Hello, everyone, and welcome to the KRC 4Q '23 Earnings Conference Call. My name is Emily and I'll be facilitating your call today [Operator Instructions]. I will now turn the call over to our host, Bill Hutcheson, Vice President, Investor Relations and Capital Markets. Please go ahead.

Thank you, Emily. Good morning, everyone, and thank you for joining us. On the call with me today are Angela Aman, our CEO; Justin Smart, our President; Rob Paratte, our Chief Leasing Officer; 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. This call is being webcast live on our Web site 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. Angela will start the call with a strategic overview and quarterly highlights. Justin will review our in-process development pipeline. And Eliott will discuss our financial results and provide our 2024 guidance. Then we will be happy to take your questions. Angela?

Thanks, Bill. I'm happy to join you today on my first call as CEO of Kilroy. I want to start by thanking John Kilroy on behalf of everyone on this platform for his visionary leadership of this company over many years in various real estate cycles. John has built a premier portfolio in the most dynamic innovation driven markets in the country while also creating an organization capable of meeting and exceeding the high expectations of our diverse tenant base. I'm honored to be stepping into this role and excited about what the future holds for Kilroy. I spent my first two weeks getting to know the team here in our Los Angeles headquarters while also getting out to see our assets and meet our regional teams, starting with Seattle and San Francisco. And I'd like to share a few takeaways from my first 11 days on the job. First, our West Coast geographic markets are feeling better with more energy and vibrancy than has been seen in the post pandemic period. The underlying data backs this up. Activity levels in our markets as measured by foot traffic, public transit usage and domestic travel and tourism, have all trended up significantly over the course of 2023. Second, while the office market is and will remain challenging in the near term, our portfolio is focused and well positioned to respond to tenant needs that continue to change and evolve. Employees are back in the office but their expectations have changed. Offices need to be more than efficient, they need to be effective at enhancing productivity and driving collaboration and results. Kilroy’s well located, high quality amenitized portfolio can meet these demands and in the process, capture outsized market share throughout what is likely to be an extended recovery in this space.…

Thank you, Angela. As of the end of the fourth quarter, our in-process development totaled approximately $1.1 billion, down from the third quarter due to the delivery of Indeed Tower in Austin. There's roughly $440 million left to fund in the development pipeline, most of which is related to the second phase of our Kilroy Oyster Point Life Science Development in South San Francisco. As you may have noticed, the stabilization date for the second phase of Kilroy Oyster Point is now estimated to be the fourth quarter of 2025. The updated time line is a result of scheduling revisions for the construction of the garage and amenities. In conjunction with the revised time line, the anticipated cost for this project now reflects the additional carry costs that will be incurred during the revised construction period. We continue to be excited about the quality and the competitiveness of our Kilroy Oyster Point project because we believe is one of the most compelling life science projects in the country. The physically attractive waterside campus setting with unparalleled views and world class amenities differentiates the campus from others, and we are confident that many prospective tenants will find it every bit as appealing as Cytokinetics and Stripe did in Phase I. On a related note, we are thrilled to see the recent progress Cytokinetics made with positive data from a Phase III trial of its heart disease drug, aficamten, which has resulted in a near doubling of their market cap. Cytokinetics has a 20 year history in public markets and a strong drug pipeline, and we look forward to a long relationship with them at Kilroy Oyster Point. With respect to our future development pipeline, we do not anticipate starting any new developments in 2024. We intend to continue advancing entitlements and design on all pipeline projects in order to maximize future optionality. With that, I will turn the call over to Eliott.

Thank you, Justin. I'm pleased to report that the fourth quarter was a very strong conclusion to the year. Fourth quarter FFO was $1.08 per share and included roughly $0.05 of rental income reversals, the majority of which was tied to one tenant in the Bay Area. Adjusting for this, FFO was roughly flat from last quarter. For the full year, FFO was $4.62 per share, which was the second best year in the history of the company and more than 5% better than our original guidance after adjusting for the previously disclosed CEO transition costs. On a same store basis, fourth quarter cash NOI was down about 1% due to lower occupancy year-over-year. GAAP same store NOI was down roughly 10.5% due to the previously mentioned rental income reversals. For the full year, cash same store NOI was up roughly 4.5% or approximately 350 basis points better than our original guidance. At the end of the quarter, our stabilized portfolio was 85% occupied and 86.4% leased. The decrease from the prior quarter was due to a lease expiration in Los Angeles as well as the inclusion of Indeed Tower in the stabilized portfolio. As a reminder, Indeed Tower entered the stabilized portfolio in December, which included approximately 265,000 square feet of unoccupied space. As a result, we are no longer capitalizing any interest, operating expense or real estate tax costs for the property. Turning to the balance sheet. Net debt to fourth quarter annualized EBITDA was approximately 6.4 times. During the quarter, we repurchased roughly $7 million of our December 2024 bonds at a discount, which when added to our debt repurchases in the third quarter, brings the total amount repurchased to roughly $20 million. As a result, our remaining 2024 December maturity is now approximately $405 million. Subsequent…

[Operator Instructions] The first question today comes from Camille Bonnel with Bank of America Merrill Lynch.

