Hello, and welcome to the Kilroy Realty Corporation 2Q '23 Earnings Conference Call. My name is Elliot, and I'll be coordinating your call today. [Operator Instructions]. And I'd like to hand over to Bill Hutcheson, SVP of Investor Relations and Capital Markets. The floor is yours. Please go ahead.

Good morning, everyone. Thank you for joining us. On the call with me today are John Kilroy, Chairman and CEO; Justin Smart, our President; Rob Paratte, Chief Leasing Officer and Senior Advisor to the Chairman and Eliott Trencher, our CIO and CFO. At the outset, I need to say that some of the information we will be discussing during this call is forward-looking in nature. Please refer to our supplemental package for a statement regarding the forward-looking information on this call and in the supplemental. The 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 our second quarter highlights. Justin will review our in process development pipeline, and Eliott will discuss our financial results and provide you with our updated guidance. Then we will be happy to take your questions. John?

Thank you, Bill. Hello, everybody. Thanks for joining us today. As you saw in the press release we issued last night, we recently closed on a $375 million secured financing on a portion of our One Paseo campus in the Del Mar submarket of San Diego. The loan has an 11-year term. It bears interest at 5.9% on a fixed rate, interest-only basis. We ran a competitive process that had a multitude of premier life insurance companies interested in providing the debt, and we're fortunate to execute with a terrific partner in New York Life that originated the entire loan. One Paseo is a world-class mixed-use campus, it spans across 36 acres. As a reminder, the portion of One Paseo that we finance is on 23 acres delivered in phases from 2019 to 2021 and is comprised of roughly 290,000 square feet of office, 95,000 square feet of high-end retail and over 600 luxury apartments. On prior calls, we've talked about the flight to quality dynamic occurring in the leasing market. It is increasingly evident that this theme is also prevalent across the capital markets and it played to our favor in our One Paseo transaction. Lenders are still open for business on competitive terms for the highest quality properties and One Paseo certainly fits that description. Occupancy is approximately 95% across the entire project with market-leading rents on the office, residential and retail. Consistent with our strategy, Kilroy places a premium on optionality. While our existing liquidity position is strong, we decided that being opportunistic in raising incremental capital today would result in better risk-adjusted execution as we prefund future needs and position for future opportunities. The additional liquidity we secured at an attractive rate bolsters our ability to play defense in a softer environment while affording us the…

Thank you, John. As of the end of the second quarter, our in-process development totaled approximately $1.8 billion with about $590 million left to fund. The majority of which is for the second phase of our Kilroy Oyster Point Life Science Development in South San Francisco. In April, the core and shell of our fully leased development project at 9514 Towne Centre Drive in the UTC submarket of San Diego. The building is in the tenant improvement phase, and we commenced revenue recognition in July, a few months earlier than anticipated. As we have discussed on prior calls, Indeed Tower is also expected to enter the operating portfolio in the fourth quarter of 2023. So as we enter 2024, our in-process development pipeline is expected to be approximately $1 billion, the smallest it has been since 2016. All three current pipeline projects are Life Science. Supply remains something of a bright spot for the market nationally. There have been roughly five million square feet of new office starts year-to-date, which represents a roughly 75% decline from the two-year trailing average. In addition, roughly 15 million square feet of office has been converted or demolished year-to-date. The net of these two has reduced the national office stock by 10 million square feet. Said another way, as demand for high-quality space surges, there is currently little new product in the pipeline to be delivered over the near-term, creating a future shortage of high-quality product that tenants want. As many of you know, our strategy has been focused on the high end of the market. As John referenced, it is increasingly clear that there is a significant bifurcation between high and low quality office buildings. And we expect more of the low-quality and obsolete properties to be converted or repurposed where possible. To that end, according to JLL, 17% of total U.S. vacancy is derived from approximately 1% of office buildings, highlighting the outsized challenges for owners of commodity product. Outperformance of high-end product is not unique to the office sector. Luxury hotels have generated better RevPAR growth than the overall market since 2020 and Class A apartments have had better absorption than the overall market every year for the past decade. Focusing on premier product has been a pillar of our strategy for many years, and it has proven to be -- to generate better results over the long-term. That said, we are excited about our future land bank comprised of eight development projects totaling eight million square feet across our five markets. From a product-type perspective, these products will be approximately 30% Life Science, 20% Residential and 50% Office. We continue to advance design and entitlements on these future projects so that we are prepared to be first movers when market conditions warrant. With that, I will turn the call over to Eliott.

