Marubeni Corp

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Good afternoon and welcome to the Kilroy Realty Corporation Fourth Quarter 2021 Earnings Conference Call. My name is Harry, and I will be your operator today. [Operator Instructions] I would now like to hand the conference over to Doug Butterworth, Senior Director of Corporate Finance. Thank you. You may proceed.

Good morning, everyone. Thank you for joining us. On the call with me are Angela Aman, CEO; Jeffrey Kuehling, EVP, CFO and Treasurer; and Eliott Trencher, EVP, CIO. In addition, Justin Smart, President; and Rob Porat, EVP, Chief Leasing Officer, will be available for Q&A.

Please note 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 8 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. Elliot will provide a transaction market outlook and Jeffrey will discuss our financial results and provide you with our 2025 guidance, then we'll be happy to take your questions. Angela?

Thanks, Doug. I'm pleased to report on the strong end to 2024, which was [indiscernible] by outperformance in our financial results and a material acceleration in leasing activity. In addition, throughout the course of last year, the team worked tirelessly to prepare for the recovery we knew would take hold in our markets, making critical senior hires across the platform, rethinking processes and systems to be more efficient and nimble, successfully completing several in-process development and major repositioning projects, taking significant steps to address our future development pipeline and other nonincome-producing assets, including the sale of our corporate airplane, which closed in the fourth quarter and actively monitoring the market for opportunistic transactions.

The Kilroy team has risen to every challenge that has presented itself. And the recent devastation in Los Angeles, the location of our corporate headquarters is no exception. I've been inspired by the strength and resilience of this team as they work to support our Los Angeles tenants and each other as we've collectively navigated a very challenging start to 2025.

During the fourth quarter of last year, we signed approximately 708,000 square feet of leases, achieving our highest level of leasing activity since the fourth quarter of 2019, a testament to the ongoing demand for high-quality spaces that align with evolving tenant needs.

The quarter was headlined by 2 significant deals. First, we executed a multi-floor lease with Walmart at Skyline Tower in Bellevue, Washington. Our regional team worked creatively to accommodate Walmart's significant requirement and accelerated time line, simultaneously executing an early termination with an existing tenant for a portion of the space that Walmart will occupy, addressing a late 2025 expiration and achieving a meaningful rent increase in the process.

In addition, we executed a 274,000 square foot new lease in the San Francisco Bay area with a global technology company that is the subtenant occupying our largest 2026 expiration. Over 70% of the square footage for this expiration has now been addressed through the lease sign this quarter and a 157,000 square foot lease signed with the same tenant in the fourth quarter of 2023. This execution, combined with the SAP renewal in Bellevue, Washington, announced last quarter, underscores both the proactivity of our team as it relates to addressing our 2026 lease expirations and the increased willingness of tenants to engage and make long-term commitments related to their space needs.

Given historically low levels of new supply, and increased workplace attendance requirements taking effect, our markets are demonstrating important signs of sustained recovery, and we expect these trends to continue to accelerate over the next several years.

Kilroy has a number of unique opportunities to capture this growing momentum as we executed over the course of this year. One particular area of focus is the embedded upside inherent in our highest quality vacancies, specifically those concentrated and recently developed or repositioned assets, including [indiscernible] ate in Seattle, 2100 Kettner in San Diego and Indeed Tower in Austin. These properties set the standard for quality, functionality and market-leading amenitization, ideally positioning them within their respective markets.

Vacant space at these assets alone represented 410 basis points of leased occupancy upside at year-end, highlighting an exceptional source of future growth for the company. And while not reflected in our occupancy statistics until early 2026, the second phase of Kilroy Oyster Point in South San Francisco will be a substantial growth driver for the company in the coming years. The project received its temporary certificate of occupancy in January 2025, following some slight delays in municipal approvals and is now fully ready to welcome tenants. The spec suites, conference facilities, food and beverage offerings and outdoor meeting and event spaces set this project apart from competitive supply in the market and are driving constructive conversations with several life science and office users.

While the environment in South San Francisco remains highly competitive, we are convicted in the quality of what we're delivering in Oyster Point and the long-term success of this project.

As discussed on prior calls, we continue to proactively assess our future development pipeline and are executing on various programs to derisk, accelerate and maximize value realization for our shareholders. We expect to continue to hold certain parcels such as the land associated with future phases of Kilroy Oyster Point, as our current program continues to represent the best path forward.

In other cases, including some of our sites in Southern California, it is clear that the path to maximizing value will be a full reentitlement to an alternative use, such as residential, and we're focused on defining the execution path that will best balance our desire to maximize proceeds with accelerating the timing of monetization. In still other cases, such as with the Flower Mart parcel in San Francisco, the path to value maximization will require more work and exploration. The original plans for the Flower Mart were created against the backdrop of a very different market environment and contemplated 2.3 million square feet of primarily office space to be supported by significant infrastructure investments in the site, which limit the ability to face construction. Our team is actively working to create additional optionality for this project that will allow us to be responsive to the market as the recovery continues.

Although the steps we are taking now will maximize the value of the site over time, there will likely be an earnings implication in the second half of the year if our planning and design efforts conclude and development is still unwarranted based on market conditions. Jeffrey will provide some additional details in a moment.

In conclusion, our fourth quarter and full year results, including our robust leasing volume speak to the strength we see emerging across our markets. And the Kilroy team has prepared for a busy year across every part of our platform. I want to thank the team again for their hard work and dedication in 2024 and for the energy and enthusiasm they are bringing to 2025. Eliott?