Could we start with any new themes that you're seeing in the leasing pipeline since the start of the year, whether it’d be size requirements of tenants or markets?

Let me give you a backdrop of what's happening in our regions. What I'm going to talk about is also happening nationally in select markets. Although, we all know the macroeconomic trends for office continue to be challenging, there are some really positive things that’s happened in Q4 and that are leading into Q1 of '24. For example, Walmart signed a 720,000 square foot lease in Silicon Valley. As Angela mentioned, our two leases totaling 210,000 square feet in Silicon Valley, and one of those leases was the fifth largest in 2023. In San Francisco, Anthropic, OpenAI and Hive all led to record leasing in San Francisco at 1.6 million square feet for the quarter, which is above the pre-pandemic 2019 average of about 1.2 million. In Bellevue, Washington, this past week, a 450,000 square foot lease was signed with Pokemon, a gaming company and another 120,000 square feet with TikTok. So I think that gives you a good perspective on what's happening in our markets. What we're seeing in our spillover into Q1 is that we have good activity at West 8th, for example, where we're exchanging paper with two different prospects. We're seeing continued activity at Kilroy Oyster Point. I would say my comments about Kilroy Oyster Point aren't much different than last quarter. However, tour activity has maintained steady and there appears to be a more positive view on the VC funding world, and that will spill into demand eventually. There's usually about a six to nine month gap between VC funding and tenants meeting space. Lastly, I'd say that in Austin, we continue to attract some of the best law firms and financial services firms in the country. We recently signed a lease with Orrick, Herrington & Sutcliffe, the San Francisco based law firm, and we're seeing some more activity from firms like that, which I can't go into. I think the last data point I'd give you is that in San Diego, we're talking to three different tenants that have expansionary plans in our project. So overall, it feels better. I'm still cautiously optimistic because this won't be a straight line and it will ebb and flow, but things feel much better than they did Q1 of last year.

I could just kind of summarize, pull some of that together. I would just say, if you heard in my prepared remarks, we had a very strong fourth quarter from a leasing activity perspective, at least certainly carried over into Q1, which we're very encouraged by. As Eliott highlighted, we're obviously facing some significant move-outs in 2024 that's going to weigh on occupancy. But I think the trajectory we've got on leasing feels really good and we're hopeful we can meet if not exceed the expectations we laid out last night.

And so just expanding on the leasing pace for the year. Are you expecting it to be at a similar run rate as what you've seen in fourth quarter in terms of what's baked into guidance, because your implied occupancy outlook does seem to indicate a weaker retention than the 50% average you've been achieving?

We're not going to speak to what is in guidance in terms of leasing signed and that's generally because if you think about the timing of when leases are signed and how they impact the average occupancy, it tends to be pretty back-end weighted. And so it will have more of a 2025 impact on occupancy versus 2024. And in terms of the color, Rob, if there's anything you want to add?

It's just hard to predict, Camille. I mean the large amount of leasing in San Francisco, it's hard to predict whether there's more of that. There are some larger transactions in the pipeline. I would just characterize it as big tenants had been on the sideline for quite a few, I would say, quarters and now we're starting to see activity across our markets in the larger size ranges.

It is a very challenging market. Just final question from my end and shift gears a bit. You have substantial amount of liquidity even accounting for the upcoming maturities and development spend. So when you look towards the opportunities to allocate this capital today, where does the dividend fit in this context?

Well, you can see that from what we've done this year, we've kept our dividend at the current levels, it’s something that the Board evaluates annually. Right now, we're comfortable with where those levels are. And as we get into 2024, we'll make a judgment at that time as to whether the dividend -- whether the current dividend level is appropriate, whether it needs to be adjusted in up or down.

Our next question comes from Daniel Tricarico with Scotiabank.