Thank you, Justin. FFO was $1.19 per share in the second quarter, a $0.03 decline from the first quarter, mainly due to Amazon's move out in Seattle. This was partially offset by higher interest income. The 2Q results also include roughly $0.03 of positive nonrecurring items tied to 10 termination fees and restoration payments. On a same-store basis, second quarter cash NOI was up roughly 3%, driven by free rent burn off at the first phase of Kilroy Oyster Point in South San Francisco. GAAP same-store NOI was down roughly 2%. At the end of the quarter, our stabilized portfolio was approximately 87% occupied and 89% leased. The decrease from the prior quarter was due to previously disclosed move-outs. Net debt to second quarter annualized EBITDA was about 6x. Our liquidity remains robust and after accounting for the proceeds for the One Paseo financing, we have roughly $1.9 billion in total capacity comprised of $1.1 billion on our line of credit and $830 million of cash and marketable securities, which includes $170 million available under our term loan facility. In total, our available cash is sufficient to cover the majority of our near-term development spend and address our next bond maturity in December 2024. In addition, our dividend is incredibly well covered with a payout ratio of approximately 50% of FAD through the first half of the year. Furthermore, by putting in place an 11-year mortgage, we maintain a well-laddered maturity schedule with an average duration of six years. Now that proceeds to the December 2024 bond maturity have been identified, our next maturity is not until October of 2025. We are focused on keeping liquidity high and leverage low and are thrilled we could boost our liquidity on efficient terms via the One Paseo loan. Now let's discuss our…

Thank you. [Operator Instructions] Our first question comes from Nick Yulico with Scotiabank. Your line is open.

Thanks, hi everyone. Just in terms of the second half of the year, I want to make sure we had some of the moving parts, right, in terms of occupancy impact. So I think you previously said Pac-12 was a move out in July, that was about 114,000 square feet. And then I wasn't sure if you have an update on Riot Games, where I guess there was a partial expiration in July and some additional expiration in November. Any update there?

Yes. Nick, this is Rob. I hope you're doing well. It's hard to get very specific with Riot Games. We're having a variety of discussions on different floors that they lease from us, both in '23 and '24. And I just can't predict ultimately how much space they'll take, but we are in contact with them and continue to have negotiations ongoing.

Okay. Thanks. And then I guess in terms of South San Francisco, maybe you could talk a little bit more, Rob, about the demand you're seeing in that market. I know you turned one of the buildings into multi-tenant for KOP Phase 2. Maybe you could talk about leasing demand there for smaller users versus larger tenants where it sounds like the larger tenant demand is a little bit slower. Maybe you're more active on the other tenant base.

Sure. There's not a lot of change between Q1 and Q2 in terms of just the number of tenants in the market and kind of the basic market fundamentals. There's about 2.5 million square feet of demand in the market. A portion of that is on hold, but is supposed to be coming back towards the later part of this year. I think notably, a handful of younger companies are getting funding rounds, which we hadn't seen in Q1. So companies like Backsight [ph], Hexagon Bio and Septerna have gotten funding rounds completed recently. Since we did announce the multi-tenanting of our -- one of our three buildings, our tour activity has picked up an interest, meaning people are wanting to see the space wanting to understand what's in it. We're exchanging plans with a couple of companies right now in terms of the technical capabilities of the space. So overall, as I said in the first quarter, we're pleased given the overall environment with the activity we have. And we still, as John said in his comments, we had two years until we're actually complete.

