions.

Sure. I think a little more into what John was saying, Steve, is that life science has traditionally been and continues to be a little more thoughtful, I guess, slower in their uptake of space, given a lot of the factors John said, whether it's pending patents, whether it's other new innovations they're working on, and they just are a slower tenant in terms of — they're more like a fire category tenant, honestly, in terms of their uptake of space. And you hit on — the second part of your question was valid, which is that the buildings right now have steel up or topped out; they're more visible, and we've noticed an increase in activity actually. We still have large users looking, but we've noticed a marked increase in single floor or double floor users. So, as the buildings continue to progress, we expect that visibility to translate into more tours and demand. So, we're kind of still in the early stages, but now that we have steel up, things are moving forward. And I guess the last thing I'd say is no industry is immune from the uncertainty in the economy we're in. So, as I said earlier, when I was answering Nick's question, tenants are moving slower due to uncertainty.

Got it. Thanks.

Thank you. The next question comes from Tom Catherwood with BTIG. You may proceed.

Thanks, and good morning, everybody. Eliott, sorry to keep drilling on occupancy here, but just some still not lining up for me. I understand the move out is very helpful. But when we look at the difference between leased and occupancy right now, it implies maybe a little over 200,000 square feet of leases that haven't yet commenced. Is the expectation that those take longer to come online, that's later in the year, which drags down average occupancy? Or it seems like that would push you up even above the top end of the range that you have now? How are you factoring that into guidance?

Yes. It's mainly a weighting thing, I think, that you're the missing piece there. The move-outs that we talked about are in January, April, kind of the first half of the year, and the bulk of the move-ins are in the back half of the year. So, you're right; that square footage is coming in, but in terms of the waiting for the total year, it doesn't have a full-year impact, whereas the move-outs have much more closer to a full-year impact.

Sure. Well, as we've said before, there's different segments of sublease space or increments of it. Some of it is just obsolete space that is going to be very difficult to move. I think what you're seeing, particularly in San Francisco, but in other markets also is that some sublease space is converting to direct space. And again, you can't generalize about that. Some of it will be very good space, Class A, and some of it will be not so good. And so, you have that kind of convergence there of sublease becoming direct. Sublease space is always a factor in a negotiation or in a market. But again, if you’re really looking at flight to quality, the sublease space that is available using San Francisco as an example, more than half of that is space that we wouldn't consider competitive to premium product and assets like we have. Another statistic kind of going off what John said in his remarks, 70% of the deals done in San Francisco in the fourth quarter of 2022 were into a space that was basically 2010 or newer space. And so whether that's sublease or whether that's direct, the rates are going to be higher than they would be in just kind of Tier 2 space or Class B, B plus. And that's universal. I mean that's going to be whether you're talking Manhattan or wherever; that's just a fact.

Got it. That’s it for me. Thanks everyone.

Thank you. The next question comes from Dave Rogers with Baird. Your line is open.

Hey everyone. Tyler, congratulations on the retirement. It's been good to work with you all these years, and congrats to everybody else. John, maybe on investment. Blaine asked the question earlier, but with respect to development versus acquisitions, I'm kind of curious on your thoughts, if we're talking only the top 10% or 15% of assets now in any particular market are super attractive from a tenant perspective, I mean, do you really anticipate seeing a number of opportunities that come as distressed opportunities in that 10% to 15% subset? Are you really interested in those opportunities, knowing that you're facing kind of a next-generation rollout? Or would you rather just build? I guess, I'm curious about how much distress really is attractive for you and the REITs overall versus wooing a tenant away and building them a new building?

Yes, it's a really perceptive question. And I don't recall, Dave, whether you were at our Investor Day, but I comment on that, then the target list of buildings that meet our locational and our sort of the quality, not only quality in terms of finishes and all that sort of stuff, but the floor plates, etc. that are attractive — would be attractive to us then have to be trading at a price that makes sense to us. So, I think it's going to be harder to find quality assets across our markets than it has been. But having said that, we're pretty innovative people. If we find something that's in the right market that can be made to be the kind of building that we know people want, we have the skill set to accomplish that. And there's been a lot of times, and a lot of buildings and so forth in periods where we were less optimistic than we ended up, that our actions dictated. So, you just have to be out there; it's like a fisherman. You have to be out there fishing, and you throw a lot of them back, maybe a bad analogy because I'm not even a fisherman. But on the development side, if you're quite perceptive again, development, you're not going to do it unless you're pretty confident you're going to get the kind of return that makes sense. You've got best-in-class product with long life ahead of it and so forth. And we, of course, are pretty good developers and have a good development pipeline. So, we just — we're going to keep us when we started buying in San Francisco in 2010; we caught the market by surprise. We bought aggressively good product that had the physicality we wanted. We positioned ourselves for development. We moved into that quickly. Every cycle has a little bit different execution, but you got to be nimble, and we are, and you got to have a great team and we do. And in the context of development sites, they are pretty difficult to find in our markets, and we control a number of them that are entitled. So, more to come.