It's Nick Yulico here. Maybe first question on the guidance. Eliott, if you could just touch a little bit more on the occupancy and how to think about the phasing of the occupancy through the year? And then whether there's anything else that's a meaningful known expiration where you're not retaining a tenant or a downsizing like what happened with the Riot Games?

So Nick, there are obviously a lot of moving pieces in terms of our occupancy. But the easiest way to think about it is starting at the fourth quarter and going to the midpoint of our range, that's about 175 basis point decline on the 17 million square feet in our portfolio that comes out to about 300,000 square feet. We outlined the two large move-outs, which total about 300,000 square feet. There will be other moving pieces beyond that, nothing over 100,000 square feet. And as we think about the range, our ability to backfill some of those other smaller move-outs is what gives us confidence in the range. And the better we do, the higher in the range we end up.

And then Angela, congrats on the new role. Maybe just a question in terms of how you're viewing the company and what your approach is going to be? You talked about some of the strategy staying the same. But I guess I'm wondering early thoughts on how you're thinking about balancing future investments, whether it's starting a new development or if there's an acquisition that pops up that's attractive versus a leasing focus for the portfolio given there's so much leasing still to do to get back to a more stabilized occupancy? Just any early thoughts on how you're thinking about balancing those two items?

I would just say I'm incredibly excited about the opportunity in front of us. There are obviously challenges in the sector in the space, but I'm very convicted that this platform, given we have a premier portfolio, an impeccable reputation in the industry, an incredibly talented team of people and a really excellent track record of capital allocation that we'll be able to not only sort of weather through some of these challenges, but really outperform and take advantage of the opportunities that some of this disruption creates, which really gets kind of the heart of your question about capital allocation and how we should think about that going forward. I don't think -- obviously, we have a big development pipeline in front of us now as we complete Kilroy Oyster Point 2. We have a lot of opportunities embedded in the future development pipeline and I'm going to be spending a lot of time with Justin and Eliott and the rest of the team to really understand what those opportunities look like, and where we have sort of the most outsized opportunities to create value for shareholders already embedded within what the company owns and controls. As it relates to transaction activity in the market and how we might evaluate that, we're at a point right now where there just hasn't been much activity and many data points to sort of key into. We're going to continue to watch how that evolves over time. And I do believe, and I would underscore this again, I said earlier, I said in prepared remarks, that there will be real opportunities that come out of this disruption. But not everything that trades is going to be an opportunity for Kilroy. I already talked a lot about sort of the idea of creeping functional obsolescence in the space and how we really need to be keyed in on maintaining the quality of this portfolio. And so there are going to be things that trade that have distressed sort of flapped on them. And not everything that trades at sort of distressed pricing is going to be compelling for this company given the focus on quality. And so we'll wait and see how things play out. As Camille sort of noted earlier, we have a tremendous amount of liquidity and we're in a really good place from a balance sheet perspective. So I think we need to be patient. We need to continue to evaluate the market and how things are trending, but I think there are going to be some really interesting and exciting opportunities on the other side of this.

Our next question comes from Steve Sakwa with Evercore ISI.

Welcome, Angela. I know you're not going to go through -- Eliott, I know you sort of gave a few pieces on the occupancy. It just seems to us as we kind of try to look at the ranges, it's very difficult for us at least to get to the very low end of the range unless you've really got almost no new leasing commencing or you have an exceptionally low retention rate on the space that's not a known move-out. So you could assume it's kind of close to zero, which seems abnormally low or you can put no new leasing, which again would seem abnormally low. Just I guess, can you just help us sort of understand what are the really big swing factors to get to kind of the low end of the occupancy? And I guess, some of the better drivers or kind of retention rate or new leasing that might get you to the high end?

Steve, I think you hit it on the head, right. The two swing factors are what is the retention on some of the balance of the portfolio and then how well do we do in backfilling that and how timely are we. I think that’s the other factor to consider. So to the extent that we have a lot of leasing success in the back half of the year, as I mentioned earlier, that helps in 2025. But as we think about the 2024 average, it's not all that meaningful. So if we're at the lower end of the range, you can assume that the new leasing is pretty light and the retention is pretty low, I think that's fair.

Look, we're going to be hyper focused this year on making sure that we are doing everything we possibly can from a leasing perspective to not just get our share of the market but really to get an outsized share of activity that's happening across all of our markets. And that's true across the stabilized portfolio, it's also very true in the development pipeline as well. So retention is lower this year, as Eliott sort of highlighted in his remarks about the two large move-outs, it's just naturally going to bring retention down a little bit, and we need to make that up with leasing.

