Kilroy Realty Corp (KRC) CEO John Kilroy on Q1 2021 Results - Earnings Call Transcript

Kilroy Realty Corp (NYSE:KRC) Q1 2021 Earnings Conference Call April 29, 2021 1:00 PM ET

Company Participants

Michelle Ngo - CFO, SVP & Treasurer

John Kilroy - CEO & Chairman

Robert Paratte - EVP, Leasing & Business Development

Tyler Rose - President & Company Secretary

Eliott Trencher - SVP & CIO

Conference Call Participants

Nicholas Yulico - Scotiabank

James Feldman - Bank of America Merrill Lynch

Steve Sakwa - Evercore ISI

Emmanuel Korchman - Citigroup

Mike Bilerman - Citigroup

Craig Mailman - KeyBanc Capital Markets

Derek Johnston - Deutsche Bank

David Rodgers - Robert W. Baird & Co.

Frank Lee - BMO Capital Markets

Omotayo Okusanya - Mizuho Securities

Operator

Good day, and welcome to the Kilroy Royalty Corporation First Quarter 2021 Earnings Conference Call. [Operator Instructions].

I would now like to turn the conference over to Michelle Ngo, Chief Financial Officer. Please go ahead, ma'am.

Michelle Ngo

Thank you. Good morning, everyone. Thank you for joining us. On the call with me today are John Kilroy, Tyler Rose, Rob Paratte and Eliott Trencher.

At the outset, I need to say that some of the information we will be discussing is forward-looking in nature. Please refer to the supplemental package for a statement regarding the forward-looking information on this call and in the supplemental. This call is being telecast live on our website and will be available for replay for the next 8 days, both by phone and over the Internet. Our earnings release and supplemental package have been filed on a Form 8-K with the SEC. And both are also available on our website.

John will start the call with a review of the quarter and business conditions in our markets. I will discuss first quarter financial results and provide you with earnings guidance for the second quarter. Then, we'll be happy to take your questions. John?

John Kilroy

Thank you, Michelle. Hello, everybody. Thank you for joining us today. We're pleased to see optimism beginning to take hold in the economy as economists are forecasting strength in corporate earnings, housing and job growth, and global growth is rebounding more quickly than expected. These indicators all bode well for real estate. And we are increasingly positive on tenant demand. While we understand there will be headwinds ahead, it appears we have turned the corner.

We've seen the frequency of property tours significantly increase across all our markets. In San Francisco, for example, brokers are reporting tour activity, approaching pre-pandemic levels with Seattle, San Diego and Los Angeles reporting similar increases. Further, new requirements are starting to appear more regularly with tenants looking to renew their leases, expand their workforce and upgrade inferior work environments for modern buildings and superior space.

In our portfolio, we signed more than 200,000 square feet of leases in the first quarter compared to 61,000 square feet last quarter, and we are beginning to see traction on 2100 Kettner in San Diego. High-quality, well-located assets in our markets continue to command strong valuations, in many cases, with record pricing.

And with respect to life science, demand in the San Francisco Bay Area and San Diego is very robust. The combined trends of the flight to newer, higher quality properties and the acceleration of obsolescence of older buildings work in our favor. They validate our development strategy and our commitment to sustainability and wellness.

And we are increasingly hearing from companies that they are advancing return-to-office plans. Google, Amazon, Facebook, Microsoft and Netflix, are among the many technology and media companies that are moving their entry time lines forward.

With that overview, let's take a closer look at 3 key objectives that underpin our past, present and future success. First, we continue to focus on a disciplined and thoughtful approach to capital allocation. Looking back, we completed more than $12 billion in transactions over the past decade, that have fundamentally reshaped our portfolio, diversified our market footprint and produced one of the most valuable development pipelines in the country, and last month sale of the exchanges and other milestone in these efforts.

We acquired the land site for $95 million in 2014, invested an additional $490 million to develop the 750,000 square foot property and leased it to Dropbox while under construction for a 15-year term in 2017. We completed the sale of the property late last month for $1.1 billion or $1,440 per square foot, nearly doubling our total investment. It was a record price for commercial real estate in San Francisco. We chose to sell the exchange because it monetized the full value of an asset with limited options for us to add incremental value. It also provided us with substantial capital for new investment. And I'd like to point out that the transaction also demonstrates the significant disconnect between public and private market valuations.

The second objective is the strategic expansion of our life science portfolio, primarily focused, at least for the near-term, on entitled land that we already own. The forces currently driving growth in the life science market are substantial, but effective capital deployment into the sector at this point requires caution and discipline. We continue to see properties marketed and acquired for life science that we believe will not be successful. With the expertise we have built in this sector and the pipeline of land sites we have accumulated in several of the best sell markets, we believe we are well positioned for a new round of significant value creation.