All right. Thanks, Rob. Appreciate it.

Our next question comes from Steve Sakwa with Evercore ISI. Your line is open.

Yes, thanks. I don't know, Eliott or Rob, if you could maybe just talk about maybe the next 18 months and some of the, I guess more pronounced maybe known move-outs, just kind of remind us what you know is to be vacating over the next, say, through the end of '24?

Steve, it's Eliott. I'll start. We've talked about the expirations over 100,000 feet for the balance of this year. There are two, there's Pac-12, which as everyone knows, is moving out. And there's Riot, which Rob just addressed next year. We also have two, one in the Bay Area, one in Seattle, and those are both TBD and how they play out. And in 2025, we do not have any expirations over 100,000.

Okay. Thanks. And just to circle back on the G&A. And I know you guys did better than we had expected in the quarter. Just kind of remind us what you're expecting overall for G&A in dollar terms and I guess, including the expenses for John's retirement, just -- and will that be equally weighted between Q3 and Q4? Or is that tilted to Q4?

Yes. So the overall number inclusive of the retirement charges will have a range from 90 on the low end to 104 on the high end, which is consistent with what we talked about last quarter. In terms of the -- how it plays out through the balance of the year, there's going to be a portion that continues to be amortized. So we amortized the portion in actually a little bit of 1Q, but it jumped up meaningfully in 2Q. So we've taken, call it, about $0.03 of the $0.10 tied to the retirement charges so far. That will be similar in 3Q and then in 4Q, it will be a little bit higher depending on performance.

Thank you.

We now turn to Blaine Heck with Wells Fargo. Your line is open.

Great, thanks. Good morning out there. Just to clarify on the occupancy guidance. I'm assuming current guidance assumes Riot stays in place, but I wanted to clarify that. And then also, what does guidance assume with respect to Indeed Tower when it comes into the operating portfolio later this year? Is that held at the current lease rate? Or is there additional leasing factored in there?

Yes. So Blaine, we don't typically talk about assumptions for particular tenants. And so I think on Riot, there's not much more we can say beyond what Rob mentioned. For Indeed, you're correct, it is going to come in, in the fourth quarter. And we anticipate that it comes in at the current levels. So that will weigh on the occupancy in the fourth quarter, and that obviously also impacts the average number as well.

Okay. Thanks, Eliott. And then a second question, maybe a high-level question for John. There was a lot of optimism earlier this year after the midterm elections, which were, I think generally seen as a step in the right direction for San Francisco. Can you just talk about any improvement you've seen or signs of improvement to come with respect to crime, homelessness and just overall creating a bit of a more hospitable business environment?

Well, you know me, I always have to give a little story. So if you've ever been involved in an intervention of somebody who's an alcoholic or a drug addict, you're not going to get any place unless they are hit bottom. And they want to change. And that's the way I would characterize San Francisco. San Franciscans across most of the political spectrum, the economic spectrum, the demographics spectrum are fed up, and they've taken action. I think there's a real chance to replace and get a majority on the Board of Supervisors next year in the elections. The numbers look really good on that. I think there is a real opportunity to get rid of some of the bad judges that are up there. And there's some other things in the political wins that I won't talk about. And that's all made possible by the fact that over the past couple of years, a broad coalition of people have gotten together, they represent people like myself that are CEOs of companies, not just in real estate but across the spectrum of different types of companies. They represent school features. They represent the broad spectrum of the demographic base. And the wins are definitely changing. What has also happened is at the state level, we have the state law enforcement in San Francisco that can take action that the locals can't. We have the Feds in there, taking action that the locals can't. And that all sounds sort of ominous. But the fact is there are forces at work that I think are going to clean things up. It isn't going to be easy. It isn't going to happen overnight. But I was at a meeting as an example, I think it was last week. It was a big…

Very helpful. Thanks John.

