Good afternoon, everyone, and welcome to the Q4 2020 Kilroy Realty Corporation Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] Please also note that today’s event is being recorded. At this time, I’d like to turn the conference call over to Michelle Ngo, CFO. Ma'am, please go ahead.

Thank you. Good morning, everyone. Thank you for joining us. On the call with me today are John Kilroy, Tyler Rose, Rob Paratte and Eliott Trencher. At the outset, I need to say that some of the information we will be discussing 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 the SEC, and both are also available on our website. John will start the call with a review of 2020, business conditions in our markets and our objectives for 2021. I will discuss fourth quarter financial results and provide you with an earnings roadmap for this year. Then we'll be happy to take your questions. We are once again calling in from different locations, so bear with us if there are any delays in our responses. John?

Thanks, Michelle, and welcome to your first call as our new CFO. Congratulations. Hello everybody. Thank you for joining us today. I hope everyone is safe and healthy and has a brighter outlook for 2021. Let me start with a few comments about 2020. We entered the year at a very strong position. Leasing activity was solid, rents were increasing, tenants were expanding and we had expectations of another record year. While the pandemic upended our lives in the markets, we think our 2020 performance was very strong all things considered. We move swiftly to further strengthen our balance sheet. We work with our tenants and workforce to adopt healthy and safety protocols. We executed to our current development program largely on schedule and on budget. We delivered solid financial results and raised our dividend and we achieved carbon-neutral operations, a key pillar of our ESG program. Now in month two of 2021, we are seeing a number of signs of renewed positivity which we will balance with discipline as we continue to differentiate KRC as best-in-class and a market leader within our industry. Let me review where we stand today. We have a solid balance sheet. We ended the fourth quarter with liquidity of approximately $1.5 billion and net debt-to-EBITDA of 5.8x. Our under construction development remains largely leased and fully funded with cash on hand. We have a world-class tenant base supporting our stabilized portfolio results. Our average portfolio-wide rent collection across 2020 exceeded 97% with office and life science rent collection at 99%. Many of our tech, media and life science tenants, including some of the largest and most successful companies in the world continue to grow last year and remain stronger than ever. Our lease expirations are limited. They average 6.3% per year through 2025 and…

Thank you, John. FFO was $0.95 per share in the fourth quarter and $3.71 for the year. Throughout 2020, FFO benefited from the growing contribution of our current development pipeline, as well as higher rents across our stabilized portfolio. These benefits were offset by one-time charges, revenue reductions related to our assessment of tenant credit and collectability of rent, as well as lower parking revenues as a result of the COVID-19 pandemic. Fourth quarter FFO benefited from the revenue commencement of our Netflix // On Vine project in November. Offsetting this, FFO included $0.065 of extraordinary items, comprised of a net $0.03 per share of COVID-19 charges, primarily driven by co-working, advertising and residential tenant credit assessments, and $0.035 of Prop 15 expense. Turning to same-store operating results. Cash same-store NOI increased 3.9% in the fourth quarter and 8.3% for the year, largely due to higher rental revenues driven by the commencement of and burn off of free rent from several large San Francisco leases. GAAP same-store NOI declined 2.3% in the quarter and 1.4% for the year. Excluding the COVID-19 related net charges, GAAP same-store NOI would have been positive 0.6% in the fourth quarter and 1.4% for the full-year 2020. At the end of the fourth quarter, our stabilized portfolio was 91.2% occupied and 94.3% leased. The occupancy and percentage lease decline of 100 basis points from the third quarter was primarily attributable to the 136,000 square foot expiration in the Long Beach submarket, which we've previously discussed on prior calls. Overall rent collection in the fourth quarter exceeded 96% with office and life science rent collection north of 98%. These strong rent collection levels have remained consistent across the 10 months of the pandemic as our well capitalized technology, life science and media tenant base continues to…

Ladies and gentlemen, at this time, we'll begin the question-and-answer session. [Operator Instructions] Our first question today comes from Emmanuel Korchman from Citi. Please go ahead with your question.

Hey, everyone. Michelle and Eliott congratulations on your promotions. Eliott, one for you. You're taking more active role in that sort of investment pipeline. What types of deals are you most focused on and sort of what timing are you guys thinking about as you make those investments?

