Kilroy Realty Corporation (NYSE:KRC) has reported a robust performance in its third-quarter earnings call, with CEO Angela Aman announcing an increase in Funds From Operations (FFO) to $1.17 per share and raising the full-year FFO guidance.
The company's strategic acquisitions and development projects, such as the Junction at Del Mar and Kilroy Oyster Point Phase 2, are set to enhance its market presence and shareholder value. Despite facing some challenges, such as upcoming lease expirations, KRC's strong liquidity position and proactive management strategies aim to maintain steady growth and capitalize on recovering market conditions.
Key Takeaways
- KRC's FFO per share increased to $1.17, with a sequential rise of $0.07.
- Full-year FFO guidance was raised by $0.15 per share.
- The company signed leases totaling 436,000 square feet, with a notable lease to NVIDIA (NASDAQ:NVDA).
- Average occupancy guidance increased to 84%.
- Acquired Junction at Del Mar for $35 million, enhancing presence in a strong submarket.
- Development focused on Kilroy Oyster Point Phase 2, with interest capitalization expected to cease by the end of 2025.
- Strong balance sheet with $1.7 billion in available liquidity.
- Revised 2024 guidance for same-property NOI growth to a range of -2% to -1.5%.
- FFO guidance for 2024 updated to $4.38 to $4.44 per share.
- Evaluating high-density residential or retail options for the Flower Mart property in San Francisco.
Company Outlook
- KRC is nearing the delivery of Kilroy Oyster Point Phase 2 in Q4 2023.
- Plans for 2025 development spending to moderate with a strategic focus on dispositions.
- Anticipated interest capitalization to cease by the end of 2025.
Bearish Highlights
- Upcoming lease expirations may lead to short-term occupancy pressures.
- Delay in stabilization of 4400 Bohannon and 4690 Executive Drive due to tenant bankruptcy.
- Market conditions may delay immediate plans for the Flower Mart property development.
Bullish Highlights
- Strong submarket presence with the acquisition of Junction at Del Mar.
- Increased tenant interest in Seattle and San Francisco markets.
- Positive developments in the Los Angeles portfolio with 59 deals totaling approximately 425,000 square feet.
Misses
- Q4 FFO expected to decrease by $0.14 from Q3.
- Notable move-outs scheduled for Q4, including significant leases from KOP 1.
Q&A Highlights
- Focus on capturing market demand without major strategic shifts.
- Re-entitling land parcels to maximize value, impacting sales timelines.
- Managing upcoming debt maturities with a strong liquidity position.
- Consistent tenant demand in Austin's CBD with imminent lease signings.
KRC's third-quarter earnings call reflected a company adept at navigating the complexities of the real estate market while leveraging opportunities for growth. With a strong operational performance and strategic initiatives in place, KRC is well-positioned to continue its upward trajectory in the recovering market.
InvestingPro Insights
Kilroy Realty Corporation's (KRC) recent earnings call paints a picture of a company navigating market challenges while maintaining a strong financial position. This narrative is further supported by data from InvestingPro, which offers additional context to KRC's performance and outlook.
According to InvestingPro data, KRC's market capitalization stands at $4.93 billion, reflecting its significant presence in the real estate sector. The company's P/E ratio of 24.58 suggests that investors are willing to pay a premium for KRC's earnings, possibly due to its strong market position and growth prospects.
One of the most notable InvestingPro Tips is that KRC "has maintained dividend payments for 28 consecutive years." This impressive track record aligns with the company's reported strong liquidity position of $1.7 billion, as mentioned in the earnings call. It demonstrates KRC's commitment to shareholder returns even during challenging market conditions.
Another relevant InvestingPro Tip highlights that KRC is "trading near its 52-week high," with the price at 94.11% of its 52-week high. This data point corroborates the positive market sentiment reflected in the company's raised FFO guidance and strategic acquisitions discussed in the earnings call.
The company's dividend yield of 5.23% is particularly attractive, especially considering the InvestingPro Tip that KRC "has raised its dividend for 6 consecutive years." This consistent dividend growth, coupled with the company's long-term dividend maintenance, may be appealing to income-focused investors.
For those interested in a deeper analysis, InvestingPro offers 7 additional tips for KRC, providing a more comprehensive view of the company's financial health and market position.
In conclusion, the InvestingPro data and tips complement the earnings call information, reinforcing KRC's image as a resilient real estate investment trust with a strong track record of shareholder returns and strategic growth initiatives.
Full transcript - Kilroy Realty Corp (KRC) Q3 2024:
Operator: Hello everyone, and thank you for joining the KRC 3Q ‘24 Earnings Conference Call. My name is Harry, and I'll be coordinating your call today. All lines are currently in listen only mode, and there'll be an opportunity for Q&A after management's prepared remarks. [Operator Instructions] It's now my pleasure to hand you over to your host Taylor Friend, Senior Vice President, Capital Markets and Treasurer to begin. Please go ahead.
Taylor Friend: Good morning everyone. Thank you for joining us. On the call with me today are Angela Aman, CEO; Jeffrey Kuehling, EVP, CFO; and Eliott Trencher, EVP, CIO. In addition, Justin Smart, President; and Rob Paratte, EVP, Chief Leasing Officer, will be available for Q&A. 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 website and will be available for replay for the next 8 days. 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, Eliott will discuss our recent capital allocation activites with the transaction market outlook, and Jeffery will discuss our financial results and provide you with updated 2024 guidance. Then we will be happy to take your questions. Angela?
