Release Date: May 03, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Kilroy Realty Corp (KRC, Financial) reported a strong first quarter with the highest leasing volume since 2017, indicating robust demand across its markets.
- The company successfully raised both same-property NOI growth and FFO guidance, reflecting positive operational performance and financial outlook.
- Kilroy Realty Corp (KRC) has maintained a strong liquidity profile, enhancing financial flexibility with over $2 billion in available liquidity.
- The company's strategic positioning in key markets like Southern California and San Francisco has attracted high-quality tenants from diverse industries, including technology and life sciences.
- Kilroy Realty Corp (KRC) is seeing green shoots in the technology sector, with tenants like Stripe and Reddit achieving significant valuations and successful capital raises, suggesting a healthy ecosystem that could drive future real estate demand.
Negative Points
- Kilroy Realty Corp (KRC) experienced a 7% decrease in same-store cash NOI in the first quarter, primarily due to a tough comparison with the previous year which included significant restoration payments.
- Occupancy rates showed a slight decline due to tenant move-outs, particularly in Los Angeles, which could impact revenue if not promptly addressed with new leases.
- The transaction market remains challenging with a wide bid-ask spread and difficulties in securing debt financing, which could hinder potential property acquisitions or sales.
- Despite an overall strong quarter, the company noted an increase in short-term leases, which could introduce volatility in future occupancy and revenue stability.
- Kilroy Realty Corp (KRC) faces ongoing challenges in the office leasing market, with significant vacancies and the need for strategic tenant engagement to improve occupancy rates.
Q & A Highlights
Q: Just wanted to touch on the 116,000 square feet of short-term leases signed this quarter. Can you talk in general about those situations? Are these tenants that are just unsure of their business and don't want to commit to longer terms? Or should we think of this as more of kind of swing space while other spaces being built out? And then how do you feel about your ability to turn any of those into longer-term deals?
A: Angela M. Aman, CEO & Director of Kilroy Realty Corporation, explained that the short-term leases were predominantly renewals, serving as temporary solutions for tenants delaying long-term decisions. She highlighted that no capital was invested in these short-term renewals, making them financially prudent. Aman expressed cautious optimism about converting these tenants to long-term commitments within their Los Angeles portfolio, emphasizing the strategic leasing efforts to maintain occupancy and revenue.
Q: I wanted to start with better understanding the drivers behind the guidance raise. First quarter looked like a good [beep] on core, but I can't seem to reconcile that with the full year breakdown you provided, Eliott. So can you clarify how much of the core versus noncore items drove the increase?
A: Eliott Trencher, Executive VP, CFO, CIO & Treasurer, clarified that the increase in guidance was driven equally by improvements in the core portfolio and reductions in interest expense/interest income. He detailed that within the core portfolio, the increase was split between better parking and fee income.
Q: Great. I want to go back to the leasing outlook for a second. On the Riot renewal, looking through this up, it looks like it was about a 3-year renewal to 2026. I think you've still got some leases that are expiring for them this year. How should we think about maybe locking a tenant down like that for a longer-term lease? And I would also ask probably the same around LinkedIn just given they have some safe expiring this year, but the big chunk of that is in 2026.
A: A. Robert Paratte, Executive VP & Chief Leasing Officer, responded that while detailed discussions with tenants like Riot and LinkedIn are confidential, Kilroy Realty is strategically accommodating their needs. He noted ongoing active conversations with both tenants, emphasizing a strategic approach to tenant relationships and lease negotiations.
Q: Angela, you talked about green shoots mostly on the tech and biotech side. I was wondering if you had seen anything similar in LA, any (inaudible) on demand on the horizon. You've occupancy in the mid-70s in your portfolio, which is not unique, but I was wondering if there's anything that could turn it around?
A: Angela M. Aman noted increased activity in the L.A. portfolio, with a range of different sizes and uses showing momentum. She acknowledged the need for this momentum to pick up due to significant vacancy but expressed optimism about the positive leasing activities.
Q: Maybe the flip side of Steve's question earlier, you've mentioned before that you could consider monetizing stabilized high-quality assets, lower-quality assets and/or land parcels. So I'm just wondering what type of assets do you think we could see you sell first? How big of an opportunity could it be? And is it something that you're already kind of working on behind the scenes?
A: Angela M. Aman explained that while there are no specific assets at a stage to discuss publicly, Kilroy Realty continuously evaluates various assets for potential capital raising, focusing on maximizing value. She mentioned that this could include future land bank assets, assets with differing future trajectories, or high-quality assets with limited value creation potential.
Q: In terms of KOP, the development Phase 2, can you just remind us how much square footage is going to be delivered on the spec suite basis? And remind us the timing for that later this year. And I just want to be clear as well as if you're delivering that spec space and you got a leased on end of the year, would that be something that could commence right away under that situation? Or is there still some sort of delay in revenue that would happen?
A: A. Robert Paratte clarified that two floors totaling just over 80,000 square feet are being developed as spec suites, with delivery expected in October of the current year. He confirmed that these suites could see immediate occupancy upon completion, aligning with the demand for ready-to-move-in spaces.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