And maybe on the G&A front, I realize with John's retirement and Angela coming in, it's not a one-for-one on the dollar side. So there is cost savings. I think it was a bit more than maybe we had envisioned. So can you maybe just walk through some of the moving pieces on G&A? And are there other things to possibly still look at on a go-forward basis with kind of the run rate?

So I think the easiest way to think about it is when you think about our 2023 number and take out all of the nonrecurring items tied to some of the transition costs. You get to kind of the high $70 million range. So the midpoint of our guidance in 2024 is a few million dollars below that. So we continue to look for efficiencies in all parts of the organization. There really isn't one area in particular that is getting outsized impact from this, and it's just us trying to be efficient in a time where we think that's the appropriate thing to do.

I mean I'll just add to that. Obviously, I'm only two weeks in and I'm really still getting my arms around the organization and how it's structured and how workflows across different departments and different disciplines. So I still have a lot of work to do to get up to speed. But I will say we are going to be, as Eliott just highlighted, as efficient as we possibly can be from a G&A perspective. It's not just about the absolute number in G&A though it's also about how every dollar of G&A we have is being allocated within the company. And we really need to make sure that all of the earlier questions about sort of what our primary objectives are for this year that we're making sure that we have all the resources we need in leasing and development, and those functions of the company to meet or exceed the goals we've laid out for the year.

Our next question comes from Michael Griffin with Citigroup.

Maybe just touching back on the leasing environment for a minute, and I realize you're not going to give formal guidance kind of around the number. But do you think that the sustained recovery in leasing activity has legs, was this more of a one-off quarter? I know you noted in the release, it was the largest leasing velocity since I think 2019. But how should we view it in terms of more sustainable from a leasing perspective?

I think, again, you have to look at it, as I said earlier, it's not going to be a linear progression or straight line. What I would say that's changed from the pandemic because during the pandemic, companies were thinking they may not need office space and we saw some of that. Today, companies are resolved to the fact that they need office space, and so now the question is how much? And so what you're seeing is the same thing we saw on ‘20, shorter term lease extensions while companies really rationalized the return to office with their employees and the mandates that they've put in pace. So I think that it does have legs. I just am cautiously optimistic that it's -- I don't feel that it's going to be quarter-to-quarter in the same magnitude that I highlighted earlier. The year could end up a good year, just like '23 did. It just it's early in the quarter.

And then maybe just sticking on demand that you're seeing. Rob, you talked about some of the legal demand that's really driving leasing, I think, particularly often for the more tech focused markets. I mean, how much do those traditional sectors have to sort of step in to fill the void of tech leasing, or do you see some of those bigger tech firms coming back to the market and taking the space?

So we'll use San Francisco, and I think Seattle, as examples. 35% of the leasing that I mentioned and 35% roughly of the demand that we see coming up is related to AI, and there's a higher proportion of that of executed leases, it's around 40% that are a combination of AI and different tech. So we see that as a trend that's really escalated because the average -- for example, the average size of a tech tenant in San Francisco is our AI tenant was 5,000 feet in the beginning of Q1 '23. It's now up to 15,000 feet, and that is taking out those large AI leases that I mentioned. So I think that you have about 35% of the transaction volume happening in San Francisco and roughly in Seattle being from tech, another $35 million is from financial services, law firms, et cetera, professional services.

Our next question comes from Blaine Heck with Wells Fargo.

I was hoping you guys could give us an update on the mark-to-market in each of your markets and whether you've seen any change in that metric recently, especially in Los Angeles where you guys have a pretty large proportion of your expirations this year?

Blaine, so plus or minus, across the portfolio were about 5% below market. And the only region that is sort of outsized relative to the others is Austin where we're in the double digits, call it, 20%-ish below market. The others are kind of around that plus or minus 5%. L.A. specifically, it's about flat.

Second question, can you talk about the tenant or tenants that were moved to cash accounting? Just a little bit more color on those specific situations and what drove that shifts and maybe the outlook for that tenant or those tenants?

So it was, as we said, predominantly one tenant in the Bay Area. We do an analysis and evaluation every single quarter on the collectibility of future rents. And in this instance, we deemed it was appropriate to convert them to a cash basis. We'll say they are current on their rent. And so that's how we kind of came to the conclusion that we came to.

And prospects for retaining them, any color you can give there?

Our expectation is that they're going to continue to pay rent in 2024.

Last question for me. Can you guys just give an update, and maybe Angela can chime in on your thoughts, on share repurchases just given where the stock is trading and whether those might be an attractive alternative use of funds as you guys remain on the sidelines with respect to acquisitions and additional development?