Sure, Manny. Happy to take that. I think strategically not much is going to change. I mean, we're going to continue to focus on deals that fit our profile. And John talks about a lot, the circle, square and triangle. We're going to continue to follow that, right. It's got to be well located. It's got to have the right bones and the right physicality and the math has to make sense. So we think that if it's not broke, don't fix it. And what we've been doing from a capital allocation perspective has been pretty good and we are going to keep doing it that way.

Great. And then Michelle, you mentioned DIRECTV’s sort of desire to terminate part of their lease. And I think you mentioned that you're in discussions with them. I guess the question was what changed for them that they all decided to stay when previously they had made an impression on you that they were going to stay?

Yes. Rob, do you want to handle that?

Sure. How are you doing Manny? This is Rob Paratte. We've had discussions with them over the past two or three years on their business. This is really a DIRECTV entity, but after AT&T acquired DIRECTV, they've had multiple scenarios for, in fact, growing and contracting and then staying stable. And so I don't want to get into a lot of the discussion about what we're doing with them. But we are engaged with them and we'll report when we have more clarity on what the outcome is going to be. But it's basically been driven by their business needs changing over time.

Great. Thanks all.

Our next question comes from Nick Yulico from Scotiabank. Please go ahead with your question.

Okay. Thank you. I guess first question was just on the decision to not provide guidance. Maybe you can just walk us through a little bit on the thought process. And then Michelle, I know you did give a lot of components, I'm sorry, I think you were cutting up a little bit or maybe with my phone. But I don't know if you did give any range to think about in terms of occupancy year-end, how to think about that and sort of the same-store portfolio? And I guess also on the lease expirations, how we should think about, and your confidence in getting re-leasing done this year that the fourth quarter volume did look a little bit light on that front?

[Technical Difficulties].

Hey, Michelle. This is John. We can't hear you. It's like you're cutting out every other words. I don't know if I'm the only one. I think Nick mentioned that. I don't know whether you can hear me clearly, but you've got a problem on your end on broadcast.

Okay. Yes, it looks like our line is choppy.

Hey, it’s better now.

Okay. Nick, I heard the first two parts of your question. I'll take the guidance piece with respect to occupancy and same-store, and Tyler can provide a little bit more color on why we chose not to provide guidance. I think with respect to the occupancy range, I did not include that in my prepared remarks. I think more to come as we get more visibility in terms of where the restrictions on COVID-19 goes. But I think directionally, we think occupancy should be higher in 2020, given all the development leasing that will come on line towards the end of this year. We've got roughly 2 million square feet that's coming on line. That's a 100% leased. So I think hopefully that gives you a sense of where occupancy is going. And then we did not provide same-store NOI guidance either and more to come as we get more visibility as we move through the year.

Yes. And this is Tyler. I think that Michelle just said, the reason we're not providing guidance is really nothing all that much has changed from last quarter, where we didn't see a lot of visibility to where things are going with some of our income in terms of parking income, retail income, even residential income and we're very solid on the office front. But given that we're still in lockdown, it’s just a little too early we think to provide guidance. Hopefully, we can do it next quarter, but more to come on that.

Okay. Thanks and congrats on the promotions everyone as well. Just one other question is on the leasing markets maybe for Rob. A bit of an update on what you're seeing in terms of tenant demand if activity is picking up at all, perhaps you can go through some of your markets. And I guess that big picture, how we should think about, again retaining tenants among the lease expirations this year versus any sort of gut feel also about a rebound in new leasing activity for the portfolio? Thanks.

Okay. Hi, Nick. I'll try to keep this to a brief answer, but you asked a lot there. I would say definitely that the overall market sentiment throughout our portfolio in the first month of 2021, which is really kind of just three weeks, is significantly more positive. If you start in Seattle and look at how the companies that have moved up there continue to hire, net tech job growth in 2020 was 6,500 new jobs. And that's a direct correlation to the fact that Seattle and Bellevue are becoming the cloud headquarters for the world. So you have Amazon Web Services, Microsoft, Google Cloud, all of them have expanded. All of them have continued to hire employees. Microsoft, which had for many years, particularly in Bellevue retracted, has actually renewed leases in the Bellevue area and has taken small amounts of space outside of the Redmond campus. So I think it's just a good indication that Bellevue and Seattle continue to have the employee pool that employers are looking for. And in fact, hiring in Seattle has outpaced hiring in Austin for tech talent. And that's based on LinkedIn surveys that were recently done. So we continue to feel really good about the Pacific Northwest. As you know our portfolio in Bellevue is virtually leased and our Dexter project is completely leased. So we're in really good shape and it's a market that we see having a long-term improvement over time just because of the sheer presence and size of the tech companies that are in the market. In San Francisco, we have – San Francisco has been more shutdown than any city in the country and more shutdown longer than any city in the country. We have had more tour activity in January than we had in…

Okay. Great. Thank you, Rob.