And then maybe just a follow-up. You talked at NAREIT, John, about potentially looking at other markets. Does this environment to these opportunities make you more or less interested in adding another dot on the map or does that not really matter?

We're not looking at — to use your terminology, we're not in serious pursuit of any other dot on the map at this point. We do have a strategy for the greater Austin area, and we're excited about that. We're not executing anymore; we don't have any land sites or anything that we're looking at buying at this point. I think that may be an area where we find some opportunity to do so. Again, we have nothing that we're looking at. But there are some folks that have approached us where they thought they were going to be able to entitle things and then move it into a sale category. But obviously, there's a lot less appetite for risk; the interest rates and the economy and so forth have given a lot of people's hope. So, there may be some opportunities at some point in that area. But we're not looking seriously for any near-term execution in other markets.

Yes. Good morning out there. Again, Tyler, all the best, Eliott and the rest of the crew congratulations. A little bit of focus on Eliott, I think your comment about the earnings cadence this year was that the first half was going to be stronger than the second half, so you're going to see a gradual slowdown. I'm just wondering if we should kind of think about the second half really as the bottom or the inflection point earnings-wise as we start to look kind of beyond 2023? Or if there's still — first one again, you have Indeed Tower coming on board, you have Kilroy Phase 2 coming on board. Or should we kind of still be thinking about things a little bit differently about earnings cadence, even beyond back half of 2023?

Hey Tayo, so we obviously are talking about 2023 guidance. We don't have 2024 guidance yet, which is, I think, sort of where you're going. As you think about some of the drivers in those out years, you're right; we will have full years from Indeed in 2024. We'll have a full year from the two San Diego projects that are coming in, in 2023. And then just the big question is what happens to the core portfolio in 2024. So, I think those are some of the major drivers, and as we kind of progress throughout the year, we'll have better clarity on how those are going to play out in 2024.

Hey guys. Thanks for taking the question. I guess just curious, how are you guys thinking about the portfolio in terms of market concentration from a longer-term perspective? Are there certain markets where you see yourself expanding or contracting more so than others?

Yes. This is John, Dylan. That's a good question. It's one we ask ourselves quite a bit. In others — we're — three or four different products and with regard to life science, San Diego and San Francisco are two pretty key areas. So, we think we'll continue to grow in those markets. We don't have any plans at this point to be in any other markets with life science with regard to office concentrations. Over time — and it takes a long, long time, we're likely to be more active on the buy or the acquisition side in the Austin and beyond just because of the balance issue, but things never work out exactly as you might plan. On the development side, we have some pretty big development opportunities within the markets we're in today, and that is really in all four areas, five areas. And those will play out over time. Will we add significant development again over time as it's appropriate in the Greater Austin market? Probably. It's a very intellectual question, and I appreciate you asking it. I wish I could be a little bit more intellectual in answering it because at the end of the day, we don't have some internal formula about having this much here, not much there. To me, you've got to keep your eye on a lot of different factors and the factor that first and foremost in my mind, that should be in everybody's mind, is where is innovation growing and what kind — what's the supply or barrier to entry equation? In the comments I made in my earlier comments about artificial intelligence, I think this is going to be the biggest thing in tech that it's been, I guess, invented, if you will, in decades. It has massive, massive legs. And we're right in the middle of that.

I appreciate that. Thank you. And then I guess just one follow-up. It looked like Riot Games expanded their square footage in your portfolio? And then there was a footnote added that they have some square footage expiring sometime this year. I guess can you kind of update us on your renewal talks there or it's kind of indicating that they're likely to move out of that space?