Angela Aman: Thanks Taylor. I'm pleased to report on a strong quarter of execution as we continue to navigate a challenging but steadily recovering operational environment. Kilroy's high quality, well amenitized portfolio, differentiated tenant relationships, experienced and talented team, strong balance sheet and robust liquidity profile uniquely position this platform to capitalize on the recovery that continues to take hold across our markets. Our third quarter financial and operational results speak to this dynamic. FFO for the third quarter was $1.17 per share, a sequential increase of $0.07 due to a combination of recurring and non-recurring items, which Jeffrey will cover in a few minutes. Based on our strong third quarter performance and outlook, for the balance of the year, we increased our full year FFO guidance by $0.15 per share at the midpoint of the range. During the period, we signed approximately 436,000 square feet of leases, including 209,000 square feet of short-term leases. In addition, we also signed 110,000 square foot short-term lease related to the DermTech (OTC:DMTKQ) bankruptcy. The short-term leasing activity this quarter was predominantly comprised of renewals for tenants that will be vacating or significantly downsizing in the portfolio in the near-term. Excluding short-term transactions, the weighted average lease term on executed deals was approximately 5.5 years with cash leasing spreads of approximately 7%. Notable transactions this quarter included the previously announced 118,000 square foot SAP renewal in Bellevue, Washington and a new 28,000 square foot lease with NVIDIA and South Lake Union. Recent leasing activity in conjunction with an early rent commencement on a previously executed new lease drove a 75 basis point increase in the midpoint of our average occupancy guidance to 84%. As SAP, NVIDIA and late stage deals in our future pipeline highlight, we continue to see robust demand in Bellevue and are beginning to see signs of a pickup in demand in South Lake Union and Seattle. Amazon (NASDAQ:AMZN)'s recent 5 day return to office announcement is further accelerating the dynamics that we have seen in the Pacific Northwest over the course of 2024 and is the latest in a series of announcements from major West Coast employers that had worked hard to embrace remote work, only to arrive at the conclusion that in-person collaboration is the most effective way to enhance innovation and productivity and build a differentiated culture that drives long-term sustainable performance. In San Diego, where physical occupancy has been at pre-pandemic levels for some time, we continue to experience strong demand. And recently, we have seen a notable uptick in interest from existing tenants looking to expand within our portfolio. In several instances, this demand is coming from tenants that previously downsized, but are now realizing that they underestimated their utilization and optimal real estate requirements and are looking for opportunities to course correct. In Los Angeles, while aggregate demand remains soft, we continue to execute well, driving improvements in sequential occupancy in each of our submarkets. Of note, we continue to see solid activity in Long Beach and have recently seen a nice uptick in interest in Culver City, driven by professional service and technology tenants. And in San Francisco, we remain encouraged by ongoing improvements in physical occupancy, foot traffic and the overall vibrancy of the city. The momentum being created by the continued growth and evolution of the AI industry has been and will continue to be a significant catalyst for this market. The Bay Area commands by far the highest proportion of AI-related VC investment in the country, which is actively driving significant levels of new business formation, a very positive longer-term trend for this market. While to date many early stage AI tenants have focused their real estate searches on sublease space that is immediately available for occupancy, it's worth noting that approximately half of the remaining available sublease space in the market at the lease expiration prior to the end of 2026, limiting the attractiveness of the space to many users. As a result, prospective tenants are shifting their focus to direct deals and we're working hard to capitalize on this dynamic by leveraging our well developed and thoughtfully executed spec suites program. As it relates to Kilroy Oyster Point in South San Francisco, we're excited to begin delivery of the second phase of this extraordinary campus next month. In early 2024, we described a meaningful acceleration in tour activity off of a very low 2023 base. That higher level of interest in tour activity has remained relatively consistent throughout 2024. But over the last 2 to 3 months, we've seen a crystallization of this demand as tour activity has expanded to include a much wider range of potential tenants and these tenants appear more prepared to execute. Recently, we have spent time on-site with early, and late stage life science companies, research institutions, technology companies and other more traditional office users. While there's no question that the deal process has become significantly elongated, we remain highly convicted in the quality of what we are delivering and its unique ability to cater to a wide range of highly discerning tenants. While Eliott will discuss the transaction market in more detail in a moment, I will note that the environment is clearly evolving. Financing markets, while still challenging, are improving, leading more sellers to test the market. As a result, Eliott and team are spending more time evaluating actionable deals through a disciplined risk-adjusted return framework, while also making good progress on the land sales discussed last quarter. In addition, I'm delighted to announce our recent acquisition of Junction at Del Mar, a 104,000 square foot, 2 building campus located strategically adjacent to Kilroy's One Paseo mixed use project in the Del Mar Heights submarket of San Diego. While a small transaction, this deal represents an excellent value proposition for the company, increasing our presence in one of our strongest existing submarkets and achieving a very compelling risk-adjusted return on an as-is basis with additional potential upside from longer-term redevelopment and integration with One Paseo. Before turning the call over to Eliott, I want to take a moment to thank the entire Kilroy team for the hard work, dedication, and flexibility I've seen every day since joining this platform. It has been gratifying to see the way this organization confronts challenges, leans into opportunities, and embraces change, and I'm excited to see what we can deliver together in 2025. Eliott?
Eliott Trencher: Thanks, Angela. As Angela mentioned, at the end of the quarter, we acquired Junction at Del Mar in San Diego, our first acquisition since 2021. This opportunity was attractive because of the premier location, additional scale and a strong submarket, ability for Kilroy to uniquely add value, in place income and lease term. The buildings are adjacent to our One Paseo campus and by consolidating ownership, we can drive value creation through better integration to the nearly 700,000 square feet of office and retail we have next door. The purchase price was $35 million which equates to approximately $335 per square foot or a low double-digit stabilized yield. The project is 96% leased to a variety of tenants with a weighted average term of over 4.5 years. In the few weeks since we have closed on the deal, we have seen good interest in the remaining vacancy at terms consistent with our underwriting. Longer-term and depending on market conditions, we may consider additional redevelopment opportunities on-site. Turning to land sales, we are working on monetizing several parcels in our future development pipeline. Strategically, the rationale is threefold. First, after thorough evaluation, we believe that the highest and best use of these particular sites is something other than office and life science, and as a result our resources are better focused elsewhere. Second, these sales help right-size our land bank for the current environment. And finally, it allows us to raise attractively priced capital to be acquisitive when appropriate. We have advanced negotiations with multiple sophisticated groups that support our thesis behind the re-entitlement, but as previously discussed it will take longer to realize proceeds. To put some numbers around this, the two deals furthest along are projected to generate in excess of $150 million and we hope to have more to discuss in future quarters as these transaction advance. Bigger picture the capital markets continue to strengthen as lending is up year-over-year driven by a strong recovery in the CMBS market and that improving leasing market that allows buyers and sellers to underwrite more thoughtfully. As a result, transaction volume has increased compared to last year and high quality office and life science opportunities are starting to surface. To this end, there have been a few core office deals trade in our markets at cap rates ranging from the mid-6% to low-7% range. In summary, as we demonstrated this quarter, we are prepared to transact when the right deal comes along and we're hopeful that we can find additional opportunities as both a buyer and a seller in the coming quarter. With that, I will turn the call over to Jeffrey.