Our next question comes from Craig Mailman from KeyBanc Capital Markets. Please go ahead with your question.

Hey, everyone. I just want to circle back on the DIRECTV. Michelle, I think you said 2022 would be the termination. Can you just kind of give a little bit of details about their termination option, and also outside of DIRECTV, maybe any other top 15 tenants with near-term early expiration options that we should have on the radar?

Yes. Hi, Craig. We're limited in terms of what we can say on DIRECTV at this time. But I said that they have a contraction option at the end of 2020 with the effective date being early in January of 2022 for up to 150,000 square feet. And with respect to our top 15 tenants, there are no other material contraction options associated with any of those tenants.

Okay. That's helpful. And then just on kind of maybe DIRECTV, but in general, Rob, that was a really good overview in the leasing, but just a little bit on kind of what your mark-to-market is in the portfolio. I know there's a lot of concern about net effective rents getting weak, but your mark-to-market have always been pretty strong. So just your ability to absorb any potential weakness here in the near to medium-term in your markets?

Yes. I'll start this and Michelle may want to jump in on it. Craig, I think again, if you look at what's happening and this is transformational on the West Coast, but I think it's going to happen across the country. There are companies that grew and they grew into B quality type buildings. They are still growing and they're going to use this opportunity, whether it's in San Francisco, LA, the West Coast or New York to upgrade their facilities. And that's what we're seeing happening. In fact, the example I gave in San Francisco of tour activity and that sort of thing are that very example where a company – they’re growth companies, they're in B product buildings. They can now take advantage of A product. And we have the good fortune of being pretty leased up in San Francisco. And what I think you're going to see is that institutional quality, great landlords with great product are going to hold their rates. And you're seeing that already across the board with renewals, not only with Kilroy, but renewals at the other trophy properties that are in the San Francisco financial district, where renewal rates have been either at pre-COVID rates or higher. You may see landlords in that description I just gave, the institutional class of landlord increasing TIs here and there. But I think that if we had a lot of space, I think we'd feel comfortable keeping our rates where they were pre-COVID, given the quality of our portfolio.

Yes. And on the lease expirations or mark-to-market rent, it's hard to peg where rents are at this point, but we said there's limited expirations in 2021, and we think rents are roughly 20% below market.

That's helpful. Thanks.

And our next question comes from Steve Sakwa from Evercore ISI. Please go ahead with your question.

Thanks. A bunch of my questions were asked already, but maybe Michelle, I just want to make sure I understand. You talked a little bit about the retail and some of the rent that you're not collecting. I just want to know kind of in aggregate when you sort of look at the Q4 results, I'm trying to really just get a kind of an aggregate number of how much rent you're maybe not collecting from office, but primarily retail tenants that are still kind of in your occupancy stats that maybe moved to cash accounting. So like what is not being recognized kind of in the P&L today that you may start to collect going forward?

Yes. So we said roughly 90% of our retail tenants are on the rent deferral program and roughly 70% of that program are already on a cash basis. Does that answer your question, Steve?

Well, I'm just looking for maybe a dollar figure just to kind of say, $2 million, $5 million, $10 million, I'm trying to kind of get a sense for if those tenants sort of all come back, what is the dollar amount that we should be thinking about? Maybe you won't get all of it back. But sort of what's the growth potential pickup that you might get if all those tenants came back on line and we're sort of paying rent again?

Yes. I think we said – in Michelle's comments that one month of rent referral for these tenants is approximately $1.5 million. So for a quarter it will be $4.5 million.

Okay. And anything on co-working? Or is it really – the issue really, I guess, centered on just retail?

So on co-working, we had – we didn't have a lot of co-working going into the crisis, and we've taken both of our co-working tenants to a cash basis already. We're really just left with one co-working tenant in an immaterial amount if we did go to cash basis of around $0.01 for 2021. So we're in very good shape on a co-working front.

Yes. Steve, this is John. And Tyler you might comment on this. The other component of rent that we're not collecting that we normally collect would be monthly and transient parking revenue and the magnitude of that. Tyler?