Later this quarter, we plan to commence construction on the second phase of our roughly 50 acre, 3 million square foot Kilroy Oyster Point life science campus in South San Francisco. Phase 2 will include 900,000 square feet of space across 3 buildings and will represent a projected total investment of $900 million. Approximately $150 million has already been invested in land and infrastructure. We believe we are ideally positioned with the Phase 2 and are already in negotiations with several prospective tenants.

In addition to KOP Phase 2, we are also planning 3 new life science projects in San Diego on properties we own. Santa Fe Summit on the 56 Corridor and 2 others in the UTC submarket. At Santa Fe Summit, we have full entitlements to build approximately 650,000 square feet of life science product. And in the heart of UTC, we plan to develop a 60,000 square foot property at 9514 Towne Center Drive as well as redevelop 4690 Executive Drive, a nearby 50,000 square-foot building when its existing lease expires in 2022. And like KOP Phase 2, we are in negotiations on all 3 properties in San Diego.

In the aggregate, these 4 projects will add approximately 1.7 million square feet to our current life science portfolio. And in the longer term, phases 3, 4 and 5 at Kilroy Oyster Point will expand our life science portfolio by an additional 1.8 million square feet. Adding this all up, we have a future life science development pipeline fully entitled for close to 3.5 million square feet. When completed and fully leased, it would increase our revenues from life science and health care tenants from 14% to more than 30%, all else being equal. We will have assembled the best-in-class life science portfolio of approximately 5 million square feet with an average age of 3 years in the best locations.

And third objective is our commitment to build a portfolio at a company that leads in wellness and sustainability and meets the highest expectations for diversity, equity and inclusion. As most of you know, this has been a passion of ours for some time. We are the industry leader in every measurable category of sustainable property and company operations, culminating last year in the achievement of carbon neutral operations. We are making substantial progress in enhancing the health and wellness profiles of our stabilized portfolio, and we now have the most certified Fitwel projects underway of any non-government property owner.

Across our company, we continue to prioritize a number of human capital management initiatives, including diversity in hiring, career development and strong team building and mentoring. We are dedicated to these actions because they benefit our tenants, our communities, and importantly, our shareholders. They make our properties more attractive and more durable. They make our enterprise smarter, better managed, and a more rewarding place in which to work. I'm always proud to note that many accolades and awards we receive each year for our efforts in these areas.

To wrap up, let me reiterate a few points: One, demand for quality space in our markets is increasing, both from a leasing perspective as well as an investment perspective, highlighting the embedded value across our portfolio; two, we have been successful with our capital allocation program, which focuses on assembling a young, modern, well and sustainable portfolio located in strong growth markets; and lastly, we are well positioned to monetize entitled life science sites that we already own through our development program. This provides us with a clear advantage to develop best-in-class product with superior returns.

That completes my remarks. Now I'll turn the call over to Michelle. Michelle?

Michelle Ngo

Thank you, John. FFO was $0.98 per share in the first quarter and included $0.01 of COVID-19 charge, which was half driven by residential and half driven by office tenant credit assessments. These charges are clearly trending in the right direction from the last few quarters. FFO per share in the quarter reflected continued growth and the contribution from our current development pipeline.

Netflix on Vine contributed a full quarter of earnings, and we recognized revenue on our 9455 Towne Center Drive project in early January. These benefits were partially offset by the expiration of the 136,000 square feet lease in Long Beach in the fourth quarter.

In our same-store results, first quarter cash NOI was down 2.9%. Adjusted for $4.7 million of lease termination payments in the first quarter of 2020, cash same-store NOI growth would have been positive 0.7%. GAAP same-store NOI was down 1.4%, reflecting lower occupancy and lower parking income. During the quarter, we signed more than 200,000 square feet of leases, of which 2/3 were renewals and 1/3 were new leases. Cash rent spreads were positive 4.9% and GAAP rent spreads were positive 15.4%. Rent spreads were largely driven by 3 renewal leases, which had an average term of 2 years and located in our second-tier markets, generally within projects currently undergoing renovation.

At the end of the first quarter, our stabilized portfolio was 91.5% occupied, which was up 30 basis points from the prior quarter and 93.3% leased, which was down 100 basis points from last quarter, driven by the sale of the exchange and small expirations across the portfolio. Overall rent collection in the first quarter was 96% with office and life science rent collection of 98%. In April, our overall rent -- overall collection rate is currently 95%. These continued strong rent collection levels reflect our well-capitalized technology, life science and media tenant base.