Jeffrey Kuehling: Thanks, Elliot. Since joining Kilroy in late August, I've spent my time getting to know our team and portfolio and I'm excited to work closely with Angela and the rest of the executive team to deliver value and drive outperformance going forward. FFO was a $1.17 per diluted share in the third quarter and was impacted by several one-time items totaling approximately $0.05 per share, including $2.6 million of bankruptcy settlement income, $2.2 million of restoration fee income and $1.4 million related to real estate tax appeals. Cash same-property NOI growth was 2.7% in the third quarter, including a 230 basis point impact related to the four mentioned one-time items. In terms of our forward outlook, we've increased 2024 guidance for same-property NOI growth to a range of minus 2% to minus 1.5%, a 175 base point increase at the midpoint of the range. Our improved outlook is driven by the increase in our full year average occupancy projection, which Angela discussed earlier, the cash impact of our non-recurring items in the third quarter, and cash restoration fee income expected in the fourth quarter. In addition, we have updated our 2024 FFO guidance range to $4.38 to $4.44 per share, representing an increase of $0.15 at the midpoint. The revised guidance reflects our updated same property NOI growth and G&A guidance, as well as the expected contribution of our junction at Delmar acquisition in the fourth quarter. Our G&A guidance range was narrowed and lowered by $1 million at the midpoint, reflecting a variety of ongoing G&A initiatives that have refocused resources across the platform with the goal of improving the efficiency and effectiveness of our G&A spend. The midpoint of our updated full year FFO guidance implies fourth quarter FFO of $1.03 per share, a $0.14 decrease from the third quarter. To bridge there subtract $0.05 related to the previously discussed one-time items in the third quarter, $0.04 related to lower sequential GAAP and net operating income due primarily to fourth quarter anticipated move outs, $0.03 related to lower interest income, net of lower interest expense and $0.02 related to the timing of G&A spend. Turning to development activity as Angela highlighted, we're excited to be approaching the delivery of Kilroy Oyster Point in the fourth quarter of this year, as the project was the primary driver of our development spending during 2024. We expect development spending to moderate in 2025 pending future TI capital outlays. As a reminder, for KOP Phase 2, interest capitalization will cease at the earlier of tenant occupancy or one year from base building completion, which is expected to predominantly occur in the fourth quarter of 2025. With respect to the future development pipeline, as Elliott highlighted, we continue to work towards the monetization of several parcels that we now believe have the highest and best use outside of the company's core competencies. As we continue to evaluate and begin executing on a disposition program to maximize shareholder value, the continued capitalization of interest may not be appropriate in all cases. As our disposition plans gain traction, we will be able to provide more detail on what this will mean for 2025, but we do currently expect that capitalized interest will be lower next year. Finally, from a balance sheet perspective, we are exceptionally well positioned with $1.7 billion of available liquidity. While we'll use cash on hand in the fourth quarter to repay our scheduled bond maturity, we still expect to end the year with significant cash on hand and a fully undrawn credit facility, providing us with ample flexibility and capacity to navigate a dynamic operational, transactional and capital markets environment for 2025. With that, we're happy to take your questions. Operator?
Operator: Our first question today will be from the line of Nick Yulico with Scotiabank.
Nick Yulico: Thanks. I guess first question, if you could just talk a little bit more about Oyster Point Phase 2 and you mentioned some traditional office users potentially being candidates. If you could just talk about what dynamic is making that potential for the project? And then also in terms of the tenants in the first phase, whether any of them might be expansion candidates for Phase 2?
Angela Aman: Yes. Thanks, Nick. I'll start and then I'll turn it over to Rob to provide a few more specifics. I would just say, as I mentioned in my prepared remarks, we're really convicted about the quality of what we're delivering in Oyster Point. And the closer we get to delivery of that project, the more you can see sort of the unique attributes of the campus, the amenities that we're putting in there and that's certainly improving sort of the relevancy on the tours, just what this project is and what it will be to the tenants that end up locating here. In terms of the demand I mentioned or tour and interest activity we've seen from traditional office users, I think it's really just a reflection of the quality of the project that's being delivered and the fact that we have, as you know, in Phase 1, an office tenant already that's very successful and very happy at the project as well. So I don't think there's anything more to it than that. It's really just very high quality project delivering with a really fantastic amenity package. Rob?
Rob Paratte: Hi, Nick. I guess I'd say also kind of going off Angela's comments, the landscaping is now, I'd say about 2/3s of the way installed and that makes a huge difference in the project and we're now for the first time presenting inside our fully fitted out conference center. So our prospects really get a sense of what it's going to be like at Oyster Point. And I think kind of going further on the demand and what we're seeing, as I've said before, we're delivering into a really positive environment. VC funding for the quarter is at $2.6 billion. In the year-to-date, number is about $9.9 billion which is about $1 billion more than the quarter before. So we're seeing an improved funding environment, which is leading to more demand. Demand has remained steady at about 2.8 million square feet. And I think for us particularly at Oyster Point, one of the things we're seeing is larger format tenants coming into the market and a good proportion of them are larger than 44,000 feet, which is a single floor for us. So all things are coming together. It's a really busy place right now and are sort of going off what Angela said also, our tour activity and presentations are have accelerated in the last month to 6 weeks.
Angela Aman: Yes. And just on the second part of your question in terms of the 2 tenants we have in Phase 1 and the likelihood that either of them expands into Phase 2. I would just say we've got 2 very successful tenants in Phase 1 of the project, both of whom I believe are extraordinarily happy at Oyster Point. And I would say I do think there is long term expansion potential for one or both of those tenants. At this point, my expectations would be that that's most likely for phases beyond Phase 2.
Nick Yulico: Okay. Thanks. That's helpful. Second question is just on the short-term leases. So I know you talked about that, saying many cases it could be tenants leaving in the future or downsizing in the future. So is there a way to just put some numbers around this? When we look at the short-term leases that were announced year-to-date, it looks like it's about 340,000 square feet 2% of the portfolio, I imagine. I think there was also some short-term leases last year. So we're just trying to understand like how much of that occupancy benefit, I guess is in this year or maybe even helped with some of the occupancy guidance revision higher, but we should think about as at some point next year, it's occupancy that could go away.