I'll take a crack at it, and Eliott can certainly jump in here. But we're going to look at everything and the full sort of menu of opportunities available to us from a capital allocation perspective, buybacks are certainly one of those alternatives. But buybacks will have to compete for capital with all of the other investment opportunities we have today, either embedded in the portfolio or the opportunities we think are going to emerge over the next couple of years. I'd also just underscore, obviously, we've got tremendous liquidity like we've hit on a few times, so we've got lots of capacity to be able to allocate capital over the next few years, I think, in a smart way. But we're also always going to do that, whether it's buybacks or whether it's development or whether it's acquisitions we see in the market in a way that protects the balance sheet.

Our next question comes from John Kim with BMO.

My first question is on KOP 2. Any commentary you could provide on the additional amenities and parking space that you're adding to the property? And also just the impact of higher cost and I guess the softer market, new supply, what that will have on your development yields?

The schedule for the project was affected by utilities that ran through the center of the project. If you can imagine pipes and conduits, full of gas, electric, power and telephone. They all had to be relocated, including the reconstruction of the street before we could get to the project. And the utility companies are notoriously slow at the best of times, and despite scheduling for their work plus contingency, they took far longer. So what the net effect is, is that the work that went on top or was scheduled to go on top of the utilities had to be delayed. So it meant the corner of the parking structure couldn't start exactly as we had scheduled and the amenities took longer. So the net effect is another six months.

I'll just jump in here. I'd say I toured the project last week with Justin and Rob and the rest of the team, and I just want to echo everything Justin said in his prepared remarks. I really think this is an outstanding product with unparalleled amenities. And I am really excited about the long term prospects, not only for Phase II, but for potential future phases at KOP as well. From a leasing standpoint, we obviously have work to do there. But I would just underscore, I think the biggest piece of feedback we've received from tenants that have requirements in the market today it's just that our project isn't ready yet. And many of the tenants looking and taking space right now are looking to take space in the very near term. So I think our product is resonating with the demand that's in the market, we just need to finish construction. But I'm hopeful we'll have leasing progress on KOP 2 as we move through this year.

Timing wise, do you think the leasing will be -- something will be announced this year?

We're going to work really hard, yes. Everybody is focused on it.

My second question is how we should think about NOI margins going forward. In the fourth quarter, it ended at 68.2%. There was what we thought was an unexpected decline in property taxes. I'm not sure if that's recurring, but also with your guidance of 400 basis point decline in occupancy, how should we think about margins in 2024?

So the two parts. So the property tax that you referenced was a reimbursement on a refund that we got on real estate taxes, most of which gets passed through. So the net impact to us was not meaningful in the quarter, which is why we did not call it out. It obviously does impact the margins, as you mentioned. I think the right way to think about our margins going forward is if you look at the 2023 margins and then adjust for the fact that we're going to have lower occupancy as their occupancy gets lower that negatively impacts our margins.

The next question comes from Dylan Burzinski with Green Street Advisors.

I guess just wanted to touch on sort of expectations for net effective rent growth or potential further decline in net effective rents as we think about 2024?

Dylan, are you talking about Kilroy specific or market specific, because I think it's hard to tell, every transaction is going to be different…

Yes, maybe just market level [brought] across the footprint, right? Are you still expect even more market occupancies are, further degradation in terms of either further pressure on concessions or maybe we start to see face rents finally start to trickle down?

I would say that, again, if you tier the market and really look at what the premium space is in almost every market, that space is what's commanding a premium. And so in San Francisco, for example, net effective rents are up substantially from where they were in 2019. Another way to look at it is of the vacancy that's in the market like Seattle, over 35% of that is in buildings that are 20 years or older. And so newer construction, including the Pokemon deal that I mentioned are commanding premium rents. So it's just going to be a function of the transaction, the credit of the tenant and it's also going to be a function of the market that it's in and where that market is at that given time.

Yes, I think Rob is really hitting on the right point here, which is I sort of referred to it is creeping functional obsolescence in my prepared remarks, but you've heard it referred to by this company and others over time as a play to quality, the winners and losers, the haves and have nots, you're really going to see that bifurcation continue in a pretty meaningful and significant way. So I'd just caution against looking at the market overall data in any of these markets as a read through to the quality portfolios like Kilroy.

And did I hear you right, you're saying that for Kilroy's quality portfolio, net effective rent today are higher than they were pre-COVID…

No…

Even given the significant rise in concessions?