Thanks, Angela. The transaction market closed the year on a positive trajectory. Deal volume and financing levels were higher year-over-year with a bias towards smaller deals. In 2024, approximately 85% of office sales were under $100 million. By comparison, this number was 70% of transactions back in 2019. Another sign of progress has been the return of core capital to the sector. In the fourth quarter, there were notable core deals in Austin and the Bay Area with growing in yields in the mid-6% to low 7% range.

The combination of deeper bidding pools and a variety of capital sources is encouraging us to start testing the sales market again, something we put on hold over the last few years as valuations were in flux. We will focus our disposition efforts on properties where the current market value does not appropriately reflect our assessment of the medium-term risk. Fortunately, our funding needs are modest over the next few years, and our balance sheet is in good shape, so we will only proceed with sales that meet our stringent criteria.

And while we did not acquire anything during the quarter, we remain optimistic about the opportunity set of potential value-creating acquisitions. Our strong balance sheet, local market knowledge and operational insights are all advantages we expect to put to good use in 2025. As always, we will remain disciplined in our approach and judicious for shareholder capital.

Turning to land sales. As we mentioned last quarter, we are in advanced discussions with residential developers on 2 sites in our future development pipeline that are expected to generate in excess of $150 million of proceeds. There remains an acute need for more housing in Southern California and reentitling commercial land is a logical way to address the significant and growing problem. We expect to have more to discuss on our capital recycling initiatives as the year progresses.

Given continued uncertainty in the transaction market and our expectations for an elongated closing process on our land sales, guidance does not contemplate any FFO impact from such activities, and we will continue to update our expectations throughout the year.

With that, I will turn the call over to Jeffrey.

Thanks, Elliot. FFO was $1.20 per diluted share in the fourth quarter, and it was impacted by several onetime items totaling approximately $0.11 per share, including a $6 million gain on the sale of the corporate plan, $4.7 million of GAAP restoration fee income and $2.5 million of GAAP termination fee income. Cash same-property NOI growth was 70 basis points in the fourth quarter, including a 90-basis-point contribution related to restoration and termination fee income.

Occupancy ended the year at 82.8%, and it was impacted by several large move-outs that were discussed on last quarter's call, including Capital One and Microsoft in the San Francisco Bay Area and a short-term lease expiration in Los Angeles.

Now let's discuss 2025 guidance. Our 2025 FFO guidance range is $3.85 to $4.05 per diluted share, representing a midpoint of $3.95. 2025 average occupancy is expected to range between 80% and 82%, a decrease of approximately 300 basis points versus our average occupancy in 2024. The decrease is primarily driven by the previously mentioned fourth quarter 2024 move-outs as well as 3 larger move-outs or down sizings expected to occur in the first quarter of 2025 and totaling approximately 216,000 square feet. Following the activity in the first quarter, no remaining expiration in 2025 is in excess of 50,000 square feet.

Cash same-property NOI is projected to decline between negative 1.5% to negative 3%. At the midpoint of the range, base rent will detract approximately 50 basis points from growth, net recoveries will detract approximately 75 basis points and nonrecurring items such as restoration fee income will be tracked approximately 100 basis points. Despite the almost 300 basis point decline in average occupancy expected during 2025, the limited detraction from base rent highlights the strength of our contractual rent growth across the portfolio. Please note that the same-property NOI growth is expected to be lower in the second half of the year, primarily due to the trajectory of occupancy and significant restoration fee income recognized in the second half of 2024.

As part of our enhanced disclosure efforts beginning in 2025, lease termination fee income will be excluded from both cash and GAAP NOI, a change that has been reflected in our cash same-property NOI guidance. FFO guidance assumes $3 million of such income, down from $7 million in 2024. Noncash GAAP NOI adjustments, which include the amortization of deferred rent and net below-market rent, straight line rent and other lease-related adjustments are expected to decline significantly in 2025, but remain positive with a range of $2 million to $5 million, down from over $20 million in 2024. The year-over-year decrease primarily reflects the cadence of leasing activity over the last 24 months.

The combination of G&A and leasing costs totaled just under $81 million last year, a steep decline from approximately $100 million in 2023. During 2024, our focus was on both reducing the total amount of overhead spending and ensuring that each dollar of spending was appropriately allocated across the platform. As we executed on these goals, overhead spending in 2024 came in artificially low as cost savings initiatives outpaced the timing of certain platform investments. The $83 million to $85 million overhead guidance we have provided for 2025 represents a more appropriate run rate going forward.

Moving to interest income. You may recall that last January, we prefunded our capital needs for 2024, resulting in elevated cash balances for most of the year, which were utilized to pay down a portion of our term loan balances and repay $400 million of unsecured notes at maturity in December. We expect to maintain less cash on hand during 2025. And in turn, we expect a significant reduction in interest income, down from $38 million in 2024 to about $6 million in 2025.

As it relates to capitalized interest during 2025, please note 2 things: One, as construction at KOP Phase 2 was completed in January, interest capitalization will cease at the earlier of tenant occupancy for 1 year from base building completion, which will now occur in January 2026. Two, as we have previously discussed, we remain committed to methodically evaluating each land parcel to determine its highest and best use and the optimal program for project execution.

To provide some additional context related to Angela's comments on the Flower Mart, we currently capitalize approximately $7 million of interest expense and an additional $1 million of real estate taxes and other expenses for the project each quarter. Our 2025 guidance incorporates a range of potential capitalization scenarios for this project, and at the midpoint, assumes that capitalization ceases at the beginning of the fourth quarter. This assumption, combined with our assumptions for several other parcels in the future development pipeline, are expected to result in capitalized interest of approximately $72 million in 2025 at the midpoint of the range versus $82.5 million recognized in 2024. We will update these assumptions as our plans to lead side.