Angela Aman: Yes, thanks, Nick. I appreciate it. I'll say a couple of things. Number one, anything that we've disclosed as a short-term renewal is already reflected in the lease expiration schedule you see in the supplemental. So you have full visibility to all of those short-term renewal activity. So during the quarter, the short-term activity we announced was primarily related to one large renewal for Capital One on a short-term basis in San Francisco. That's going to extend that maturity just a couple of months, so it's still a 2024 expiration, but again reflected in the lease expiration schedule you see. The only thing that was significantly different than that kind of activity are really two things that varied from that. Were first, the larger format short term lease we announced I believe in the first quarter of this year, which is 75,000 to 100,000 square feet? That took occupancy this quarter. We'll be exiting the portfolio in the fourth quarter of this year. And then the second more unusual transaction was the new lease we signed with a successor entity DermTech this quarter. That's going to keep them in occupancy through this year and to mid-first quarter next year. And that's one where we do expect a vacate or a significant downsize, but are in discussions with them now.
Operator: Our next question today is from the line of Upal Rana with KeyCorp (NYSE:KEY).
Upal Rana: Great. Thanks for taking my question. Could you provide some color on your decision to acquire Del Mar? It seems like the market is pretty tight. Is there any kind of long-term plans to maybe integrate with One Paseo there? That'd be great.
Angela Aman: Yes. I'll make a few comments and then turn it over to Eliott for additional commentary. But this is located really adjacent to our One Paseo project, which is an incredibly successful mixed use project that the company has developed. And I would say there are strategic benefits longer term as we think about how this site could potentially be redeveloped and further integrated with One Paseo. But as I think you also heard Eliott really highlight in his prepared remarks, this was also a very attractive deal on an as-is basis if there's no redevelopment play given the cap rate that it was acquired at, and lease term we have with existing tenants and just really how tight that submarket is. As we mentioned, it's one of our most successful submarkets in the portfolio. We ourselves are 97%, 97.5% leased in Del Mar. And as Eliott highlighted, this acquisition was 96% leased as well. So it's both good income on an as-is basis with yes, sort of a strategic potential longer term benefit through redevelopment and further integration with One Paseo.
Jeffrey Kuehling: Yes, Upal, as we sort of touched on, I mean, this really hits checks so many boxes for us as an acquisition. We know the market incredibly well. We know the micro location very well. Having so much scale next door allows us to take advantage of that, and whether that's as we think about how tenants grow in our portfolio or if there are expenses that we can manage, and then there's also something to say for the brand that we have as a company have created at One Paseo. And the more we can do to extend that brand and integrate adjacent properties, we think is very additive.
Upal Rana: Great. That was helpful. And then, on the development pipeline, could you elaborate on the 4400 Bohannon and 4690 Executive Drive being moving to the tenant improvement grouping and maybe what, what it will take for the assets to be placed in service and then building off that in any color on the decision to push the stabilization out a quarter?
Eliott Trencher: Yes, so this is Elliot, I'll take that. The reason they went into the TI ready phase is because the cold shells essentially complete and it is tech, it's more of a technical timeline that we've hit. And so now that we've hit that point in time, our 12-month clock begins for lease up. And then at that point, the properties will go into the operating portfolio, capitalization will seize and they will be integrated into our occupancy statistics, et cetera. As far as the leasing market around that, Rob, if you want to touch on that.
Rob Paratte: Yes. As kind of going off what Elliot said, as the, building has delivered or starting to deliver and the tenant improvements are starting for the spec labs, it's increased our activity there. And as you recall, we did this, we made this decision to move to life science, because it gives us a wider net to cast. Although there are a lot of tech companies in the neighborhood, there's also a lot of life science in the area. So we're seeing a good amount of interest on the project. We just had a relatively large broker event last week that was very well attended.
Eliott Trencher: And then just the last piece of your question on the timing on 4690, as you may recall last year we had at tenant, Sorrento Therapeutics (OTC:SRNE) that was supposed to take that space and declared bankruptcy. We then pivoted and readjusted our design to go from a single tenant use to a multi-tenant use. As we sort of worked through that, it just took a little bit longer in developing those plans and that was the one quarter delay.
Operator: Our next question today is from the line of Blaine Heck with Wells Fargo (NYSE:WFC).
Blaine Heck: You talked a lot about the land parcels. So related to that, I wanted to ask about Flower Marts. Clearly, the pandemic interrupted the plans you had to develop, mixed use space with a lot of office there. But in the past, I think you guys have excluded it from any land parcels you're evaluating for disposition. So can you talk about what the plan is there? Can you adjust the property mix to lean more towards residential or retail? And then, lastly, I believe you're capitalizing interest there. Is there any clear answer to when that could cease?
Angela Aman: Yes, thanks Blaine. I'll say a few things about Flower Mart. This is a really exceptional assemblage of property in the city of San Francisco. Very well located, accessible, and zoned for pretty high density, and so at the right time, I think, there's a lot of reason to be enthusiastic about how Flower Mart ultimately gets developed. Given where the market is right now, that's unlikely to be in the near-term. And certainly, we're going through an extended process of really understanding what all of our options there and making sure that we're on a path that will ultimately maximize value, through whatever eventual outcome that is. I note that right now, we're still working on completing our work at the wholesale flower mart and moving the flower vendors over. So we're still at that stage of the project, but actively working on longer term design and density considerations at Flower Mart. The things that make this site challenging, I think in the near term are just making sure while it sounds like a good idea to pivot to alternative uses, I think we have to be really mindful of the fact that we do have such significant density approved at the site. And there are a number of other plans that might be more actionable in the short term that would really impair the eventual ultimate value and realization at Flower Mart. And so those are things that we have to be mindful of. As we continue to work through our plans for that site, we'll have better clarity on sort of what timelines look like for those different plans and what that means for interest capitalization.
Blaine Heck: Okay, great. That's great color. Just for my second question, another kind of high level one. Over the years, Kilroy and in particular John has been very vocal about the need for political reform on the West Coast and now we're also facing a presidential election that's highly controversial. So I guess from both angles here, Angela, how are you feeling about the political and business environment on the West Coast? I guess, have you seen any improvements in the short time that you've been there? And I'd also be interested in any potential implications you think there could be from the San Francisco, election and maybe even federal election, if you have any view there.
Angela Aman: Yes. I'll make a few comments. Obviously, as you point out, the company has been very politically aware over time and politically active in the markets we operate in, really championing, great policy, both from a business perspective, but also just from a quality of life and safety perspective as well. And that's been a huge focus of the company's efforts over the last few years. I would say we have seen, not just during my time, but over the last probably 18 to 24 months, a real improvement in many of the markets we operate in. That's absolutely true in San Francisco, but it's true in our other markets as well like Seattle and Los Angeles to varying degrees. We are continuing to monitor all of the election activity really closely. We do feel like what's happening in San Francisco will continue given the way that the mayoral race and the Board of Supervisor races are shaping up and do feel like we'll continue on the path we've been on, which is to some degree more moderate policies that again continue to focus on quality of life and safety issues in the cities and really bringing back employees and residents and really just continuing to improve the overall vibrancy of those markets.