It’s about a $1.5 million a month.

Okay. Great. That's helpful. And then I know you said this, kind of early lease termination is not really prevalent in the current portfolio today. But I'm just curious, Rob, is, are things like that becoming any more prevalent in lease discussions? I know I heard about one at least in New York. And I'm just wondering if tenants are looking for more flexibility, are they trying to put some kind of early termination clause into the leases to give them a little more flexibility?

It's an interesting question, Steve. If you go back pre-COVID particularly with tech companies, the reason that if they tried to negotiate terminations and that sort of thing was because they were growing so quickly, they were afraid of growing out of the premises they had. And we haven't seen. It comes up frankly in every negotiation and kind of in every cycle. We at Kilroy have had the good fortune of resisting giving those sorts of concessions primarily because we're also – a lot of what we've done is ground up development and it just doesn't pencil to give a termination right in a ground up development.

Got it. Thanks. Appreciate it.

And conversely also, you do have discussions about options to grow and that sort of thing that happened as well. So it's not just always ratcheting down. There's often – more often than not discussion about, okay, if we're taking a building, what happens when we need more space? Where can we grow that kind of thing?

Okay. That's it for me. Thanks.

And our next question comes from Derek Johnston from Deutsche Bank. Please go ahead with your question.

Hi, everyone. Thank you. While many point towards San Fran is one of the weaker U.S. markets at this point, you guys are still pretty well leased there, but as you had mentioned demand and sublet headwinds kind of remain. More concerning to us is your LA lease rate now at only 88.3%, I think further declining in 4Q by 330 basis points. And this is the weakest we've seen since we've been keeping track back to 2012. So I guess the question is, what drove this quarter’s big decline and what can you guys do to plug the hole in LA?

Do you want to start – I mean, I'll address the vacancy in LA. We have in Hollywood space, that's about 75,000 square feet. It's in Columbia Square, which is the preeminent Class A project in Hollywood. As I said with tech and every other company, production companies that basically been on hold over 2020. To just give some color, we had little to no interest, and we’re also negotiating with a tenant that was in the space to terminate them. But in 2020, we had little to no activity on that space and now we have five different entities looking at either all of it or portions of it. And again, that's come up in the last two to three months. So wherever there is space and vacancy, I guarantee it's been hampered by lack of availability of people to tour, people not being comfortable touring even if they can due to the pandemic. And so it has really impacted LA, but I feel given the growth and the demand that we see from the content producers and the strength of these companies, I think we're going to be just fine.

And just to follow-up on your question about the occupancy decline. Largely it was driven by the Long Beach expiration that we've talked about and that impacted both LA and the overall portfolio, obviously.

Okay. Thank you. And next, this is more of big picture, but how is the work-from-home trend changed business leader decision-making, and I'd say, especially for TAMI and FIRE tenants? We acknowledged life science has been a bright spot, but I'd say we have a pretty good sense of the cyclical impacts of a recession on office REITs. But there does seem to be some evidence of a work-from-home secular shift that play as well. How do you view, and could you address the possible impacts of a work-from-home secular risk on office space demand and net effective rents in your markets from what you can see at this time? Thank you.

Sure. This is Rob. I'll address that again. As I said earlier, when I was going through some of the hiring numbers, it's just not possible that that many people are going to be working from home 24/7. There is, and if you look at the FANG companies and the other large tech companies behind them and including FIRE category tenants, every one of those entities is pretty much a work in the office entity and some of them have been very public about it. If you’re looking at Google, Netflix and what their CEO said about working from home versus working in the office; Microsoft CEO, same thing. As John said in his remarks, working from home, the pandemic has changed the dynamic. Working from home will be a more accepted practice if you will or a more formalized practice if you will in every workforce and labor force. However, you're not going to be doing the team building, you’re not doing the collaboration. It's extremely difficult. We're going through it at Kilroy ourselves, extremely difficult to onboard new employees when they can't meet their colleagues or really ramp up as quickly as they would ordinarily. And frankly, aside from the employer demands, it's also becoming pretty clear from employees, especially young, talented, aspiring employees who really can't get face time with their bosses and get a career path established because they are working from home. So I think the world looks to tech to be the leaders in what's going on. And right now tech has said, people should stay home until we have clarity on the pandemic. But the conversations we're having with our tech clients and other large tech companies are some have advanced plans to begin opening in 2021 when they were – mid-2021 when they were actually looking at the end of 2021. So I think there's a lot that's going to unfold here in the next three to four months. But I personally just think you can't make a film at home. You can't collaborate on software or a complex problem solving from home. And so as we said, there are going to be various times people are working from home, but you're going to have large teams meeting to be in office space using the technology that office provides.

