KILROY REALTY CORP Q3 FY2024 earnings call

Strategic Overview

• Strong quarter of execution with high quality portfolio, differentiated tenant relationships, and robust balance sheet. FFO for Q3 was $1.17 per share, up sequentially due to recurring and non-recurring items.

Quarterly Highlights

• Signed ~436,000 square feet of leases including short-term and related to DermTech bankruptcy. Excluding short-term transactions, weighted average lease term on executed deals was ~5.5 years with cash leasing spreads ~7%.
• Increased full year FFO guidance by $0.15 per share at midpoint. Occupancy guidance midpoint increased by 75 basis points to 84% due to recent leasing activity and early rent commencement.

Capital Allocation Activities

• Acquired Junction at Del Mar, a 104,000 square foot campus in San Diego. Land sales in progress to monetize parcels, with two deals furthest along projected to generate over $150 million.

Financial Results

• FFO for Q3 was $1.17 per diluted share, impacted by one-time items. Updated 2024 FFO guidance range to $4.38 to $4.44 per share, with G&A guidance narrowed and lowered.

Development Activity

• Approaching delivery of Kilroy Oyster Point Phase 2 in Q4 2024. Development spending expected to moderate in 2025 pending future TI capital outlays.

FFO for the third quarter was $1.17 per share. Cash same-property NOI growth was 2.7% in the third quarter. No specific breakdown of revenue contribution by product segment provided, but discussion of performance in markets like Bellevue, South Lake Union, Seattle, San Diego, Los Angeles, San Francisco.

Full Year Guidance

• Increased full year FFO guidance by $0.15 per share at midpoint to $4.38 to $4.44 per share.
• Updated same-property NOI growth range to minus 2% to minus 1.5%, a 175 basis point increase at midpoint.
• G&A guidance range narrowed and lowered by $1 million at midpoint due to G&A initiatives.
• Midpoint of updated full year FFO guidance implies Q4 FFO of $1.03 per share, down from Q3.

Risks

• Financing markets still challenging but improving, with lease expirations and elongated deal processes. Potential move-outs in Q4 and lease expirations in 2026 posing occupancy risks. Elongated deal process at Kilroy Oyster Point Phase 2 due to competition and tenant decision-making.

Q: Talk more about Oyster Point Phase 2 and potential tenants.

A: Angela mentioned conviction in quality of project, with tour activity expanding and interest from traditional office users. Rob added on landscaping and conference center presentations, with VC funding improving demand.

Q: Color on short-term leases and occupancy.

A: Angela said short-term activity reflected in lease expiration schedule, with examples like Capital One renewal and DermTech lease. Occupancy guidance revised higher but some short-term leases may vacate in future.

Q: Decision to acquire Del Mar and long-term plans.

A: Angela said adjacent to One Paseo, strategic for redevelopment and as-is value. Eliott noted good occupancy and potential for integration with One Paseo.

Q: Development pipeline and stabilization.

A: Eliott said 4400 Bohannon and 4690 Executive Drive moved to TI ready phase, with 12-month lease up clock. Rob added on life science interest and tenant pivot from Sorrento Therapeutics.

Q: Flower Mart plans and interest capitalization.

A: Angela said Flower Mart in San Francisco has density approved, working on design, with no near-term development. Interest capitalization timeline unclear.

Q: Political and business environment on West Coast.

A: Angela said improvement in markets, monitoring elections, with focus on quality of life and safety policies.

Q: Market recovery by city.

A: Angela and Rob discussed return to office announcements, positive dynamics in Bellevue, Seattle, San Francisco, Los Angeles, San Diego.

Q: External growth strategy.

A: Angela said focus on risk-adjusted returns, Junction at Del Mar as example of value proposition, evaluating transactions in submarkets.

Q: Lease expirations and occupancy.

A: Angela discussed Q4 move-outs and 2025 expiration year, with lighter expirations and good discussions on 2026 leases. Rob added on long-term discussions on 2026 expirations.

Q: KOP 2 elongated deal process.

A: Angela said competition and tenant decision-making, with tour activity and spec suites delivery increasing momentum. Rob added on timing and life science tenant pre-leasing issues.

Q: Leasing numbers and LA market.

A: Angela said one quarter data point, LA team executing in challenging market, encouraged by Long Beach and Culver City interest. Rob added on film industry incentives and deal activity in LA.

Q: Land sales earnings impact and KOP 2 conversion.

A: Angela said capitalized interest expected lower in 2025, gains not through FFO. Eliott noted re-entitlement process timing. Angela said KOP 2 conversion not an impairment, with space for different users.

Q: Sublease market and direct leasing.

A: Angela said sublease market competitive, but over half expiring soon, encouraging direct leasing. Rob added on sublease space obsolescence and demand for short-term vs long-term.

Q: Spec suites offering and land sales re-entitlement.

A: Angela said leveraging existing program, adding spec suites in San Francisco. Eliott said land sales re-entitlement working with groups, contributing to sales timeline.

Q: Debt maturities and refinancing.

A: Jeffrey said $1.7 billion liquidity, opportunistic in 2025 refinancing.

Q: Austin market demand.

A: Rob said demand picked up in Austin CBD, with pending tech leases and IBM signing.