Operator: Our next question today will be from the line of Jeffrey Spector with Bank of America Merrill Lynch (NYSE:BAC).
Jeffrey Spector: Great. Thank you. Angela, you mentioned in your opening remarks recovery, but you also said subtle recovery. In New York City, I'm sure you're aware, I mean, I think one of the key catalysts was companies finally deciding to stop producing space. How would like, I guess, by market, where does that stand? Where do you think that stands in San Francisco or LA or Seattle versus New York City given everyone's trying to compare?
Angela Aman: Yes. Thanks, Jeff. I mean, I'll say a few things. Number one, I think important commentary made in the prepared remarks was just around some of the recent return to office announcements we've seen. And what I really tried to highlight there is what we're seeing in this phase of the return to office dynamic is companies that had worked really hard to embrace remote work as a consistent and significant part of their workplace environment that are moving back to environments, in particular, in Amazon's 5 day announcement that represents sort of pre pandemic norms. And so I think that's certainly a very helpful dynamic overall. I also pointed out particularly in the San Diego market. But I'll turn it over to Rob to talk more broadly about what we're seeing in other markets, that we have recently seen a pretty significant uptick in terms of tenants looking to expand within the portfolio. And then in several instances, and I do think this is a sign of things to come, we're seeing tenants who had reduced space or were actively planning on reducing space in 2025 come back, and sort of begin conversations with us because they believe they've overshot those reductions. And now that they're getting people back into the office more consistently, they have a better sense of what their ultimate utilization of real estate requirements are and are realizing that they're a little bit different. And that is I'll turn it over to Rob. But we've certainly seen that dynamic not necessarily within our portfolio but within the broader markets we operate in as people would put sublease space on the market and pulled some back as their plans kind of shift and change.
Rob Paratte: Yes, Jeff, just adding on to that, there's a palpable change and difference in the streetscape in all the markets we're operating in for the better, and I'll just tick through a couple. Bellevue, for example with Amazon being a major employer there, is on track to have about 25,000 employees, Amazon employees in the office phased in over the next 24 months. So that's a very positive thing for it's just a virtuous cycle. When you get companies bringing people back to work that helps retail helps the companies have their employees at work, and we're seeing that happen in Seattle. In addition to Amazon's return to work policy, the City of Seattle and Kings County are mandating a 3-day-a-week return to office starting in November for those employees. So in the core, that means about 13,000 more people working in downtown Seattle, which will be nothing but helpful. San Francisco sales force is the most recent largest to announce a return to office policy that will take effect -- has taken effect but will really be phased in over the next couple of months, and that in particular because our San Francisco headquarters office is directly in the middle of the sales force campus. There's new restaurants opening. There's a lot going on in San Francisco where even a year ago there wasn't much retail at all. Now we're seeing new openings. Los Angeles, in our markets where we operate, Culver, Hollywood and the Westside of LA, people have been back to work and there's it's continuing to improve. We're starting if this says anything about it. We're starting to see larger transactions. Starting to tour the market in places like Playa Vista that had been very slow over the last year. San Diego, Angela hit on, and Austin was probably one of the biggest leaders of return to office over time.
Jeffrey Spector: Thank you very helpful. My second question is on external growth. I guess acquisitions versus development, Junction at Del Mar. I mean is this I guess, can you talk a little bit more, Angela, about your strategy over the next few years. Have you changed that external growth strategy from the past a little bit? And is Junction at Del Mar a good example of what we should expect more out of Kilroy and including of course, you discussed the land sales.
Angela Aman: Yes. I don't know that there have been huge changes in how we'll approach capital allocation going forward. I mean, I think this is, as we pointed out in the prepared remarks, a real focus on risk adjusted returns and just making sure we're continuing to deploy capital at levels that represent returns to the company and to our shareholders that are above our cost of capital. It's really no more complicated than that. The junction at Delmar, I think was a really fantastic transaction where we're underwriting as Elliot mentioned in his remarks, a low double digit stabilized yield translating into kind of a mid-teens IRR, and even at discounting cost of capital today. I think that transaction makes sense all day long. And then you layer on top of that potential future redevelopment down the road. I think it's a very compelling deal. Now, I'll be at a very small size at 35 million, but I think it made both financial and strategic sense for the company. I don't think that's necessarily anything dramatically different from what the company would've done historically. We're going to evaluate a wide range of transactions in our markets and I think being be very focused on risk adjusted returns, how we're underwriting cashless streams going forward, how we're thinking about the conviction we have in different submarkets that we operate in today regarding lease up and the timing of that lease up and things like that. And just trying to make sure that we're continuing to put capital to work in ways that all that benefit the shareholders.
Operator: Our next question today is from the line of Anthony Paolone with JP Morgan.
Anthony Paolone: You talked about the short term leases and I know there's some sublease space in the portfolio, and as we look out the next couple years, the lease expiration schedule spikes. And so maybe Angela, like as we step back and look at this, how do -- what's your comfort level that we don't see another step down in occupancy the next couple years? Or how do we think about just the path of just absorbing what's coming down the pike?
Angela Aman: Yes, I mean, I'll talk about it a few ways and we can talk longer term about 2026 and sort of how we're positioning for the least expirations that are coming in that year. But look, we were pleased to report an increase in sequential occupancy in the third quarter. The teams working really hard across the entirety of the portfolio to prioritize occupancy and getting tenants in and rent paying as quickly as we can. And that came through and some of the deals announced this quarter and also some of the early revenue recognition or early occupancy that we were reported that helped drive the occupancy number as well. So I'm pleased to see that sequential increase in occupancy. Obviously, the full year occupancy guidance does point to deceleration of that occupancy level in the fourth quarter and that will have something to do with both the short-term Capital One extension we talked about earlier. They will vacate in the fourth quarter as I previously mentioned, and that shorter term new lease deal that we had announced in the first quarter took occupancy this quarter and we'll vacate the portfolio next quarter. In addition to a move out from Microsoft (NASDAQ:MSFT) or LinkedIn in the Bay Area. So some pressure in fourth quarter. What we had pointed to in 2025 in particular and have continued to point people to is that that is overall a lighter expiration year for the company and it is a more granular pool. So, until this quarter, and I'll put one caveat on that, we have had no lease expiration in 2025 greater than a 100,000 feet. With the shorter-term DermTech deal that was signed this quarter, they will vacate the portfolio in the first quarter significantly downsize, and as I mentioned, we're in conversations with them now to understand what that looks like, but there will be some space from that 110,000 square foot, short-term renewal coming back to us in the middle of the first quarter. So that's the only real update there. So 2025, again on the move outside feels certainly, an easier hill to climb than 2024 was, but you're appropriately sort of keying in on 2026 being a larger expiration year. And I will just say Rob and team have been very focused on the 2026 expirations really since I joined the company back at the beginning of 2024 and are making good progress in conversations with many of those tenants already. Rob?