Hi, this is Rob. I really don't want to — yes, I really don't want to comment on active discussions we're having especially in an environment like this. I just — all I can say is we're engaged, and more to come.

Yes. Thank you. I just wanted to ask, you have Salesforce as the top tenant. I know your leases are mostly in its average nine or 10-year term remaining. But just curious, have you had any conversations with them, just given the restructuring plans they announced and the possible office footprint reduction as to kind of what their plans are if that relates to any of the buildings you have them in?

John, I can — yes. In markets like this, we’re really in touch with all of our clients even more so now, but we — as a regular practice do, but now we have doubled down on it. So, we talk to Salesforce quite a bit. They successfully sublet space in 350 Mission, which is our building, but we're not having any discussions with them in any way about any changes beyond that, and they're happy in the building. Some of the space they have in the market is building their own and much older product. So, hard to say. I think it's notable that Salesforce, which had their work-from-anywhere policy, is one of the companies that's come back pretty quickly to three to four days of work in the office for most employees. So, I think a lot will change in the next year or so in terms of just, again, how many people are back to work, how companies are using space and demand will eventually play out. I mean we're in a cycle, right? And certain cycles are like 2019 where everything is great, and other cycles we've worked through. I mean one of the best things about our management team and the basic team we have in every region is that we cycle-tested and have been through these before, whether it's dot-com or the financial crisis or when.

Thank you and congratulations to everyone on the promotions, and good luck, Tyler, with your next chapter. We'll certainly miss you. Looking at the bigger picture, we've seen layoff announcements in your markets. Could you provide more insight into what's happening on the ground? You've mentioned that job levels are still higher than they were before the pandemic and over the past three years. What noticeable shifts are occurring? If we look ahead a year from now, how do you envision your markets compared to today, and will this affect the types of assets you want to own or the locations and submarkets you wish to focus on?

Well, it's a — that's a compound question, Jamie. Good job. We'll take it one at a time. Rob, do you want to take the first part?

Sure. Jamie, good to hear your voice. It's been a while. So, with respect to layoffs and what we're seeing in our markets, there's the headlines that all the media publishes. But then to your point, you get into the specifics. And when you look at some of the big tech layoffs, a lot of them have been in what I would call the softer sides of the business where they had multitudes of event planners or very robust HR departments because they were ultimately doubling their workforce over a short period of time. So, that's where we're seeing a lot of the focus, and that's not unusual, right? It's usually things like whether it's marketing, events, some HR and basically sort of headquarters-type functions. What we are seeing, and this is happening in the Bay Area quite a bit, is — and there's a statistic out there that the typical tech worker that's been laid off, whether it's from whatever company you can think of basically has a new job in three to four months. And that's from ZipRecruiter. So, I think it's a very dynamic situation in terms of layoffs and where things go. And the one thing that we've always loved about the West Coast is the talent pool that's here in the universities that keep graduating this high-tech talent that everybody wants. So, although we're in a low now, we will get through this, and the cycle will turn.

I'd make the — this point, Jamie. Just sort of broadly speaking, this flight to quality is massive, and we think we're really well-positioned. And as Rob pointed out earlier, a lot of what we're seeing, although not entirely because there was quite a bit of the recent lease we've done where there are new deals and where companies are expanding. The fact is that the predominant thing we see right now is the flight to quality. So, people are moving out of an old building into a newer building, be it ours or somebody else's. So that's not showing positive growth in most markets. But when that collides with growth, you're going to have a flight to quality and growth in quality. And then you look at the delivery of quality space, it's way off, and I think it's going to be a lot less under construction this year and possibly next. The dynamics can change for the premium space very, very quickly. And — so I think that's a dynamic to be aware of, and I think we'll be an early recipient of that. In terms of — I think part of your question was what we might see in a year? And how does that translate into our planning. Was that the last couple of parts of your question?

Yes. No, timing is always certainly tough. And let's just end it there. That's it for me, John. Thanks a lot guys. Congrats on the promotion.

Hi. Just a very quick follow-up. 2023 guidance, are there any term fees in that number?

There's a little bit in the first quarter; expect a few million bucks in the quarter.

Okay. And nothing else for the rest of the year?

Not at this point.

Great. Well, thank you, Tania, and thank you, everyone, for joining us today. We appreciate your continued interest in Kilroy. Have a great day.

This concludes the conference call. Thank you for your participation. You may now disconnect your lines.