In conclusion, we remain well positioned to navigate the evolving market landscape with strong liquidity and stable leasing fundamentals and a disciplined capital allocation strategy. Our continued focus on maximizing -- or on maintaining a flexible balance sheet, monetizing noncore assets and delivering high-quality developments will allow us to drive long-term value while adapting to changes in market conditions.

With that, we're happy to take your questions. Operator?

[Operator Instructions] With that, our first question today will be from the line of Pal Reiner with KeyCorp.

You guys laid out several known move-outs for 2025, particularly 1Q. I was wondering what your current visibility on occupancy is for 2025. Do you expect to potentially bottom this year?

Yes. I mean just to talk through a little bit sort of the dynamic in 2021 that I think -- excuse me, the dynamic in 2025 that I think Jeffrey did a good job at laying out. We've got some significant move-outs in the first quarter of the year, which include an 80,000 square foot move out we had talked about previously, in addition to that short-term lease associated with the bankruptcy situation from the fourth quarter that will also be, we believe, significantly downsizing, but remaining in the portfolio in Q1. In addition, as I mentioned in my prepared remarks, there's a pretty exciting new deal in Bellevue that also resulted in a termination that will take effect during the first quarter with that new tenant coming online later in the year as well. after we get past the first quarter, we do expect a lot more stability in the occupancy level throughout the year. Jeffrey mentioned that after the first quarter, our largest move out -- or largest expiration, I should say, in 2025 is no greater than 50,000 feet. So there's a really granular pool, and we will start to really see the benefit, I think, from the leasing activity that's been done over the last couple of quarters.

As we look into 2026, as you can see in the lease expiration schedule, we certainly have a higher move out year in 2026. And I think that Rob and his team have been doing a really excellent job in engaging with tenants as early as possible and starting to address some of those larger expirations. Our largest expiration in 2026 has been 1 lease that was just under 600,000 feet. And as I also mentioned in my prepared remarks, we made some significant headway on that this quarter and have now addressed over 70% of that expiration. So I think we're making really good progress as it relates to 2026, feel pretty good after we get through the first quarter about how expirations look for the balance of 2025, but sort of how things settle out between the back half of '25 and into '26 is just going to depend on our continued ability to proactively address those '26 expirations and continue to see leasing pick up across the portfolio for currently vacant space.

Okay. Great. That was helpful. And then on KOP 2, could you give us a sense of what the conversations have been like over the past few months? And maybe what your existing pipeline is currently there?

Yes. I'll just kick it off and then turn it over to Rob for some additional detail. I mean, I think what I'd say about this project today is that the completion of the project in January has really sort of changed the nature of the conversations we're having at that project. I think even if you saw the project pretty recently, now having the amenities fully completed, now having the spec suites fully furnished, having all the landscaping and has really changed the dynamic and how that project feels. And we're seeing that result in additional tour activity and additional constructive conversations across a broad range of tenants and a broad range of sizes as well. I think we had some pretty good traction in a slightly larger format size than just the spec suites has been about 40,000 to 60,000 square foot range as well.

So I think all of the dynamics are healthy. As we mentioned earlier, South San Francisco remains a very competitive market and there is significant vacancy in the market that we're competing against. But I really believe the quality of what we've delivered in Oyster Point and the scale of what we've delivered in Oyster Point is getting a tremendous amount of focus from market participants, both the brokerage community and from tenants in the market and even tenants that might not have been considering Oyster Point as a location. And I think we're really pleased at how things are evolving, kind of post the completion of that project.

Sure. Adding on to what Angela said, this is Rob Pratte, by the way, taking a step back and just looking at KOP, now that it's delivered, it is the most notable newly delivered life science project in the most preeminent market on the West Coast for life science, and, as a result, we're seeing a really broad swath of interest from tenants as well as brokers from across the Bay Area. And that focus sort of runs from life science, the buildings or purpose-built life science, that was the original intent, that's still our intent, that's our focus for leasing is life science. But given the campus-like nature of the project and the leading-edge amenities that Angela outlined, it's attracting attention from technology companies and financial services and sort of what you know the Bay area to be, especially from large users. So the project has really come on to its own. And as I said, it's attracting a lot of attention in a positive way. And I know that feedback we're getting both from users as well as the brokerage community is that there's nothing else like this campus that's available.

In terms of our pipeline, you've heard us over the past few quarters talk about how our pipeline has continued to grow and that remains the case. We're in discussions with a variety of companies in different sizes. Our spec suites are very well received. They're furnished now. And again, it just makes -- when I think about the years we've been marketing this project, there's nothing like being able to walk it and go through the landscaping and sit in the conference center or go to an office floor as opposed to trying to market something from renderings and photographs. So that touch and feel experience is really translating into, we think, tangible activity.

The last thing I'd say is just the overall leasing environment in the Bay Area is improving for life science. VC funding for '24 was $11.1 billion, which is up 39% from 2023. And we all know -- and that's specific to life science, and we all know that VC funding is a big driver of the life science demand. There's also been activity in the market that's increased over '23, So as I said, I think in the overall summary, we're really poised well, and I'm very confident about 2025 in Oyster Point.

The next question will be from the line of Steve Sakwa with Evercore ISI.

Great. Angela, I just wanted to come back to your comment about the '26 lease expirations. And I think you said the largest one was $600,000 and addressed over 70% of that. Just to be clear, is that reflected, I guess, within the lease exploration schedule that's still showing 1.9 million feet? Or has that not maybe taken effect yet? I guess I'm just trying to make sure I understand kind of what's been addressed or what's still to be addressed?

Yes. That's a really good question, Steve. That has -- it's still showing in the 2026 expiration schedule. We did add some footnotes this quarter to give you a little bit more detail on what of that number, what in the '25 and '26 towers have already been addressed, which hopefully will be helpful. But the reason it's still showing in the '26 towers is because, as I mentioned in my prepared remarks, it wasn't a renewal with the existing tenant. It was a direct deal with the subtenant. And so you won't see that reflected until the new lease takes effect.