You're welcome.

Our next question comes from Michael Griffin with Citi. Your line is open.

Great. Thanks. I wanted to touch on retention for a bit. I know it was lower similar to the last quarter. As we look to the back half of the year, is the expectation for this retention rate to stay low or John, you're talking about some of those green shoots we potentially see in uptick in these retention levels?

Yes. It's -- Mike, some of these bigger tenants just don't know. They're all trying to figure out what they're doing. I'm unwilling to predict retention levels. You're a young guy, and I think you have kids. And as you know, I've got six, most of them are grown, but the game shoots and ladders. We're going to continue to see shoots, but we're now seeing longer and more ladders. And so in that context, I think things get better over time, but they're not going to get better instantly. There's no -- nothing in my mind that says that we're back to 2019, certainly not in San Francisco. So we'll see. It's interesting that some of the people that have moved out of buildings are buildings are talking to us about potentially moving back into buildings. And I'm not speaking specifically to San Francisco, but across the platform. So there's just a lot of kind of wait and see. We're very busy dealing with people and the optionality, they're trying to structure. And as I've made a comment to in my remarks, in the case of like Columbia Square and Hollywood, we hadn't seen any leasing there for two years. Now all of a sudden, it's on fire. What changed? And it's right during the middle of this big industry -- entertainment industry strike. If you talk to people, it's just that they're seeing -- they're being more optimistic. They're getting people back to work. They have plans to expand. So those things can change pretty quickly. I'll make another comment just about -- I think I've said this before at various things, including your event in March. I remember a couple of times in different downturns, people talking about Silicon Valley as a case in point, having 20 some years of supply. And within two years, there was nothing to be, there was nothing of substance available. I'm not predicting that will happen in the next year or two, but I think it will happen over time because people are starting to get back to work and innovation is alive and well. There are a lot of new companies being formed. I just -- if I could predict it, I wouldn't be in this business. I'd be in the venture capital business.

Great. Thanks. Maybe expanding on that green shoot opportunity you talked about. I think we've heard more about AI driving space requirements, particularly in San Francisco. I mean, how big can you quantify this as terms of a long-term driver in the market? And any color you have around that would be helpful?

Sorry, Mike, you cut out in the first part of that. So can you just start with your -- the early part of your question?

Yes, just -- AI demand in San Francisco and kind of the opportunity set that you see there? I know the market has been kind of soft, but that seems like a potential green shoot for space requirements there.

Yes. There is a tenant in one of our buildings that sublease 50,000 feet to an AI company. Here, there's a lot -- I know some things I can't talk about with regardless of folks that are going to be investing quite heavily in AI that haven't really announced yet, and they're big, big players. I have no idea how big it's going to be. If you talk to some of the folks that are in it. And with well-established companies, they think it's going to be enormous. And it's one of those things that when Uber came out, people thought, well, what it's still the idea is not going to happen and they needed a lift and everything else. The same thing with Airbnb came out, or we believe we thought, what a stupid idea, we now know that they're the biggest hotel company in the world. So I don't know. With AI, the world is its market. I mean it literally could be involved in everything. And with that will come both good and bad things. And I don't want to get into that, but it could be really big. I think a lot of people hope it's going to be giant and instantaneous or immediate. I don't know how -- normally, these things grow and then they start getting bigger and bigger. If you look at the pattern of most of these tech companies, they started with 5,000 feet, and they had an idea. They leased 10,000 feet for 10 years and then all of a sudden, they need 30,000 feet, then they needed 100, then they needed 400 and so forth. It doesn't take many of those to change the market, but I don't know.

Got you. Well, that's it for me. Thanks for the time.

Yes. Thanks a lot.

We now turn to Caitlin Burrows with Goldman Sachs. Your line is open.