Rob Paratte: Yes. I would just add a little more color to that. On the last earnings call, we discussed that tenants now sort of in general are looking starting to look out further than just their upcoming expiration and that's being borne out in what we're doing in 2026. And I would say right now, we have good confidence in the discussions we're having and we're having discussions on over half the space that is expiring in 2026 and these are relatively longer term transactions as well. So not the short term that you have seen in the past.
Anthony Paolone: Okay. Thanks for all that color. My second one is on KOP 2. You just talked about the elongated process to try to get things done there. I'm just wondering, is this mainly like competition from other sites that tenants might be looking for? And also thinking about what the risk is that you have to offer more in either concessions or up the development budget or whether you have enough room and what's been planned to kind of get it all done?
Angela Aman: Yes. I mean, just from a tone perspective as I kind of think through all the things in the pipeline we're referring to when we talk about that elongated process, certainly there's plenty of supply in the market which has been highlighted. And so there is competition for space, but I don't think that's what's been elongating the process as much as it is tenants really just understanding what their requirements are and ultimately being prepared to commit to longer term deals and move forward. And we do think that that's changing. I mentioned that in my prepared remarks. We feel like we really have seen kind of a continued level throughout 2024 of higher tour activity and interest in the space. We're nearing the delivery of the spec suites in the fourth quarter, so that certainly is creating a little bit more momentum. And it does just feel like what we're seeing is a combination of tenants who are ready to move forward as well as tenants who might have toured the project earlier in the year. And as it turns out weren't ready to commit at that time coming back and seeming much more prepared to execute as well. So it feels to me like it's been and this is not true obviously in all circumstances, but it feels like it's been more driven by tenants really understanding their own needs and their business plan and being ready to commit versus spending a lot of time in the process really evaluating different options in the market.
Rob Paratte: Yes. I'd just add two things to that. One, as we've talked about before, timing has been an issue with KOP in terms of our delivery, and we're now getting past that. I mean, our spec suites or spec labs are delivering in November. And as I said earlier, the project just shows amazingly right now. The other thing I'd remind you is that life science companies in general are not apt to pre lease, which has also been an issue for us. And now we're in that mode where we're beyond the point of pre-leasing and we have shell and core up and amenities in and that's making a big difference in terms of the conversation. So overall, this business is sort of a protracted negotiation business anyway, but we're confident in what we're seeing in the activity that we're working on.
Operator: Our next question today is from the line of Michael Griffin with Citigroup.
Michael Griffin: Great. Thanks. Just wanted to get some more color on the leasing numbers this quarter. Obviously, rent spreads and retention rates were higher relative to 2Q, but you saw noted jump in TIs as well. Can you give us any sense on maybe how this has impacted net effective rents? Are you seeing a greater ability to maybe push face rents, but you have to sacrifice more in TIs to get deals done. Just curious on any color there. That would be helpful.
Angela Aman: Yes. I mean, I'll let Rob come in a minute. But I guess what I would say is, one quarter data point doesn't lead to a trend line necessarily. I would say there were a couple of deals in the pipeline or in the deals reported this quarter that just based more on condition of the space than on market dynamics drove that number to be a little bit higher. And certainly, we're in a competitive market environment, but I don't really think that's what drove the number this quarter as opposed to just the condition of the space and more of a mix issue than market or trend issue.
Rob Paratte: Yes, and Angela hit the nail on the head, Michael. It's the condition of the space in 2 cases, which were relatively large. The space hadn't been redone for over 10 years by 2 different tenants. And so to put that in perspective, post-pandemic there was no remodeling done to reflect a new modern work environment, so it necessarily means tenant improvements are going to be higher. Then one more piece I'd add is that there involves some corridor work, which we always kind of we assess that as part of the TI work even though it's separating 2 spaces.
Michael Griffin: Appreciate the color there, Rob. And then just going back to your commentary maybe specifically on LA, it seems like look, might be a little bit better, but obviously we've heard about the issues that the film and TV industry has had there. I know studios don't directly impact your business, but can you give us a sense? Do you need to see an accelerated recovery within that industry to drive additional demand for office space?
Angela Aman: Yes, I think there's no question that would help. And as we mentioned in the prepared remarks, it's -- LA has been soft, but I think the team is doing a fantastic job of executing in a challenging market. And we are encouraged by what we're seeing in Long Beach, which has been consistent for some time, but we have seen some average deal size continue to ratchet up there, which is great to see. And new interest, I would say, in Culver City in particular are driven by both professional service and some technology tenants coming back to the market. So that's an encouraging dynamic as well.
Rob Paratte: Yes. I'd add a couple more things, Michael. Governor Newsom over the weekend passed a bill that basically doubles the incentives for film the film industry to film in California, and specifically in Hollywood and he signed that in Hollywood. So that's a move in the right direction because that's also been an issue where we've seen tenant activity in addition to Angelo's comment about Century City, we've seen it pick up in Culver City and Beverly Hills as well. There's also a start of larger deal activity at least looking in Playa Vista. So things are looking they're starting to turn the corner. And if you just look at our portfolio in LA, just to put it in perspective because we have a smaller tenant market, we are -- we've executed 59 deals year-to-date and that's almost 425,000 square feet. So our team in LA has been really busy. Smaller deals granted, but our tour activity is up and we're feeling pretty good about what we see going on in the competitive markets around us.
Operator: Our next question today will be from the line of Steve Sakwa with Evercore ISI.
Steve Sakwa: Yes. Thanks. Good morning out there. Just to -- Hi. Just to clarify, on the lease expiration schedule, I think you have 3 large known move-outs in the fourth quarter. I just want to make sure that kind of implies something like a 90% plus, I guess, exit rate. So I just wanted to make sure that was right. And then as we look at '25, I guess, on Tony's question, outside of DermTech, is there any other I guess, large known move-outs that you're aware of today within the 750,000 feet expiring?