Okay. And then maybe just going back to kind of the Flower Mart. I guess it sounds like you've got maybe 5, 6 months to kind of work out some sort of maybe residential plan for that? I guess I'm just trying to read through the tea leaves. If you don't -- I guess I'm trying to put what milestones do you need to achieve in order to kind of continue to capitalize that project? Or what would sort of prompt you to go down the path that we just ran out of time, and eventually, we've got to just stop capitalizing the costs on that project?

It's what -- and hopefully, we're not making you read through too many [indiscernible]. We're trying to be as direct and transparent about it as we can. It's less about how much time can we capitalize and more about how much active work we're doing to continue to maximize value on the site and to prepare it for future development. So we think based on where we stand today, as we sort of talked about earlier, one of the main hurdles with this project as we think about how this could get executed at the right time in a way that's responsive to market conditions is the ability to phase the project. And so a lot of the work we're going to be doing over the course of this year is meant to really kind of redesign the program there so that it's easier to phase construction. This is something we talked about. We started talking about probably on last quarter's call, though I'm sure it's come up and conversations with the company has had historically as well.

Right now, just based on how the project was designed for 2.3 million square feet high density project with significant infrastructure investments that need to go into the site before you go vertical, just very difficult to face. So given how the market has shifted, I think it's reasonable to assume that even if development were to start or the way to get development started earlier rather than later is to make sure you've got the ability to phase it and you can not go spec on an enormous project, but do it in incremental pieces that are responsive to tenant demand. So that's the lion's share of the first component of the work we're doing.

And then I think to your question, I think the second piece is really evaluating the mix of uses that should be programmed on the site and really trying to understand, not just what will give us the opportunity to maximize value and be most responsive to the way the market kind of continues to shift and evolve, but what does the community need as well. And so that's the work we're going to do over the course of this year, have been doing that work over the last year as well. But we think the runway for that is probably through at some point in the second quarter. And as Jeffrey said in his prepared remarks, right -- excuse me, second half of the year. And as Jeffrey said in his prepared remarks, right now, we assume that capitalization will stop right around the beginning of the fourth quarter.

The next question will be from the line of Nick Yulico with Scotiabank.

Can you just talk about the cost for KOP Phase 2 went up a bit this quarter and the stabilization date, I think it was pushed out a quarter. Can you just talk about what drove those?

Yes. The timing was really related to just some slight delays in final municipal approvals. The project did reach full completion in January, as we noted in the press release. And so it's really -- it looks like a full quarter move, it was really less than that, I think, based on our plans. The change in cost was related to that delay, but also just the trajectory of lease-up for the project over the course of the next year.

Okay. And then second question is just going back to thinking about occupancy for the portfolio. I know you gave a lot of details on this year, which was helpful. But should we assume that you just -- you need sort of an overall pickup in new leasing activity in your markets, meaning that if you look at last year's level, you need to do more than that in terms of new leasing activity based on what I think was a lower retention ratio you've kind of had historically in the portfolio and ordered it back to occupancy growth? Is there anything sort of a high level that you can point to on that would be helpful?

No, I think that's the math, right? I think occupancy is going to come from where the retention rate settles out, and we do need new leasing to fill that bucket. I think that the movement you've seen in our leasing volume, particularly in new leasing volumes over the course of the last couple of quarters, give us some real confidence that we'll continue to see our markets overall continue to accelerate through 2025. But as we talked about, we've got some additional larger move-outs in the first quarter of this year. Things really stabilize after that and to really get occupancy moving in the right direction, we're going to need to see new leasing continue to accelerate.

The next question will be from the line of Jeffrey Spector with Bank of America.

Great. I guess just a fair follow-up to that conversation around occupancy and your other comments. I mean, -- and I know you're not providing '26 guidance, but I guess I just have to ask, what is the messaging then on '26 occupancy?

Yes, you're right. We're not providing 2026 guidance right now. But I do think we've tried to provide as much color and clarity as we can around 2026 lease expirations. It's been no surprise that 2026 is a larger expiration year for us. And we've talked for the last several quarters, really going all the way back to the fourth quarter of last year about the team's sort of proactivity around addressing those expirations early and doing as much as we can to continue to improve the retention rate off of what has been a historically lower number over the course of last year and 2024. So I do think the announcement this quarter that we signed 274,000 square feet associated with the largest expiration in 2026, which combined with 1 of the other deals that were signed with the same sub tenant about a year ago, has now addressed 70% of the largest expiration in 2026 is a very positive number.

As I mentioned in my prepared remarks as well, last quarter, we had announced the renewal for what I think was a substantial portion of the third largest renewal we had in 2026 as well. So the team really has been doing a very good and very proactive job at chipping away at some of the larger expirations in 2026, trying to get ahead of those and trying to solidify as much of that as possible. And as I mentioned, we've worked this quarter to provide additional clarity and transparency on the lease expiration schedule. So you can see the impact in some of those -- the ways that those have been addressed have been with new deals and not with renewals, they're still sitting in the 2026 towers.

So very focused on addressing that, stabilizing and improving the retention ratio as we look into '25 -- later '25 and into 2026. And and then continuing all the work the team is doing across the portfolio to really focus on new leasing activity and tap into the demand we're seeing recover really across markets.

The other thing I want to highlight, which is a comment I made in my prepared remarks, is just taking a step back and looking at what should be some of the easiest bases to lease in terms of new leasing across the portfolio. If you just look at 3 of the assets that have been recently developed or recently repositioned, West [indiscernible] in Seattle, 100 at in San Diego, India Tower in Austin, there's 410 basis points of leased occupancy upside sitting in just those 3 assets alone, which are some of the highest quality assets in the portfolio.