Hi, good morning. Maybe a follow-up question on the One Paseo deal. Given that only 5% of your debt or so was secured as of 2Q. Can you just go through what drove the strategy for this property? And under what situations going forward you expect to use additional secured versus unsecured strategies?

Yes. I'll start, and then Elliot, may want to give some comments. Caitlin, we're sort of agnostic. As you know, we haven't been big users of secured debt. What drove this is if we take a look at bond debt, it was considerably more expensive. Obviously, our goal was simply to take -- to pre-fund any of the commitments that we have, whether it's development or loans that come due and take that off the table. We had 18 months, I think, before the bond deal in next year comes up. Now goes out to 25%, so it's 30 months or so for the next tranche. We had some development. We were already prefunded. We think there's going to be an opportunity to play offense here. We're not exactly sure when and how that's going to play out. But our view is we're just sort of prepositioning for success. We've got best-in-class product, we are at a terrific financial position that where we can take care of whatever our obligations are as they come up and be very methodical about that. We're at a terrific financial position to play offense. And then we have the ability to start new product as it's needed. And as Justin pointed out, we think there's going to be a real shortage. So that's what drove that transaction. It was just the most efficient way to go. Elliott, I don't know whether you have a further comment.

No, I think that's all spot on. In terms of do we do more of these? I mean, who knows? We certainly like the efficiency of the bond market. But there's a time in place where secured debt makes sense and we thought this was it. But this is not an indication of a bigger shift in strategy.

Got it. Okay. And then maybe just on return to work and office utilization. You gave some details on year-to-date improvement up 800 basis points and up 500 basis points from last quarter. I guess, could you go through how you measure that? And do you have any visibility to what could happen over the next, say, three to six months?

You want to deal with that, Eliott?

Yes, sure. So Caitlin, we have a process where we go through each of our markets and do a combination of survey data with our tenants -- and card reading data with our tenants, we sort of triangulate all of it to put it together and track this information monthly. So that's our process. It's generally tracked the castle data up until recently where the castle data had sort of flat lined, but we continue to see increases in our portfolio. So a little tough to predict exactly how it will pan out, but we think that all of the announcements that we've referenced earlier, in particular, in the Bay Area and Seattle are good leading indicators that we should still continue to make progress on the physical occupancy.

I'd add a little comment that's just interesting. As you can well imagine, we deal with a number of architectural firms that not only deal with us, deal with other developers, deal with particularly a lot of users. So one of the things that they're saying is that they're not real busy on new buildings, but they're very busy on reconfiguring space for tenants. And I was talking with one a few weeks ago in Seattle, who's been active all over the Western United States. And the comment that was made is that they're doing a third thing for the same tenant on a major -- on their utilization of a major campus and they keep trying to figure out how to add more capacity for more people because their numbers keep changing. So what has sort of happened at least in some of these companies is they were wondering whether people were going to come back to work, they wanted people to come back to work. Now they're coming back to work. Now they're coming back to work more, and they're coming back at higher rates. In some cases, people have slowed down the back-to-work reentry in terms of making -- giving time to reconfigure their space to bring more people back to work. So those are just some anecdotal comments, but it's happening in real time.

Thanks.

You're welcome.

We now turn to Vikram Malhotra with Mizuho. Your line is open.

Thanks so much for taking the question. Just going back to sort of the green shoots comment. I guess we've heard from a couple of multi-family players that there's a bit more, I guess, they themselves seeing green shoots and more traffic. You talked a little bit about the AI trajectory or potential, I should say there. But could you maybe just elaborate a bit more on, like, say, the office, the pipeline you're looking at? What sort of -- types of tenants, the size requirements? And if you could break that up sort of between strictly office and then life sciences?

Yes, you want to take that, Ron?