Our next question comes from Frank Lee from BMO. Please go ahead with your question.

Hi. Good morning, everyone. Just want to touch on some of the prominent headquarter relocations announced since your last call in California. What are your thoughts on the longer-term implications there? And maybe in the shorter-term, have you seen any early impact on rents or tenants further delaying leasing decisions?

I'll address part of it, and John, please jump in if you feel like you want to. But let's specifically talk about Oracle, for example. They've been a long time headquartered Bay Area company. They announced moving to Austin, their headquarters. But if you look at Oracle over the last 15 years in the Bay Area, they have not been an absorber of space. They've not signed one third-party lease since they've been headquartered in the Bay Area. They've grown by acquiring companies. They've generally kept the space of the company they acquired or as the lease expired, didn't renew it and absorbed it within their portfolio. What we understand about that relocation is they are continuing to grow and hire tech talent in the Bay Area. They're not planning to pull the plug on the people that actually create their growth and their business, and they're continuing to look at other markets to expand as well. So I think it depends on how you look at headquarters relocation and what that really means. Does it mean the support services like HR, accounting, finance, that sort of thing? They're going to markets like Texas versus where the talent and where you can hire the talent in bulk is.

Okay. Thanks. And then a question on the redevelopment opportunities at Blackwelder. What are your current thoughts there? And could we see redevelopment plan accelerate given the strong leasing activity in the Culver City market and just general overall strong media content demand?

Yes. This is John. We're evaluating that. We had some elections that had occur in LA before we wanted to develop our expansion plans there. We'll be able to talk more about this over the course of the next 12 months. But I don't see anything happening soon. We have tenants that are in place. We have people that want all the space that comes up and will take everything that we have. If we go down that route, then we block ourselves from future development. So we're sort of in the assessment period with COVID and the things that we've been talking about so much on this call, it just hasn't been a high priority for us to figure out the development scheme there, but we will be.

Okay. Thank you.

Our next question comes from Dave Rodgers from Baird. Please go ahead with your question.

Yes. Maybe John or Eliott, you guys have become more positive over the last couple of quarters just on the ability to develop here in 2021. And that came through again today. I guess I'm curious on the flip side of that from a funding perspective, how you think about funding, maybe KOP Phase II? Are you comfortable where you're at today? And then John, maybe talk a little bit more about some of the assets sales you had previously discussed that were put on hold with COVID and how the demand might be for those kinds of credit tenant, net leased assets that you had considered selling before?

Yes. Well, let me deal with the development spend and some of this is a repeat of what we had in our prepared remarks and what Michelle mentioned. But we have $1.6 billion of development underway today, and the spend on that in 2021 is $275 million, in 2022 is $200 million, and then we're done. If we add KOP Phase II, there's roughly $750 million of incremental spending. And if we started that in the second quarter, we'd spend about $75 million this year, $200 million next year, and then $475 million in 2023, 2024 with most – I think probably most of that is weighted to 2023. So if you add all that up, you've got roughly $350 million, $275 million on the current under development plus $75 million at KOP II this year, next year $200 million to finish off the current development, $200 million more for KOP Phase II, that's $750 million over the next two years Dave. And then $475 million in 2023, 2024, so $1 million – $1.225 billion in round numbers. And then, Michelle, you want to talk about our – just remind everybody what our current cash on hand and bank lines are, and then I'll deal with the second part of your question, which is dispositions.

Sure. Yes. As I mentioned, we've got roughly $1.5 billion of liquidity today. [Technical Difficulties].

Michelle, you're breaking up again. You're breaking up.

Okay.

Maybe call in – call in by your cellphone maybe. And maybe I'll just try to deal with that. If you could hear me? Can people hear me?

Yes.