So again, I think there are a lot of levers this company can pull that many owners and landlords can't pull in terms of how to tap into, where the demand sits today and make sure we're accelerating that and so that we can give better line of sight, I think, as we get through '25 and into 2026 to occupancy growth.

Okay. That's very helpful. And Andrew, I did want to follow up on your opening remarks when you talked about the material acceleration in leasing or strength emerging. Can you -- and again, I know you just talked about some specific achievements. Broader any comments on San Francisco or anything else you could share with us in terms of that strength? Was it really into year-end? Or you're saying that's how '25 has started off too? And then where is the strength coming from, what type of tenants, et cetera?

Yes. Thanks, Jeff. I think, I mean, at the heart of the comment is really the fact that fourth quarter represented our highest level of leasing activity since the fourth quarter of 2019 and 2024 was our highest leasing year since 2019. So you really saw, I think -- even if you look at relative to the first 3 quarters of the year, 2024, even though it is usually seasonally high, it was truly an exception. And we do see, I think, really positive stories across the pipeline and across markets as we look into 2025. I will say that, again, -- the fourth quarter is usually seasonally higher. You shouldn't expect that same level of activity to continue on a quarterly basis throughout 2025. But in terms of basic theme and sort of looking year-over-year, I think we're very encouraged by what's in the pipeline. I'll let Rob comment more specifically.

Jeff, let me just take a step back, talk about the portfolio from a broader picture. In the markets where we have the ability to push rents, which are Bellevue, San Diego and Austin, not surprisingly, those are the markets that have had the strongest return to office kind of mandates over time. But they also hit on exactly what Angela said in terms of these are the best projects, most visible projects in the market, and they're attracting very strong tenant demand, and we're really pleased with the activity there. In a market like San Francisco, and I think this is one to really kind of focus in on, in '24, there are a lot of notable things that happened. There were 86 AI deals done in 2024 to put that in perspective. We get questions a lot about is AI real? I think a number like that points to the fact that it's real. There are projections that next year, '25, could be another 1 million to 1.5 million feet of AI absorption. Vacancy, which is interesting to note, the decline for the first time in 19 consecutive quarters, and the fourth quarter finished with a moderately positive absorption. So is that a trend? Too early to call, but based on the demand we see in the pipeline, which has remained at about 6.5 million square feet, and that is close to some of the pre-pandemic numbers we've had in the past, I think things look promising for San Francisco.

The other thing I'd say is that sublease space has declined. So I think we need another quarter or 2 to know if we've hit that inflection point of continued space absorption and lack of sublease space coming on the market, but things have certainly improved. Los Angeles, I think, is just, unfortunately, with the disasters that happened in early January, understandably transaction activity took a short pause, but things are ramping back up, but L.A. is still, of our markets, is probably the one that's most still in recovery in terms of just demand for space on the west side, particularly. We do have activity in Hollywood, which is encouraging.

So I think that's just sort of a good summary. And Indeed Tower, again, you read a lot of statistics about Austin. But keep in mind, we're CBD focused. It's a brand-new product. We're doing -- we've got an incredible tenant roster, and we have more in the pipeline from companies that are actually moving into Austin or expanding their footprint due to the quality of Indeed Tower. So overall, '25 is setting itself up to look pretty positive.

Yes. I would say it's just thematically across the board and across markets right now. One thing you really saw come through in the fourth quarter leasing and we're seeing in the pipeline as we look out into the first quarter as well is just the willingness and ability of tenants to make decisions and to commit to longer term, to know what their plans are to be able to really make decisions around that. So I think that's that's part of the really healthy dynamic we need to see recover in order to feel more confident about how the pipeline transpires over the course of this year.

The next question will be from the line of Jamie Feldman with Wells Fargo.

Great. I guess, Angela to your last point on tenant decision-making and confidence. We've seen a couple of major headlines year-to-date, whether it's AI with DeepSeek and questions around demand there and then now with NIH funding in the life science market and what kind of cuts we'll see. Are you seeing any kind of hesitation for tenants? Like how are both of these headlines -- I mean maybe it's a positive on AI, I'm not quite sure, but what are your thoughts and what are you guys seeing in your conversations with tenants on both of those topics and their ability to make decisions and plans?

I think they're both really good questions. So I think it's a little early to say with any extreme degree of confidence, but it does feel like what we're hearing and continue to hear on AI, even though this is a rapidly developing situation, is that some of these developments that we've seen recently could be really good for just additional application development and use cases off of AI given the potentially improved cost structure of some of those investments. So I think, right now, we haven't heard anything about a slowdown in activity in that sector relative to what we've seen in the news over the last couple of quarters, which is encouraging.

On the life science side, again, it's pretty early to say. I think you've got cross currents there, including a really highly deregulation events and pro-innovation event to the new administration. So we'll see how all of that kind of shakes out. But again, I'd just go back to the comments we made specifically about KOP and the kind of traction we're seeing at that project now that it's been completed and the fact that the project, as Phase 1 did, really has the ability to cater to a wide and broad range of uses. I think we're really well positioned to continue to make progress at that asset over the coming year.

Okay. Maybe a better way to ask is, have you heard of any deals being put on hold in either -- based on either one of these topics?

I have not. Rob?

Jamie, this is Rob. We haven't had heard of any deals put on hold. And in fact, I was going to say that some of the activity in our buildings has picked up year-to-date. So more to come, but we're not seeing anything on the ground. And in fact, elsewhere in Seattle, we're seeing AI popping up there as well.