Sure. Let me make a couple of just general comments about what we're seeing in terms of just -- and give you sentiment in terms of the tenant markets. Real estate, we've said this before, real estate is a very local business. And even though headlines nationally are that demand is off and less than we'd like. We're seeing positive absorption play out in our portfolio in cities like Seattle, Hollywood and Long Beach, as John has mentioned. Another note I think I'd make is that while overall market experienced negative absorption, the newest and best buildings have actually experienced over 100 million square feet of positive absorption in the last two years. A note that's really important about the Bay Area is that VC funding overall is down. Everyone knows that and reads it. But Bay Area companies took more than half of the funding nationally. And that's about $20 billion. So we're expecting to see more demand come out of that sort of investment. And the last point I'd make is the transaction pace remains somewhat slow, but it's picked up and tenants are really seeking flexibility in their lease terms and they're -- just how they utilize space, not only their space, but our space, meaning our common areas, our decks, et cetera. the mix, I'd say, portfolio-wide is somewhat balanced between technology and professional services and banking firms. That's particularly true in San Francisco, where you have about one-third of the demand right now, there's about 4.5 million square feet of demand. About one-third of that is from technology. The other one-third of that is from professional services, banking, et cetera. Everybody is talking about AI. You just mentioned that. Right now, in San Francisco, there's about 750,000 square feet of AI demand. Those tenants have started out probably in the fourth quarter of last year and the first quarter of this year in the 5,000-foot range, and they've now grown to about 10,000 to 15,000 feet. So on the AI front, as John said, it's very difficult to predict where that goes. And these companies are in early stages. So more to come on that. And I think one of the things we track really closely are what the big fan companies and the level below the fan companies are doing with respect to AI, because those companies will span a lot of either companies, if you will, over the next, whatever you want to call it, two years or so.

I think there was also a question about the mix...

Yes. Any green shoots in terms of life sciences more specifically?

Yes. I mean, as I mentioned, the VC funding that the Bay Area commanded over 50% nationally. And I mentioned earlier, several firms that we didn't see in Q1 got funding just recently in Q2. And when you get that sort of investment, then demand typically follows. It doesn't follow immediately and Boards of Life Science companies are still trying to keep people or companies within the space they have rather than taking new. But that said, as I said at Oyster Point, we're seeing -- we're pleased with the activity we're seeing both in a larger tenant format as well as multi-tenant, meaning a floor, 40,000 foot to 80,000-foot tenant range.

Great. And then just one clarification on maybe sublet trend across San Francisco, maybe even just broader Bay Area. Some of my recent conversations suggested that sublet volumes are likely to -- I'm saying material, but we were at such high levels, but moderate or come down. And I'm wondering if you -- in real time, seen any trends that would indicate sublet space is coming off the market more rapidly?

Yes. I hate making predictions, because I'll do it, and then something will be announced this afternoon. But it definitely feels in the Bay Area, particularly that sublease space has plateaued in terms of big tech giving back space. There's actually been some talk, and it's very -- again, who knows what it plays out to, but some tenants actually looking at perhaps taking some of the space back off the market. And we saw that happen during the pandemic where our tenant based on the sublease market because they weren't using it or occupying it and then they subsequently took it off. So we are seeing although the numbers ticked up this quarter in terms of available sublease space, I do think it's plateaued. And again, you have to distinguish between the true Class A really marketable sublease space. And the, what I would call second and third tier space that's going to struggle mightily during this time. So it's not going to have activity.

Thank you.

Our next question comes from Dylan Burzinski with Green Street. Your line is open.

Hi, guys. Thanks for taking the question. Just going back to your comments on being patient with regard to going on offense and potentially looking at acquisitions. Could you guys help us give us a sense for some of the data points or things you're looking at to sort of start that network?