No, I said that in a city like San Francisco, the premium tier of space that's left has a lower availability rate, but it's also commanding higher rents than pre-pandemic.

I guess just sort of pivoting over to comments regarding one of the earlier questions just on tenants realizing they need space, but trying to figure out how much space they need. In your discussions with tenants that they're touring or signing leases. I mean any sense for sort of what density you're looking at today versus pre-COVID?

Yes, it's less dense than pre-COVID. I mean part of what employers -- probably the most critical thing that employers are trying to do is create a space that's really comfortable and attractive to people coming back to work. So that you're seeing a lot more collaborative space, open space and that sort of thing. So we still use a threshold of about one to -- 201 to 250, getting significantly below that is pretty uncomfortable. And you're also seeing it sort of -- you're spread out in more space. So it's sort of a interesting trend to watch. But as an example, you're not seeing hoteling being very well received in almost any industry. And that was always sort of seen as a way to use less space and put more people in space.

And that's really what I was hitting on in some of my comments about that space doesn't have to just be efficient anymore, it really has to be effective at driving productivity. People need to be able to be as productive in the office as they are at home from a quiet perspective, being able to put their head down and work. And so I think that's driving some of the trends that Rob really highlighted.

The next question comes from Upal Rana with [KeyCorp].

Congrats on the new role, Angela. Eliott, thanks for providing all the color on the office trajectory for this year. Do you feel that occupancy could bottom out this year and begin to grow again in '25? You only have about 4% expirations next year and you don't have your top tenants expiring next year either. So I want to get a better sense on that as well.

So I appreciate the question, and we're certainly not prepared to talk about 2025 guidance today. That said, I think that you hit on a good point that the backdrop is better in 2025 than it is in 2024. And as Angela mentioned, this is a top priority for the company, leasing space and doing everything we can to ensure that the trajectory is a good one.

And then I wanted to get a little update on Indeed Tower. It seems to be about 20% left to lease up there, and I wanted to get a sense on what the leasing pipeline looks like for that project.

In Q3 and Q4, we talked about how the summer particularly when we were hitting temperatures of 115 or so on a daily basis really curtailed touring activity, and it's really picked up a lot since the holidays. So we have a pipeline we feel good about. And as I mentioned earlier to one of the questions, we're seeing sort of the same tenant mix we've seen before, which are really high end professional services, law firms, financial services. We're seeing some tech. So the market has really sort of turned the corner in terms of at least our activity and people see it as sort of a dwindling asset, meaning we don't have space but ultimately, we don't have a lot of space left. So back to [Multiple Speakers].

Our next question comes from Caitlin Burrows with Goldman Sachs.

Congrats again, Angela on the new role at the new company. Maybe just to follow up on the earlier comments that the West 8th activity was moving forward. Could you talk about leasing activity more broadly in Seattle and then specifically how tenant interest has trended at West 8th? And kind of whether the improvements you planned that the property are completed by now and how they're being received?

Let me just talk about -- I'll split our two markets. So Bellevue activity for us is quite strong. Net rents have held very well in that market despite sublease space from some large tech users. And as I mentioned, this Pokemon and TikTok deals are meaningful for that market. The central CBD of Seattle is a little bit slower. We don't have any assets in that submarket. South Lake Union, where we do have assets and Fremont, specifically, we have fairly decent activity. And we're seeing a mix, but I'd say predominantly it's tech, but they're also professional services looking in the market. West 8th has just commanded a lot of attention based on the amenities and the mix of amenities that we're refreshing and upgrading in the facility. And as you know and you've heard us talk about, it's all about [indiscernible] quality and amenities for tenants. And so we have childcare on-site, we're doing a tenant lounge, we have an outdoor deck that's one of the largest in the city. And all of the amenities there are really thought through from a tenant perspective, they're not left over space somewhere in the building that we put a gym in, for example. So that is translating into tour activity and paper being exchanged with tenants right now.

Yes, I toured West 8th in my first week at the company and I would say I'm just really excited about the plans that have been developed for that asset. We're not complete with the redevelopment work yet there or the upgrades, but I think it is certainly going to resonate very, very well. And I look forward to walking through with many of you once it's complete.

And then maybe, Eliott, you mentioned earlier how the two large lease expirations for '24 are now both expected to move out, and Kilroy get the majority of the space back. Just wondering if you could clarify if you're getting all of the space back or not? And then any details you could share maybe for kind of why they're leaving, where they're going or what you think those decisions could suggest bigger picture for office needs?

There is a small portion of the space where we've backfilled some of it to another tenant. So that's why it is not the entirety of the space. And then Rob?