The next question will be from the line of Anthony Paolone with JPMorgan.

You mentioned residential as alternative uses a couple of times for land and so forth. I think you still own multifamily towers. Just remind us on thoughts on why keep those? Or are there impediments to using those as sources of cash with cap rates there being pretty low?

Yes, it's a really good question. I would say the 3 that we continue to own, 2 in Hollywood and then the residential One Paseo are all projects that are very integrated with the other uses we have at those projects with the office and retail in the case of One Paseo. So it is more challenging to break that out on a stand-alone basis. It's not impossible, but I think it's more challenging. We view some of these assets as significant growth drivers for the company long term. And so control matters a lot in terms of our ability to continue to maximize value at many of those projects. But as you noted, future development pipeline, we've been clear, I think, over the course of the last year that we're open to whatever path is going to best maximize value for shareholders and really trying to be as creative and proactive as possible to accelerate time lines to monetization. I think Elliott and team have done a great job of continuing to move those things forward. So I'm pleased with what we're seeing there as well.

Okay. And then just second question. I think Cruise had announced some layoffs and I think it's going back into GM's hands. Just what's the credit behind that? Is it actually like GM? Or is it just contained on its own credit?

This is Jeffrey. Yes, we have GM credit on the entire lease. So there's no payment concerns on our end.

And the next question today will be from the line of Michael Griffin with Citigroup.

Maybe not to beat a dead horse here, but just on the demand you're seeing for those higher-quality repositioned assets like West Ate, Kettner and Indeed. And maybe, Rob, this is best for you, but just given you're seeing increased tenant activity there, but in order to get deals over the finish line, are you going to have to sacrifice, I guess, more on the concession side to get deals done at those properties? Or is the organic demand far enough where you can hold concessions pretty steady?

I don't think we have to sacrifice, Michael. I think that, again, with the amenities and the mix we have in various assets that we're talking about, which are our premier assets that have vacancy, tenants see value in that. And often, when you get into a discussion with somebody about space like that, the amenities and the life -- quality of life for their employees is what ends up driving the decision. That's not to say we're not in a very competitive market, we are, and we're meeting market, but you're not going to see us do the crazy things that have been done in the past with lots of free rent, 3 years of free rent, et cetera. But we have -- particularly at West Ate, we have increased demand where our team on the ground is very busy. And I'm optimistic about '25 for West Ate and that project just delivered in September of '24 with all new amenities and lobby and it's really paying off in terms of activity.

Yes. I mean there's always a balance there, right? I mean I think the point to really call out there is the amount of vacancy that's sitting in some of the highest quality assets that should have some of the best economics across the portfolio. And I think as activity is picking up across all of those markets, should be some of the space that leases first. They are, to Rob's point, we're in a competitive market environment. But we don't feel the need -- what we're talking about here is it a desire to undercut the market in order to take occupancy. We know what -- we know the investments we've made in those projects. We know the quality of what we've delivered, and we're going to make sure that we sign leases that are commensurate with the value in those buildings and what the real estate is really worth.

Appreciate all the color there. And then maybe just one on the transaction market since we haven't heard from Elliott in a while. It seemed like from your commentary, things are opening back up, maybe falling a bit. You obviously did the deal at DelMar back in the third quarter. But can you give us a sense of what kind of capital is interested in either buying or selling office properties these days and maybe some insights into IRR or hurdle rates that you're underwriting to for prospective transactions?

Yes. Michael, what we're really seeing is that whereas maybe a year or 2 ago, it was strictly opportunistic capital, we're starting to see more of a range. And as we kind of talked about our decision to slow some of our dispositions in prior years, it was because when we looked across the table, we were just seeing opportunistic capital, which we didn't think was the optimal counterparty for us as we're trying to maximize value. That's starting to diversify a little bit. You're seeing more institutional funds, you're seeing high net worth. And there are a range of hurdles for those different kinds of buyers. So as a seller, it becomes a little bit more appealing, and that's why we're going to kind of dip our toe and see how things go.

As a buyer, we are looking at what the quality of the opportunities are, and as we talked about in prior quarters, that is improving. We're seeing better real estate to underwrite. And we're going to look at what our IRRs are, take a medium to longer-term view, factor in growth as well as what our cost of capital is at that period of time and look to make accretive investments.

And the next question will be from the line of Caitlin Burrows with Goldman Sachs.

Maybe another follow-up on KOP. I guess, could you just go through if you were to do some spec suite leasing say like today, it seems like those users could move in more quickly. So I don't know if that's like a month or something. And then if there was a larger deal done, what would kind of be the expected timing based on size for like lease signing versus economic occupancy?

Caitlin, you're right. I mean we can do a spec suite lease tomorrow and occupy by the weekend. It's furnished -- the labs are furnished and ready to go. For a deal that's larger and going from shell, I would expect probably -- again, it's highly dependent on the tenant and how much they have preplanning in place for design and layout of labs and suites, which we can help accelerate. But I would bet anywhere from probably a year to 18 months maybe if it's -- if they're -- maybe less than 18 months, but it's -- somebody has really got to have their act together. But we've typically seen 9 to 12 months, and I think that's probably what you should count on.

Yes, will really depend to Rob's point on the use and how complex the build-out is.

Okay. And then I guess, maybe big picture, thinking about 2024 results, at least on an FFO basis, came in materially higher than original guidance. So I was wondering if you guys could go through -- I know you went through in the prepared remarks one of the drivers for 4Q. But like what might have been noncash surprise items that are more onetime versus I know you did some short-term leasing sort of thing, perhaps it could continue. But just trying to consider like how '24 turned out and what that may or may not suggest for '25?