Well, it's kind of the obvious stuff, but it's -- we look at based upon our what we all see, what we all have available information and more particularly, what we have with regard to the relationships we have with tenants, what they're thinking as they confide with us on various comments. How that sort of relates to Kilroy's position and where we want to place our bets. There's going to be a lot of confusion in my view, with regard to what's transacting early on. We're seeing right now, properties that were properties we never would have had an interest in back in 2019 or 2018 or whatever that may have traded back then that are coming back into trade now where there's either failed debt structure or failed ownership structure or whatever it might be. There's just a lot of product out there that is not quality that's going to be busted up. And we're going to see that in all of our markets. whether it's a formal marketing process or a soft marketing process, I think you're going to see some things trade at very low rates that are properties that require hundreds of dollars of CapEx. And if you buy it and you spend it, you're going to end -- you're still going to end up with a pig. So it's going to be mixed. And what we look at is what -- we're in this business to make money. So if you can buy a quality product at a good rate that has super upside, that's interesting, but we want to know that there is a more functioning market. If you take a look at 2010, which is probably a pretty good thing for the -- to look at with regard to Kilroy, we moved…

Appreciate that thorough detail, John. I guess just one more. Are you able to share the underwritten LTV and debt yield at One Paseo?

We can't share that. But what we can say is that given the nature of the partner, you can assume that this was underwritten conservatively.

Awesome. Thank you.

We now turn to Peter Abramowitz with Jefferies. Your line is open.

Yes, thank you. Just a modeling question I wanted to clarify. So does the One Paseo deal take the need for term loan proceeds off the table sort of near or medium-term, at least through the rest of this year?

So the way the term loan was structured is that we have 12 months to pull down the cash. And if we choose not to, then those proceeds go away. But from what you can -- what we said in our formal remarks, we do anticipate pulling down the remaining $170 million of cash on the term loan by the end of the third quarter. And then just as you think about it modeling-wise, there, we have a spread of SOFR plus 100 relative to wherever we can reinvest it. But certainly, the rates on reinvesting capital have gone up in the last three months. So the dilution there is somewhat modest.

Got it. Thank you. And then one more on Life Science. So there's a pretty meaningful amount of new supply coming to South San Francisco right now. Maybe not as much San Diego. Could you just talk about what you're seeing on the ground in terms of how rents are moving and how the new supply is affecting your conversations and with potential tenants, particularly at Oyster Point?

Rob, do you want to cover that?

Sure. This is Rob. Sure, John. Again, I guess, what I'd -- first of all, I find -- let's define the market. We're in Oyster Point, which is a very specific submarket in South San Francisco. And it's -- I like to call it the Main and Main of the Life Science market in the Bay Area. There is less product being delivered in that, because -- that particular submarket we have about a little over 0.5 million feet that we're competing with. This new construction and rental rates and new construction have not declined materially. There is other space in South San Francisco, however, as I just said, different submarkets. So there's a submarket north of us called Sierra Point, which has different fundamentals and is just a market we actually prefer always to point out and most of the large tenants do as well.

Got it. That's helpful. Thank you.

Our final question comes from Neil O'Connell with Bank of America. Your line is open. Neil the line is now open.

Hi, I'm sorry. Can you hear me?

Hello, yes.

Hello? Hi, okay. Sorry. The name was wrong. It's Camille Bonnel from Bank of America. Many of my questions have been already addressed. So just one for me. Elliot, your update around parking revenues, adding positively to core operating outlook, does that only reflect the utilization that you're seeing today? Just given that a number of larger companies are starting to implement that return to work over the summer and into the fall. Does it mean that if these trends continue to improve, we'll see further upside to guidance from this income stream?

To the first part of your question, yes, this reflects what we've seen to date. So to the extent that utilization continues to get better, then we hope that that continues to translate to better parking revenue.

Okay. Perfect. Thank you.

This concludes our Q&A. I'll now hand back to Bill Hutcheson, SVP of Investor Relations and Capital Markets for closing remarks.

Great, Elliott. Thank you for coordinating the call. Thank you, everyone, for joining us today. We appreciate your continued interest in Kilroy. Have a good day.

Ladies and gentlemen, today's call has now concluded. We'd like to thank you for your participation. You may now disconnect.