Okay, great. Sorry about for this confusion. I mean, it just comes with the telephone company, I guess. As Michelle mentioned, we have roughly $1.5 billion in current liquidity, half of that's on our line, half of it's in cash. So we're well – we're completely funded on anything it's under development and anything that's underway or would become underway over the next couple of years. Obviously, if we start something else and we've got to talk about it, we've always said with the Flower Mart that we'll have our funding plan in order and communicate that to the market before we start. I don't see starting this Flower Mart anytime soon. We need greater clarity on that. Nothing else is ready to go for at least another year. In terms of dispositions, as we always do, we evaluate what things we might do. I think we'll have some thoughts on that to express within the next couple of conference calls, nothing to express today other than the market is strong for good assets, very strong. And I don't know that Eliott could give you examples on that, some of the record price per square foot and cap rates and so forth. So we think we're in great shape on the liquidity front, great firepower to do whatever we want to do from an opportunistic standpoint. And we're going to stay that way. We're not seeing anything that's really in distress that we would have an interest in buying at this point.

All right. Thanks, John.

You're welcome.

And our next question comes from Jamie Feldman from Bank of America. Please go ahead with your question.

Thank you. I want to get your thoughts on life science supply with so much capital going into this space. Can you maybe talk about, if you look over the next couple of years the demand pipeline versus supply pipeline in Seattle, San Diego and Bay Area?

Yes. Well, this is John, Jamie and happy new year. Let me give you a couple of thoughts on life science supply and then Rob can drill into the specific markets. It's interesting on life science now. It's the du jour flavor. And I say that a little bit kiddingly, but it's true. We're seeing crummy old shopping centers that don't have any relationship to any life science market nor any kind of proximity to what drives life science, build themselves as a life science entitled a future life science campus and so forth. That's just nonsense. Brokers have great imaginations, and I think they've taken them to new heights. There is a flavor – there has been some real success in the traditional life science markets on converting office space or other space that has the physical characteristics that lends itself to conversion. And then there's a whole bunch of people talking about it. And what we see in the private world are a lot of people that are out trying to raise funds or have raised funds to say they're going to expand life science and they're buying some strange things and wish them every success. But I don't think all of them are going to be successful. That doesn't mean there won't be supply increases. There will. But if you look at where we're primarily focused, which is the City of South San Francisco, we have the largest development of life science capability of any major cluster on the West Coast, if not the entire country. We have the ability to deliver many millions more square feet there in the best market on the West Coast where it's proven, it's kind of main and main, if you will. In terms of the supply that's coming on stream, Rob, I don't know if you want to talk about that with regard to Seattle, or if you're prepared to talk about that with regard to Seattle and San Diego and the Bay Area.

Sure. Jamie, just – again, starting with Seattle. The life science hub in Seattle, the place to be the South Lake Union and similar to Oyster Point, as well as our UTC locations, you have these competing forces of tech companies and life science companies and this is somewhat of a generalization. But life science companies are going to cluster around universities in the same way that tech companies do. So right now in Seattle, BioMed has a project, there's very little current supply. It's hard to find sites for life science. And I think another phenomenon that may change or life science maybe forced to change the way they operate is the tech is much more nimble and much more agile. And they end up signing leases quicker than life science companies do. I gave that example earlier about the life science company in South San Francisco that's signed in December. It's a different way of operating and they need to be more nimble and it's very difficult. There are secondary markets outside of the cluster area that I would call South Lake Union. But where Kilroy wants to be is where there is supply constraints, where it's harder to get sites and where you can drive rents. So South San Francisco, as I mentioned, we're tracking 2.2 million square feet of supply, two-thirds of that is already leased. BioMed will have the only ground-up construction, shell and core complete end of this year. And I gave you an example again earlier about the 180 different companies, biotech companies in that market and it's unrelenting. I mean, we’re tracking about 3.5 million square feet of demand right now for tenants. And our project specifically, Oyster Point, we've been very active in presentations and zoom meetings and some physical onsite presentations to companies. So we're feeling very good about that. And again, talking about clusters, you really only have South San Francisco, and then you have parts of San Mateo County. But the life science market in the Bay Area really kind of stops at Palo Alto. So it's hard to imagine going back to John's point about conversions and that sort of thing that you'll see life science leapfrog into San Jose for example, even though there's R&D type product that maybe able to be converted, that's not where they want to be. And then San Diego, particularly UTC, where vacancy is about 1.4%, I mentioned earlier the theme, and I just mentioned it now, too. You've got these competing forces of tech versus life science and it's literally a race for space. So hopefully that gives you some color.