Yes. Jeffrey, I'll go through more specifics on the fourth quarter number and how much of that sort of is recurring and carries forward versus some of the onetime items. But there really was a an entirely de minimis amount of short-term leasing and the productivity statistics we reported for the quarter. I think it was about 20,000 feet.

Yes, sure, Caitlin. Just thinking maybe the broader context of 2024 guidance and how 2024 outcomes integrate with 2025, I think the big kind of unexpected driver in 2024 related to some of the restoration fee income that you saw recognized in Q3 and Q4. When we gave the guidance range, we did talk about the same property NOI growth into 2025 and how there is [ 800 basic ] drag associated with that. So when you think next year, there's not really kind of assumptions within our numbers that that's going to continue in the future.

In Q4, you're right, there was some volatility. A lot of it was, I think, forecasted or highlighted last quarter. But just to reiterate, we did have the termination fee income or $0.02 that was unanticipated. That was a positive outcome from our perspective. It was related to the Walmart deal that we signed up in Seattle. Additionally, there were a couple of smaller just accounting assumptions, if you will, in that a tenant moves from cash to accrual and there is an effect and you sign the extension of our tenant and you see some kind of moderate effects of that. So those are those things I would assume kind of carry over into 2025. And when you look at our guidance for 2025, there's not a big collection of nonrecurring items in that.

Yes. We tried to be as specific and transparent we can about as many line items that might affect that number as possible. So hopefully, that guidance is helpful. And then the other big driver in Q4 was obviously the gain on the sale of the plane.

The next question will be from the line of Michael Carroll with RBC.

I just have a couple of clarification questions. I guess, with regards to the 216,000 square feet of move-outs in 1Q '25, mean does that include the Bellevue move-out to accommodate Walmart? Or is that move out or downtime at that specific asset in addition to the 216 that was mentioned?

It does include that.

Okay. Great. And then, Eliott, can you talk a little bit more about the land sale activity? I know you have the 150 in discussions that you've been continuing to highlight what's the level of activity level behind that 150? What other projects or interests are there right now? And is that kind of something that we could be talking about throughout the year? Or is that still kind of in the back burner?

Potentially, I'd say anything else is at an earlier stage and not something that we are factoring into our 2025 forecast. So -- and as Angela kind of outlined, when we look at our land, there're different buckets. So some of our lands, like you said, KOP, we're not looking to do anything. It's really that second bucket of where there's a higher and better use outside of office or life science. So there might be 1 or 2 others, but it's a little too early to get into it.

And the next question will be from the line of Dylan Burzinski with Green Street Advisors.

Just wanted to touch on sort of the new leasing pipeline. Obviously, you guys had a very strong quarter in terms of new leasing in 4Q. But as you sort of look at the pipeline today, have you guys been able to sort of backfill or punish the strong amount of activity that you guys did during the quarter? And if so, can you kind of talk about sort of what you guys think is sort of driving the renewed activity as it relates to new leasing? Is it simply return to office? Is it less macro uncertainty? Can you kind of walk through that?

Yes, I'll start with the last part first. I mean I think what's creating demand is a variety of factors. One is return to office, and you've got that going on in large scale across the West Coast now, and that's having an impact. I mean, for example, Downtown Seattle has had a 23% increase in traffic in the last 90 days or so. So rush hour is back. But it's also a function of just business needs and business confidence that we're hearing with our -- the customers we're talking to. There's just -- I think the sentiment is that things are more stable just in terms of predicting the future. And then lastly, some of it's exploration driven. And as Angela has said numerous times, if you've got an expiration coming up, the flight to quality is going to be an important component in that. And I'm sorry, your first part of your question was -- oh, the pipeline. I guess looking back from Q1 of '24 I'd say our pipeline today is stronger, meaning we have more LOIs in place and an LOI has a much higher degree of certainty for closure than proposals are certainly tours. So so far, 6 weeks into the year, it's feeling good.

I think 1 of the trends we're seeing across the pipeline as well that I think will continue to play out is that what you've seen over the last few years or really maybe even since the start of the pandemic is tenants being much more conservative about space planning and hoping and sort of programming the potential for expansion down the road as their needs continue to change and evolve. And I think we'll have some pretty interesting expansion to talk about over the coming quarters. So I think that's really positive. Definitely seeing, as Ron highlighted earlier, demand from AI and data analytics companies, I'm hopeful that over the next quarter or so, we're going to see -- what will be the largest lease we signed in the city of San Francisco and some time with one of those types of uses.

So I think all of this is moving in the right direction. I think Rob really hit it on the head to say, tenants are just more prepared for a bunch of different reasons, including return to office and including just the way their businesses are strategically evolving to be able to commit to longer-term periods and higher square footage numbers, as you'll see in some of these expansions.

And maybe just touching on sort of your comments around the team engaging or trying to engage with tenants more so on at leases expiring, call it over the next 18 months. Are you seeing tenants more receptive to engaging in those conversations earlier than say they were a year or 18 months ago? And then as it relates to sort of the downsizes that we've seen, not only across your markets, but just across the country of tenants upon renewal down sizing in a large portion of the space. I mean, do you think we're sort of in the latter innings of that? Or do you expect that to continue to be a sort of a headwind for the space for the foreseeable future?

I think a couple of things on that. I mean I think there's always -- even at a more -- if you're talking about San Francisco, for example, in a more normalized market, tenants rightsize space, whether that means they need more or they need less. It feels like give backs have slowed down, but that's impossible to predict. And on a renewal basis, we've seen some, in our portfolio, keep the same amount of space, some have taken more and some have given back. And I think that -- to answer your question specifically, I think about a year -- particularly 1.5 years ago, I don't think you could get anyone to really engage in a conversation about a '25 exploration, for example, much less a '26, and that's changed materially in the last, I'd say, 9 months, it's relatively recently, and it's pretty much across the board. We are finging that up in Seattle, San Diego even San Francisco. And again, it just points to companies are planning for the future.