Angela Aman: Yes. As it relates to Q4, I think the biggest move out will be KOP 1 in San Francisco, like we talked about. We got a couple of extra months, which was one of the short-term renewals reported this quarter, but that is the fourth quarter move out. We had the shorter-term new lease that was signed in the first quarter of this year, took occupancy in Q3 and will be a Q4 move out. That's around some short-term deals around 100,000 feet of vacates in the fourth quarter. And then the Microsoft or LinkedIn lease in the Bay Area, which is about 76,000 feet. Those are the biggest moving pieces in the fourth quarter. As it relates to 2025, you appropriately point out both the DermTech lease, which was 110,000 square feet that will be moving out sort of mid Q1 of next year. And then the other larger lease within the -- or the other largest lease within that expiration pool next year is also a Q1 expiration of about 80,000 feet, and we're in discussions now, I would expect it's a vacator, it's a significant downside.
Steve Sakwa: Okay. Great. And then as it relates to KOP 2 and just the delivery of that project, I guess, moving from the under construction perhaps into the tenant improvement phase, will all 3 buildings in Phase 2 kind of move together? Or because they're in different sort of phases of their life, will they move in phases, if you will? And will -- so I guess what I'm trying to ask is will the capitalization be more of a phase for that? Or will it be kind of an all or nothing?
Angela Aman: It will be pretty close to together. I mean, Jeffrey's comments intentionally said it will predominantly occur in the fourth quarter of 2025. One of the buildings might slip to base building completion in the first quarter of '25, which would push the interest capitalization clock to stop in the first quarter of 2026. But you're talking about one -- potentially a one quarter difference.
Operator: Our next question today will be from the line of John Kim with BMO.
John Kim: On the land sales of $150 million in proceeds, can you discuss what the earnings impact may be? I think you're going to have some capitalized interest coming off. I don't know what the book value of the land is, but if there's going to be a gain, are you going to include that in earnings and timing? Do you expect this to be realized in 2025?
Angela Aman: Yes, I'll say a few things, and then Eliott can jump in if there's any other color he wants to add. I would just say as it relates to the earnings impact in 2025, I'd just point back to Jeffrey's remarks, not all the parcels in the future land pipeline are being capitalized from ours, some ours. And timing and sort of what plans were ultimately working towards and each of these parcels will matter. And so we need a little bit more -- we're pointing it out as something that is worth consideration, but we need a little bit more time to progress some of these potential dispositions and refine our plans before we can get much more specific on what that means for 2025. And Jeffrey's comments highlighted. Just directionally, I would expect capitalized interest to be a little bit lower in 2025. So that's the first piece. I would say, I think based on the deals that are further along, we would expect some gains in that portfolio, but we would not expect those to be gains that would be recognized through FFO.
Eliott Trencher: And then as far as timing, since we are talking about a re-entitlement process, this is -- it's going to take quite a bit of time, and it is tough to predict exactly how long it will take. But you shouldn't expect anything before kind of the end of 2025, but we would expect these to happen in phases the end of 2025, 2026 and potentially some in 2027.
John Kim: Thank you for tackling the multi-part question. My second question is on KOP 2, just going back to potentially signing traditional office users or tech users. How does that impact the cost or the expected yield of the project if you have to convert that lab space back to office? And does that impact leasing at all? Do you expect biotech or pharma users to be kind of turned off if there's a corporate tenant in there?
Angela Aman: No, I think it all comes down to scale and sort of how the campus kind of comes together overall. I don't view leasing to some office tenants as being an impairment to the rest of the campus. We certainly didn't experience that on Phase 1. I would say as it relates to any -- I think your question is alluding to whether or not we have costs, we've expended on the project that would really have to be demolished or pulled out in order to accommodate that use. We don't on 2 of the 3 buildings. Remember, we've only really built out the lab space for the spec suites in 1 of the 3 buildings. So there's plenty of vacant space and sort of shelf condition that could accommodate those other users. To speak more specifically about overall deal economics at this point would be premature.
Rob Paratte: The last thing I'd add to that is that both [ Cito ] and Stripe cohabitate and it works really well. So as Angela said, we've got a lot of space that can be used as office that's in shell condition. And we have spec lab space that's intended to be spec lab space and not converted back to office.
Operator: The next question today is from the line of Dylan Burzinski with Green Street Advisors.
Dylan Burzinski: Obviously, office capital markets are challenged today given the overall lack of debt availability. But it seems like things are improving on the leasing front, and hopefully, that ultimately translate to a better capital markets environment. As you guys sort of look at the existing operating portfolio today and the submarket positioning, are there -- is there appetite to eventually pare down the portfolio and sell out of the markets that you guys no longer deem as core?
Angela Aman: Yes. Look, I think all of our plans, as it relates to market positioning and some market positioning are things we're actively talking about. As we've pointed out, the transaction market has been really, really slow this year. So executing on anything, it's been more academic than something we can really do in practice. But we're thinking about the portfolio holistically all the time and trying to make sure that we're putting ourselves in a position to continue to move the portfolio in directions that we think will do the best job of helping us build a durable and resilient cash flow stream that with significant growth in the future. And so that's how all of the potential dispositions and acquisitions will kind of be viewed through that lens.
Dylan Burzinski: I appreciate the comment, Angela. And then maybe just a small one on the acquisition. You guys talked about a low double-digit stabilized yield. But given the near 5-year [ WAULT ] is it safe to say that the sort of going in yield? Is close to that? Or are there sort of below market rents that are sort of bringing you guys that low stabilized double-digit yield?
Eliott Trencher: So Dylan, this is Eliott. Two comments. One, we think the rents are below market today. And two, as Angela mentioned earlier, we think this sort of a mid-teens IRR. So we don't think this is sort of a -- you buy it and it deteriorates over time. That is not our expectation.
Operator: Our next question today will be from the line of Caitlin Burrows with Goldman Sachs (NYSE:GS).
Caitlin Burrows: I think, Angela, back in the prepared remarks, you gave some commentary on the sublease market in San Francisco, how it's becoming less competitive or at least a large portion of it. Wondering if you can talk a little bit more on sublease space more broadly? But then in San Francisco, kind of how competitive is it? And are you seeing that kind of detract from conversations that you or other landlords might be having on direct leasing?