Some of it's consolidation and some of it is -- a lot of companies are trying to go through pretty massive cultural change in terms of revamping themselves for for going forward. And so sometimes moving to a new location and starting fresh is easier than trying to do that in-house.

Our next question comes from Pete Abramowitz with Jefferies.

Just one of the emerging themes from the industry and some of your peers this quarter is taking advantage of potentially partners or lenders that kind of are looking to trim office exposure right now. So could you talk about, generally, are you seeing any signs of that in your markets in terms of deals that are being marketed or conversations you're having, and how that could potentially play into your plans for capital allocation?

So as we’ve kind of surveyed the market, I think of the two dynamics you touched on, the lender one is what we've seen a little bit more of. We don't have a lot of partners. We have two partners. We're very happy with our relationship with both of those partners. So on the lender side, there have been a few instances of lender facilitated sales. I'd say they're more the exception than the rule from what we've seen so far. And for us, as Angela mentioned, the focus on quality is about most importance. And in these types of situations, the quality has not been something that warrants additional consideration for us, and so we have not spent a material amount of time on those deals.

And then just on the tenant side, I think you have a lease with 23andMe at Oyster Point. They've been in the news for just some issues there and potentially pulling back on the drug development side of their business. Are they in your watch list? And I guess, just generally, could you talk about just potentially the tenant watch list for life science in general?

Yes, I'm sure you can appreciate we can't talk about what tenants are or are not on the watch list. So what we do is we continuously evaluate both tenants’ credit history, how current they are on rents, what the trajectory of their business looks like and mak an assessment on what the appropriate accounting treatment is for every tenant. It's a very robust process and we go through it every single quarter. We have seen a big picture. We've seen a slight tick up in the watch list. We're kind of in the low to mid single digits as a percentage of ABR. By enlarge the quantity of tenants are more retail related that make up the majority of the watch list, but there are certainly some office and life science tenants on there as well.

The next question comes from Michael Carroll with RBC.

I just wanted to congratulate Angela on the new job. And I believe that you answered this earlier, but the Kilroy Oyster Point construction delay, is that prohibiting tenants from wanting to take down space, or can tenants still lease space in the property is just they'll be without the parking garage and some of the amenities in the meantime?

You can appreciate that Oyster Point is a big project. It's 900,000 square feet. There's a lot of details that need to come together before a building is ready, including the amenities and the garage and other site work that has been delayed. So net-net, we think and we are very confident that we can deliver the project within the revised time line, and the first building will be delivered late 2024, stabilizing '25.

Michael, the comment also is that for demand that's in the market where a lease has expired or is expiring, that is -- if somebody needs space right away, we're not able to have them physically occupy it, but that is changing rapidly. We're having our lab space that we're building in Building F will be ready this spring and that has created quite a bit. That's one of the reasons our activity has remained steady. So yes, we could sign leases and will sign leases. And that's a natural -- what Justin is talking about is a natural occurrence and development and tenants and landlords work together in order to get the occupancy date pin down.

And then I guess, what type of demand are you seeing at Oyster Point? I guess what's the breakout between life science and potentially tech demand? And are you seeing any AI type demand that possibly is veering away from the city proper to South San Francisco or is that type of demand just kind of still staying in the city?

So again, these buildings are purpose-built life science. They do work for tech. We've seen a smattering of interest from tech since Stripe located there. One thing I'd keep in mind is that AI and life science are actually coming together quite rapidly, because AI is able to help life science producers process massive amounts of data and also simulate drug trials and speed things to market. So we're really expecting that there's going to be, from big pharma as well as start-ups, a lot of AI involved in the life science industry. But we haven't seen the people leaving San Francisco, for example, to come to Oyster Point.

Our next question comes from Vikram Malhotra with Mizuho.

Just I guess, Eliott, just to go back, I know you're not giving us kind of anticipated leasing volumes through the year. But I'm just trying to -- for both modeling and just to understand kind of the economics over a 12, 18 month period. Should we think about the gap between occupancy and the lease rate to be similar to sort of historical averages or perhaps what you see today, is it likely to be wider? Can you just give us a qualitative sense?

It's probably similar today. I think it sort of depends -- certainly similar today as it has been the last few years. If we went back to 2018, 2019, it was probably a little bit wider then. But I think relative to the last few years, it's been similar. And generally, it will take, call it, four to six quarters for that to totally flow through occupancy.