Yes. Jamie, there's a building that I toured the other day that will go and mention that’s here in San Diego, that was office building, it's institutionally owned, it's got some vacancy, it'll have some increased vacancy over time, but not for a number of years. It would not be a product that I would have been interested in buying for office. And it's now being marketed for as life science conversion. I wouldn't walk it and toured it the other day, no way, no way. So there's just so much noise in the market right now, everything is about life science. And there are some excellent examples of where it does work and will work, ARE has communicated that to the market. I'm sure in some of the stuff they're doing in San Diego and elsewhere. But there's a lot that's just being marketed as potential life science that, in my view, doesn't stand a chance.

Okay. I appreciate the color. I guess, as I think about it though or as you guys think about it. I mean, do you feel like there's a window here? As we talk to people across the different markets, Boston, especially, it's like, you've got a couple of years here of really good demand and under supply. And then the question is, what does it look like after that? Do you feel the same way in your markets like there's kind of a race to get the good product up? Or do you think you can be patient? And as long as you have the best product, you're not in any hurry.

Well, that there is – we always look at the competitive set of what might be coming back on the market becoming vacant or might be developed and you try as best you can, put yourself in a window where you're going to have a sweet spot. I think that's exactly what is happening with Phase II of KOP. We have a beautiful window there of a couple of years where there's no product that can come on stream to compete with us and certainly nothing of any high quality. And then beyond that, we are kind of at the ultimate sweet spot there. So I think that we will have a great demand, unless demand were to drive completely, we're in a great spot. And as Rob mentioned, we could lease the whole thing to tech, which is not our intent, but we could. So we've got kind of competing demands there. And other than that, we have some life science capable stuff that we can develop down in Orange or rather in San Diego. It's too early to talk about that. Hopefully, later this year we'll have something we can talk about. I'm not promising, but we're having some good discussions. And yes, there it be could – it's settled. Remember, the old thing that always happened in office buildings when I was a private guy, there’s some report that said, eight market needs, 400,000 square feet of office space to meet demand. And then eight different developers go out and develop 400,000 square feet. And so all of a sudden you flooded the market with over supply. Could that happen? It's kind of hard to see it happening in the preferred locations because the barriers to entry are so great. A lot of people could develop what they call life science products in areas which haven't been traditional life science markets. But I'm not sure people will go there. So we'll just see what happens. But there is a lot of froth in the brokerage community, and other some of the folks trying to get into life science that haven't had experience in it. So we'll see what happens.

Okay. That's really helpful. And then just thinking about leasing volumes, so, it dropped to 61,000 square feet this quarter, 123,000 last quarter, but you talked about more activity. I mean, how long do you think before that number starts to grow again? Is it a six-month lag?

Yes. Hey, Rob.

Yes.

Rob, do you want to talk about kind of what's going on in the first month of the year for us and then further to sharing these questions.

So we’ve – I may have said this earlier, we signed 75,000 feet of leases in January, with a cash increase of 10% to 15% and GAAP increase of 20%. We have other leasing activity we're working on that we haven't announced yet in our core portfolio. And I think to more directly answer your question, Jamie, about how long, two things are happening. I think companies have been on hold basically for a year and there are fundamental changes that are happening within those companies. For example, like I said, if they have a lease that's coming up and they're in a B product building and they want A, they're going to make that move as a strategic move. I think the more robust recovery, if you will, will happen when there are larger numbers of vaccines out and people are actually coming back to the office and their companies are providing that flexibility. And I've cited on other calls, several of the companies were close to have changed their plans, where they're actually opening offices that people were forbidden to go to. They're opening them now with plans for them to be back at work in March, not the entire workforce, but people that have put their hands up, saying, I can't work at home anymore. So I really think it’s – watch that vaccine rollout, and I think you'll see a correlation to a leasing activity, tour activity, et cetera.

Okay. Thanks, Rob. I appreciate everyone's thoughts.

Our next question comes from John Kim from BMO Capital Markets. Please go ahead with your question.

Thank you. Good morning. John, you mentioned in your prepared remarks having that liquidity to go on the offense potentially. Can you just elaborate on what that means? Is that development opportunities or something else potentially?