Angela Aman: Yes, I'll start, and then I'll turn it over to Rob. As you pointed out, and I'll just reiterate kind of what we said earlier, which is it has been very competitive over the last couple of years, especially given where the demand has been coming from in terms of tenants, particularly in the AI category that are more startups that are looking for space that they can occupy very near term and just don't have the time resources capacity to really think about a long drawn out build-out process for space that they hope to grow out of a few years. So the sublease spaces really fit that need. But as we get closer and closer to those expirations, I would say when you look at the overall sublease market in San Francisco, you've got a combination of some of that space just kind of being obsolete, some of it being very large format or full floor uses, and that doesn't really meet the need for some of the tenants we're talking about, particularly in AI. And then you layer on this dynamic, which is that over half of the total sublease space in the market as a pretty near-term lease expiration. It isn't -- every day that passes that space gets less and less competitive as those tenants just don't have long enough in the space to really be able to get enough out of it. So I think the team is doing a great job at making sure we're in front of some of those tenants that do have those more near-term requirements that maybe had been focused on sublease space. But really encouraging them to look at the sublease space we have in the market and thinking about how we can position that most attractively to capture some of that demand given all of those dynamics and where things are headed going forward. Rob?
Rob Paratte: Yes, just a little more color, Caitlin. I think that -- if you look at in San Francisco, specifically on sublease space, a lot of the forming young AI companies want short term, but they're looking for 3 years, often not less than that. And to Angela's point, as sublease space continues to get absorbed, which it is, projections are conservative that by '27, the vacancy rate should be at a more normal level, somewhere between 10% and 15% for San Francisco, with some of the former sublease space converting to direct space. I'd say in our other markets, sort of the same thing in Seattle, for example, there's probably 15% to 20% of the market is sublease space, but you also have to look at what the term is in that sublease space with the shorter-term being a little less attractive than the longer-term. And so it's feeling like we are knock on wood that we just keep seeing tenants now have stopped putting space on the market, and they're in a stable mode and that space is getting absorbed.
Caitlin Burrows: Got it. And then maybe on the other side, Angela -- go.
Rob Paratte: Sorry, one other comment I'd make on sublease space in general, when you look at 35% availability in San Francisco is a lot of that space is not competitive with us, meaning it's inferior older product, depending on the location and with the physical attributes, it may never lease as office.
Caitlin Burrows: Yes. Got it. And then on the other side, Angela, you mentioned how some of those users are not necessarily looking for full floors of space. I think last quarter on the call, though, it did come up a number of times about how there were some large lease requirements in the market. Obviously, since then, we saw a big open AI lease. But as you think about the types of users that are out there, was that kind of what you were talking about with the large requirement last quarter? Or might there still be other requirements that you're hearing about for San Francisco for large spaces?
Angela Aman: Yes. No, I wasn't actually referring to the open AI lease that was in the market that we certainly had visibility and we're aware of that transaction. We were talking about a number of other larger deals that were coming to the market, I'd categorize larger in that case is more and then around the 100,000 square foot range, and that activity does continue.
Rob Paratte: There's about 200,000 more feet of pending technology leases that are larger format that should be completed this quarter or early next year.
Operator: Our next question will be from the line of Tom Catherwood with BTIG.
Tom Catherwood: Starting with Angela, following up on the sublease versus direct question. You had mentioned in your prepared remarks Kilroy expanding its spec suites offering to meet demand for more direct space from tenants. Beyond the spec suites that you're building at KOP in Phase 2, how much are you looking to add in other markets? And what type of upfront investment does this require compared to traditional office TIs?
Angela Aman: Look, we're leaning in a little bit, but I want to be clear as I was in my prepared remarks that this is sort of leveraging thoughtfully executed and well-designed program the company has had in place for some time. I don't think this is a significant departure, but there are markets based on where we're seeing demand. In particular, in San Francisco, given new business formation, particularly on the AI side and what their requirements are, then it makes sense for us to do a little bit more on the spec suite side. We're probably talking about an inventory increase of a few spec suites at any given time. This is not like a major strategic shift. But hopefully, what you take away from that is just we're being very thoughtful and very aware of where the demand is coming from in each of our markets, and trying to figure out how we can position ourselves to capture as much of that as possible.
Tom Catherwood: Got it. Appreciate those thoughts, Angela. And then second question for Eliott. On the land sales, given the conclusion that certain parcels have the potential for higher and better use, are you working on re-entitling those assets in order to maximize value? And is that contributing in any way to the sales time line?
Eliott Trencher: Short answer is yes. And -- but what we've tried to do is work with groups -- work with identified groups so that we are not re-entitling it in a vacuum, and that contributes to the time line that we discussed.
Operator: Our next question will be from the line of Ohad Bregman with Deutsche Bank (ETR:DBKGn).
Unidentified Analyst: This is [indiscernible] from DB. Just wanted to talk a little bit about the upcoming debt maturities. If you kind of have some chunky that mature in each year between 2024 to 2026 at a pretty attractive interest rate. Just kind of given the capital markets are, where pricing is today, how do you kind of think about refinancing that debt and what potential kind of earnings drag, if any, could come from that?
Jeffrey Kuehling: This is Jeffrey. So at the end of the quarter, we had $1.7 billion of liquidity. And as I commented in my prepared remarks, we'll have cash on hand after we retire the maturity December. We look at the '25 expiration schedule, it isn't until October as that bond actually matures. So given the amount of liquidity and flexibility we have in the interim, we're going to be pretty opportunistic about when we access to capital markets in '25.
Angela Aman: Yes. But as Jeffrey is pointing out, the company had effectively pre-funded the maturity this year, and has cash on hand to meet that need.
Operator: Our next question will be from the line of Peter Abramowitz with Jefferies.
Peter Abramowitz: Yes. Most of my questions have been answered, but just wanted to ask one on availability at in dealer in Austin. Could you just speak to demand overall in the market and specifically on the space you have left there to lease, just in terms of the depth and interest in that space?
Rob Paratte: This is Rob. Activity Indeed Tower remains very consistent. We have some tenants that were close to signing. I don't want to get into more detail, but we have the last block of really good space in the CBD that's manageable. I mean there's other space in the market that's sublease that's a much bigger block and landlords are going to hold out for that. So as we've said kind of throughout the year, demand in Austin has picked up, particularly in the CBD. And you're also starting to see some tech moves in the market out in the domain, where IBM (NYSE:IBM) has signed a lease and others are following. So it's just taking time to finish that last piece, but we have some things in the pipeline that we hope to announce pretty soon.
Operator: Thank you. And with no further questions in the queue, this will conclude the KRC 3Q '24 Earnings Conference Call. Thank you to everyone who is able to join us today. You may now disconnect your lines.
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