So through the year, you expect the gap to be -- over a longer term average, that gap to be similar like 2018, 2017, 2018. Okay. That makes sense. On Oyster Point, I just wanted to clarify, when you said there were higher costs, I think it was like $60 million, $70 million. I'm just -- if you could just give us a bit more color, what are those costs related to? And then just on that point, any changes in expectations around rents you might get at the property?

So just to clarify, which Justin mentioned in his prepared remarks, the change in cost was tied to higher carry. So as we have a longer period until we deliver, we have to carry the property longer, interest, operating expenses, et cetera, and that is the entirety of the delta. And then in terms of rents…

Rents have maintained very well year-over-year, both from our competitors as well as asking rates as well as our asking rates. So again, it's hard to pinpoint because each transaction is going to have a different set of components.

And then just last one, if I may -- Angela congrats on the role. A lot of exciting things going on in office. But I'm just curious at the outset, given your experience in retail, any broad similarities or strategies that lend itself well to kind of the office space from your perspective?

Obviously, there are lots of similarities and lots of big differences. But just to call out a few things. I think I spent some time in my prepared remarks talking about the way this company has sort of institutionalized the tenant relationship piece of the business. And when you think about office, particularly in a portfolio like Kilroy’s versus retail, the ability to work with the same tenants that are large space users over big portfolios in different markets and really sort of create a relationship where you can make connections between that tenant and the landlords, not just in the leasing function and not just in property management after they've taken occupancy, but in construction and in legal to make the lease execution process move faster and all these things is very similar. And I think I'm very pleased to see how well Kilroy's done that in the past. I think that's a big similarity between types of office leasing and types of retail leasing. At the end of the day, I think whether it's retail or office, or really any sector, it really is all about capital allocation. And that's true, not just in acquisitions and dispositions and development and redevelopment but just with respect to sort of basic leasing and the types of capital we invest in these tenants whether they're tech tenants or whether the retailers, or whatever it is. And so the way you make those decisions is really pretty similar across different asset categories. And then the only other last thing I would say is that retail landlords over the course of the last 15 or 20 years have been no stranger to flight to quality and increasing functional obsolescence. And so I think there are lots of lessons there in terms of how important it is to prioritize the quality of the portfolio and to be really intellectually honest about sort of what path and the growth trajectory looks like for specific assets or specific opportunities you're seeing in the market going forward.

The next question comes from Omo Okusanya with Deutsche Bank.

First of all, Angela, congratulations. Very excited to see you onwards. Question just around guidance and FAD guidance, in particular, for anyone who wants to kind of help us think through what that could look like this year, specifically also around things like second generation TI. And just kind of how do we kind of think about -- you've laid a pretty good groundwork for FFO, but for FAD, how do we kind of think through some of that?

So we touched on straight line rent in our prepared remarks, which will be a big delta from the prior year. In terms of our FAS 141, I think the 4Q run rate is a good run rate to use, plus or minus. And then the big question is CapEx. I think that we've been sort of in that low double digits as a percentage of NOI in the last few years. Our expectation is that we're higher than that this year. And we think that that's a function of the leasing that we have done in the fourth quarter and our anticipation that there'll be more leasing to come in 2024.

And then one more if you would indulge me. Angela, you kind of mentioned again about this idea of maintaining the high quality portfolio, some of the lessons learned about flight to quality on the retail side. While you do not have any dispositions in your guidance for 2024, should we be thinking about a world where it could be kind of additional dispositions in the Kilroy portfolio?

I mean I think Eliott framed it up right in his prepared remarks, which is that whether it's dispositions or acquisitions, we're going to be opportunistic on both fronts. The transaction market is very, very quiet right now. So I don't think it's prudent to bake anything into guidance. But we're going to -- I need to spend more time really evaluating the portfolio. I think there are going to be assets we choose to sell over time, because we do think that the forward growth prospects are not what we need them to be and at the standard we'd like them to be. There are also conversely going to be opportunities to sell assets that trade at amazing values as the company has done in the past that we really would look to trade because this platform, I think that's so robust just can't add additional value to those assets. So I think those two things kind of balance each other out over time. But as it relates to 2024, there's just not enough activity in the transaction market for us to really sort of [Technical Difficulty] tenant specific guidance on either dispositions or acquisitions.

With that, we have no further questions. I'll turn the call back to Bill for any closing remarks.

Right. Well, great. Thank you, Emily, and thank you, everyone, for joining us today. We appreciate your continued interest in Kilroy Realty Corporation. Thank you.

Thank you, everyone, for joining us today. This concludes our call, and you may now disconnect your lines.