The next question will be from the line of Brendan Lynch with Barclays.

You guys have talked a lot about the versatility of KOP to meet various types of demand. One of your competitors commented that life science companies are looking for more traditional office space rather than lab space. So first question is, is that something you're seeing too? And then second question is the excess supply in South San Francisco, primarily on the lab space side?

With respect to the office comment, I won't go into too much. But keep in mind, like I said earlier, KOP is a purpose-built life science project. Some of the projects that we compete with are conversions. So they're former office buildings that have been converted to life science. They've got smaller floor plates so they naturally appeal to the office component of a life science company. But the typical kind of layout that we see and the conversations we have are roughly a 60-40 split between lab and office on a floor.

And just remember, outside of the spec suites at KOP 2, right now, we can accommodate any mix of lab and office that a tenant would want. So we can, I think, be incredibly flexible at meeting the demand wherever it is as well as accommodating, as we mentioned earlier, traditional office uses. To Rob's point, I mean this has been purpose built for life science as we look at the long-term ability to maximize the value of this project over time through future phases, we're certainly hopeful this will go primarily life science. That's been our focus, and that's where we'd like to see it move. But we're really open right now to a range of different uses and really encouraged by some of the non-life science demand that we're seeing that will help us drive, I think, better outcomes across the board.

Great. That's helpful. The press release also alluded to an investment in Fifth Wall. Maybe you could tell us how much you've invested and what you hope to accomplish there?

Brendan, it's Eliott. So it was a pretty modest investment. And our goal in investing is one, Fifth Well is the leader in the proptech space. And so it's important that when -- if we're going to partner, we do it with somebody that sees a lot of different things. But the objective is to really better integrate technology into our operations. And by doing so, we think we can drive efficiencies across the portfolio. We've been very vocal about our investments in sustainability over the years. And in addition to, obviously, the benefits that has with the environment. There are drivers in reducing utility costs across the portfolio that we've been able to realize. So I think of it in a similar way.

Yes. I mean, Kilroy has been known as a leader in sustainability and innovation, and this investment is one of the many ways I think we're going to maintain that leadership position over time.

And the next question will be from the line of John P. Kim with BMO.

Now that you've dodged the private jet, is there anything else that you do on the cost-saving front. I know Jeffrey mentioned in the prepared remarks that platform investments will probably require a higher amount of overhead expense than what you had last year, but I wanted to delve into that a little bit further. And just given the trajectory of earnings, is there anything you could do on the cost savings front?

Yes. I think we made material progress on cost savings during the course of 2024. We worked really hard since I joined last January at really looking at G&A and overhead and trying to do 2 things, which I started talking about as early as this call last year. Number one, reduce the overall level of overhead, an acknowledgment of some of the challenges in our space in our sector, but also, and importantly, making sure that we allocated every dollar of G&A in the most sort of value-enhancing ways across the platform. So it's those 2 things together.

What Jeffrey really highlighted in his remarks is that those 2 line items together, G&A and leasing costs, totaled right around $100 million in 2023. And so we saw a steep decline from $99 million down to, I think, $83 million -- $85 million, $81 million last year. So now we're looking at that number coming up just a little bit as we look into into 2025, which I would say is a little bit better of a run rate. We identified a lot of cost savings, which we executed on over the course of next year. We also identified some of the costs we were saving needed to be reallocated into the platform. And that reallocation process just took a little bit longer than the cost savings did. So I wouldn't view this as increase in G&A. I would say we're settling into the right run rate for the company going forward. But I absolutely want to emphasize that we are always looking critically at G&A, and we want to make sure that this platform is as effective and efficient as possible.

Okay. And Angela, you mentioned opportunistic investments. How close were you to getting Sale Tower in Austin to pencil out for you? It seems like it would have been a complementary asset to what you're achieving in the market. And also maybe for Rob, if you could talk about the type of tonnes that are active in the market, and whether or not that represents expansions or new tenants in the market? Or is it just musical chairs?

Yes. There's just on the sale building, and I'll let Elliot jump in here as well. Look, we think that's a fantastic building. I do think you're right. It's very complementary or would have been complementary to what we own in Austin today and Indeed Tower from a quality standpoint. I think it's fair to say that pricing more resembled core than opportunistic. And we're very conscious of where our cost of capital is now, and we're very conscious of making sure that as we continue to pursue capital allocation strategies, that we're doing so in a way that maximizes value to shareholders. So we have to balance those things.

And just to that point, I think our strategy has always been pretty consistent around not just owning really high-quality assets in really good locations, but doing so in ways that we think can drive value creation and shareholder value. And so we need to be able to -- when we look at any investment, look at all of our criteria and make sure that an investment meets all of our criteria for us to pursue it.

And then, John, are you talking about tenants in the market in Austin? Or are you talking about -- you are talking Austin? Ellie is nodding his head, yes. So I'm intervening. So the types of tenants in the CBD we're seeing are consistent with the deals we've been making, which are professional services, banking, law firms, et cetera. I would say a really positive note and something to watch with Austin is that large tenant activity has picked up again in and around the domain and Northwest Austin. So more to come on that. But there are -- in addition to Amazon, there are other large requirements that have been looking around in Northwest Austin. So from our perspective, with Indeed Tower, we have a good pipeline, and we're sort of getting the best of the best of the private services, professional services firms that are out there.

And with no further questions on the line at this time, this will conclude the Kilroy Realty Corporation Fourth Quarter 2024 Earnings Conference Call. Thank you for your participation today. You may now disconnect your lines.