Well, if you take a look at, not that this is an absolute roadmap. But if you take a look at 2009 and 2010, you saw us move to San Francisco, then Seattle. You saw us buy, then you saw us develop, and we bought a very good pricing. We're not saying the pricing that's attractive to us as a buyer today. But if we do, and it meets our kind of our square circle, and circle will be active. I don't know how much of that will happen. I think that's there's a lot of folks that could become sellers if the vaccine doesn't s rollout. Do we want to be a big buyer if the vaccine does rollout, that's a whole different question. But we had a lot of discussions with people. People that are interested buying our product, people that might be interested in selling their product. There isn't clarity at this point, John, that there is a path to a highly accretive acquisitions. There maybe in the limited amount in the value-add area. We always see some of that. But that's what my comments were directed at.

Got it. Okay. And it sounds like I believe from Rob's comments that you want to hold rents given the quality of your portfolio. But given where your occupancy level is today, at what point do you think about becoming more aggressive in building up occupancy?

Never going to share that with you on up on. We're not going to comment on that on this call. I don't know how many tenants listen or will get our report. But I don't think that is in our best interest to communicate. We obviously have – the market is pretty efficient. And if we feel that we can get high rents, we'll get them. And if we feel we can't and we have to adjust, we'll adjust.

If I could squeeze one more in. The DIRECTV termination. Is there a termination fee associated with that? Or is there no penalty?

There is a fee associated with it.

There is. Okay. Thank you.

[Operator Instructions] Our next question comes from Daniel Ismail from Green Street Advisors. Please go ahead with your question.

Great. Thank you. I was hoping to get a bit more color on your health – excuse me, you're life science and healthcare exposure. Can you parse out how much of that 14% of rent is currently being used as lab space?

This is Eliott. So it's not an exact science, but I think you can also refer to. We've given you square footages of how much of our space is life science, and I think we've talked about that as the million plus right now, that's active life science. So that's one data point. If tying in to the 14% is a little trickier, but call it 25% to 30% give or take.

Okay. Great. And then going back to the 2021 objectives, John, you mentioned taking a more active role on the regulatory front. Is there anything currently on your radar or being pursued at the moment with regards to any of those? I think you mentioned in the past.

Well, yes, I mean if you think about it, there is. I'll address that in greater depth as the year goes on. I don't really want to give the opposition too much of a heads up, but let's just say there is a bunch of us that worked on Prop 15, and that group as a coalition has grown significantly to include a lot more than real estate companies, and we're pissed off.

Okay. Fair enough.

We're going to fight and I think the climate is right. You see right now, recall that fitness. I'm not saying this is part of the initiative, but you can see in California. I think you're in California, aren't you?

Yes, we are.

Yes. So our governor is not very popular, not popular with box boys, restaurant tours, executives, not everybody is pissed off. Thinks he is an idiot, and I do too. And then there's a lot idiot out there. And they need to be confronted. And policy needs to be good, not bad. And we have our problems just like all states and/or big cities that have been stupid. And we have a lot of stupid people and a lot of stupid policies. And there's a lot of us that are pissed off. And it's not just people in the real estate business or people that are wealthy, it's people at every level. And I think you're going to see a ground swell of opposition to tax increases and to other things, and that's what the polls are showing. And we have – as I often say, if we are a rug merchant, we could roll up the rugs, put them in the car and go over to Arizona or in Nevada or wherever we can. We got real estate that's stuck to the ground. We got to fight.

Do you foresee this being more of a state level issue or working within the local jurisdictions that you guys invested in San Francisco and San Diego and where else?

Unfortunately, the idiots are everywhere, and we're going to have to confront them in quite a few different venues. Some will be at the state level. The idiot, whether its policy or people, but also at the local level. There hasn't been sufficient push back. I think we've – as a state and some of these cities, and I would apply this to some of the cities and states outside of California. It's been too good for too long and people just look the other way. I don't like this policy, but everything seems to be going well. Now, people are starting to say this is getting expensive. This is being intrusive. I'm tired of people telling me what to do. I want to fight back. I'm tired. I'm sick and tired. I'm not going to take it anymore. I think that was the line from a movie network that probably nobody on this call remembers because it was so long ago. But it's sort of that attitude. And there is some policies that need to change. There's a lot of good policies, a lot of bad ones.

Got it. I appreciate the color and the candor, John.

You're welcome. You know how much I love politicians.

And ladies and gentlemen, with that we'll conclude today's question-and-answer session. I'd like to turn the floor back over to management for any closing remarks.

Thank you for joining us today. We appreciate your continuing interest in KRC. Goodbye.

And ladies and gentleman, with that we'll conclude today's conference. We do thank you for joining. You may now disconnect your lines.