Q3 2024 Kilroy Realty Corp Earnings Call

In This Article:

Participants

Taylor Friend; Senior Vice President, Capital Markets and Treasurer; Kilroy Realty Corp

Angela Aman; Chief Executive Officer, Director; Kilroy Realty Corp

Eliott Trencher; Executive Vice President, Chief Investment Officer; Kilroy Realty Corp

Jeffrey Kuehling; Executive Vice President, Chief Financial Officer; Kilroy Realty Corp

A. Robert Paratte; Executive Vice President, Chief Leasing Officer and Senior Advisor to the Chairman; Kilroy Realty Corp

Nicholas Yulico; Analyst; Scotia Bank

Upal Rana; Analyst; KeyBanc Capital Markets

Blaine Heck; Analyst; Wells Fargo

Jeffrey Spector; Analyst; Bank of America Merrill Lynch

Anthony Paolone; Analyst; JP Morgan

Michael Griffin; Analyst; Citigroup Investment Research

Steve Sakwa; Analyst; Evercore ISI

John P. Kim; Analyst; BMO Capital Markets Corp.

Dylan Burzinski; Analyst; Green Street Advisors

Caitlin Burrows; Analyst; Goldman Sachs

Thomas Catherwood; Analyst; BTIG

Peter Abramowitz; Analyst; Jefferies LLC

Presentation

Operator

Hello, everyone and thank you for joining the KRC 3Q '24 earnings conference call. My name is Harry and I'll be coordinating your call today. (Operator Instructions)
It is now my pleasure to hand you over to your host, Taylor Friend, Senior Vice President, Capital Markets and Treasurer to begin. Please go ahead.

Taylor Friend

Good morning, everyone. Thank you for joining us. On the call with me today are Angela Aman, CEO; Jeffrey Kuehling, EVP, CFO; and Eliott Trencher, EVP, CIO. In addition, Justin Smart, President; and Rob Paratte, EVP, Chief Leasing Officer will be available for Q&A.
At the outset, I need to say that some of the information we will be discussing during this call is forward-looking in nature. Please refer to our supplemental package for a statement regarding the forward-looking information on this call and in the supplemental.
This call is being webcast live on our website and will be available for replay for the next eight days. 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.
Angela will start the call with a strategic overview and quarterly highlights. Eliott will discuss our recent capital allocation activities with the transaction market outlook and Jeffrey will discuss our financial results, provide you with updated 2024 guidance. Then we will be happy to take your questions. Angela?

Angela Aman

Thanks, Taylor. I'm pleased to report on a strong quarter of execution as we continue to navigate a challenging but steadily recovering operational environment. Kilroy is high quality, well, amenitized portfolio, differentiated tenant relationships, experienced and talented team, strong balance sheet and robust liquidity profile uniquely position this platform to capitalize on the recovery that continues to take hold across our markets.
Our third quarter, financial and operational results speak to this dynamic. FFO for the third quarter was a $1.17 per share. A sequential increase of $0.07 due to a combination of recurring and non-recurring items which Jeffrey will cover in a few minutes.
Based on our strong third quarter performance and outlook for the balance of the year. We increased our full year FFO guidance by $0.15 per share at the midpoint of the range.
During the period, we signed approximately 436,000 square feet of leases including 209,000 square feet of short term leases. In addition, we also signed 110,000 square foot short term lease related to the Derm Tech bankruptcy.
The short term leasing activity, this quarter was predominantly comprised of renewal for tenants that will be vacating or significantly downsizing in the portfolio in the near term excluding short term transactions, the weighted average lease term on executed deals with approximately 5.5 years with cash leasing spreads of approximately 7%.
Notable transactions this quarter included the previously announced 118,000 square foot SAP renewal in Bellevue, Washington and a new 28,000 square foot lease with NVIDIA in South Lake Union.
Recent leasing activity in conjunction with an early rent commencement on a previously executed new lease drove a 75 basis point increase in the midpoint of our average occupancy guidance to 84%. As SAP NVIDIA and late stage deals in our future pipeline highlight, we continue to see robust demand in Bellevue and are beginning to see signs of a pickup in demand in South Lake Union and Seattle.
Amazon's recent five day return to office announcement is further accelerating the dynamics that we have seen in the Pacific Northwest over the course of 2024 and is the latest in a series of announcements from major West Coast employers that had worked hard to embrace remote work only to arrive at the conclusion that in person collaboration is the most effective way to enhance innovation and productivity and build a differentiated culture that drives long term sustainable performance.
In San Diego where physical occupancy has been at pre pandemic levels for some time. We continue to experience strong demand. And recently, we have seen a notable uptick in interest from existing tenants looking to expand within our portfolio.
In several instances this demand is coming from tenants that previously downsized but are now realizing that they underestimated their utilization and optimal real estate requirements and are looking for opportunities to course correct.
In Los Angeles, while aggregate demand remains soft, we continue to execute well, driving improvements and sequential occupancy in each of our submarkets. Of note, we continue to see solid activity in Long Beach and have recently seen a nice uptick in interest in Culver City driven by professional service and technology tenants.
And in San Francisco, we remain encouraged by ongoing improvements in physical occupancy, foot traffic and the overall vibrancy of the city. The momentum being created by the continued growth and evolution of the AI industry has been and will continue to be a significant catalyst for this market.
The Bay area commands by far the highest proportion of AI related BC investment in the country which is actively driving significant levels of new business formation. A very positive longer term trend for this market.
While to date many early stage AI tenants have focused their real estate searches on sublease space that is immediately available for occupancy. It's worth noting that approximately half of the remaining available sublease space in the market has a lease expiration prior to the end of 2026 limiting the attractiveness of the space to many users.
As a result, prospective tenants are shifting their focus to direct deals and we're working hard to capitalize on this dynamic by leveraging our well developed and properly executed spec suites program. As it relates to Kilroy Oyster Point in South San Francisco we're excited to begin delivery of the second phase of this extraordinary campus next month.
In early 2024, we described a meaningful acceleration in tour activity off of a very low 2023 base. That higher level of interest and tour activity has remained relatively consistent throughout 2024. But over the last two to three months, we've seen a crystallization of this demand as tour activity has expanded to include a much wider range of potential tenants and these tenants appear more prepared to execute.
Recently, we have spent time on site with early and late stage life science companies, research institutions, technology companies and other more traditional office users. Well, there's no question that the deal process has become significantly elongated. We remain highly convicted in the quality of what we are delivering and its unique ability to cater to a wide range of highly discerning tenants.
Well, Eliott will discuss the transaction market in more detail in a moment, I will note that the environment is clearly. Evolving financing markets while still challenging or improving, leading more sellers to test the market. As a result, Eliott and team are spending more time evaluating actionable deals through a disciplined risk adjusted return framework while also making good progress on the land sales discussed last quarter.
In addition, I'm delighted to announce our recent acquisition of Junction at Del Mar 104,000 square foot two building campus located strategically adjacent to Kilroy's One Paseo mixed use project in the Del Mar Heights submarket of San Diego.
While a small transaction, this deal represents an excellent value proposition for the company increasing our presence in one of our strongest existing submarkets and achieving a very compelling risk adjusted return on an as is basis with additional potential upside from longer term redevelopment and integration with One Paseo.
Before turning the call over to Eliott, I want to take a moment to thank the entire Kilroy team for the hard work, dedication and flexibility I've seen every day since joining this platform. It has been gratifying to see the way this organization confronts challenges, leans into opportunities and embraces change. And I'm excited to see what we can deliver together in 2025. Eliott?

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