Now turning to the balance sheet. In April, we secured a $1.1 billion sustainability-linked credit facility and extended the term to 2025 with two 6-month extension options. The new credit facility reflects a 10 basis point reduction in pricing with a sustainability KPI metric that allows us to save an additional 1 basis point, assuming we hit annual targets. Under an accordion feature, we may borrow up to $1.6 billion with lender approval. The completion of this amendment further enhances our liquidity profile. We have no material debt maturities until 2023. And after accounting for the sale of the exchange, our liquidity today stands at approximately $2.6 billion, approximately -- including approximately $1.5 billion of cash and full availability of the $1.1 billion under the new revolver. Our current net debt to Q1 annualized EBITDA is about 4x but we expect this to increase over time as the cash is deployed.

Given the continuing uncertainties associated with the COVID-19 pandemic as well as the various options we're evaluating in deploying proceeds from the sale of the exchange, we are not providing full year 2021 guidance at this time. However, we are providing guidance for the second quarter based on the following key assumptions. The sale of the exchange contributed approximately $0.13 of FFO per share in the first quarter. NOI margin is expected to be approximately 70%. G&A will range between $22 million to $24 million, reflecting seasonal corporate expenses in the second quarter. Cap interest is expected to be similar to the first quarter, and we expect straight-line rent to decline roughly $6 million to $9 million from the first quarter, driven by the sale of the exchange as well as continued burn-off of free rent.

At our newest residential project, the Jardine, located on our Hollywood mixed-use campus, we completed the 193 residential units mid-April, and we'll cease capping interest. Lastly, we expect quarter end occupancy to remain relatively flat to the first quarter, ranging roughly between 91.3% to 91.5%.

So to summarize, our first quarter results adjusted for $0.01 related to COVID charges would have been $0.99 per share of FFO. If we then adjust this for the impact of the sale of the exchange, slightly higher G&A and bringing the Jardine online, we project second quarter FFO per share to range between $0.80 to $0.86 with a midpoint of $0.83.

Further, the following assumptions based on what we know today may also help you assess our earnings results for the full year. With respect to our retail portfolio, we extended the rent relief program, which included approximately 90% of our retail tenants through the end of May. This has a minor earnings impact. And from a cash perspective, 1 month of rent deferral for these tenants is approximately $1.5 million. Noncontractual parking income totals approximately $1.5 million of NOI per month. We expect to receive about 1/3 of this amount until businesses resume more normal operations.

With respect to lease expirations, we have approximately 380,000 square feet of expirations remaining to be leased this year with only 2 leases that are greater than 50,000 square feet. Both expire in the third quarter, and we are making good progress on one of them.

Additionally, as we have previously reported, we are in a legal dispute with AT&T, which had a contraction option on up to 150,000 square feet in 2022. We strongly believe the tenant did not validly exercise its option.

We expect to commence revenue recognition for the following office and life science projects within the following time frames. At One Paseo office, we expect revenue commencement on the remaining 16,000 square foot lease by the end of the third quarter. At 333 Dexter, while we forecast the remaining 51% to the 635,000 square foot project to come online by the end of this year, revenue recognition will ultimately depend on working with the tenant to complete our TI work.

And at KOP Phase 1, we expect revenue commencement on the entirety of the 656,000 square foot project by the end of this year. At One Paseo residential, we have had strong leasing to date, putting us on pace to be at the high end of our original year-end occupancy range of 75% to 80%. And lastly, we anticipate remaining development spending of $300 million to $350 million, including spending to commence KOP Phase 2.

Now that completes my remarks. Now we'll be happy to take your questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions]. And the first question will come from Nick Yulico with Scotiabank.

Nicholas Yulico

I guess, just first question is on the cash that's on the balance sheet right now. I know you do have a large restricted cash balance. Does that mean that you're earmarking that towards a 1031 purchase? And if so, maybe you could just give us a feel for how that cash might be deployed for income-producing day 1 assets versus money being set aside for future development?

John Kilroy

Yes. This is John, Nick. As you know, we have the ability to do exchanges, and we have that ability through until the fourth quarter. And we -- in that context, we designate a pool of up to $2 billion of potential acquisitions from which to do roughly $1 billion worth of exchange. We're looking at that with earnest, I'm not going to get into specifics. We also have the ability to use a substantial portion of the cash for other purposes like development. And if we go that route, then we would have the ability to do a special which we would determine if we wanted to do that in the fourth quarter. So all of that is on the table I think by the next conference call, possibly by NAREIT, we'll be able to give you a better description of what direction we're going. But you can imagine that we're looking at a lot of different things right now.

Nicholas Yulico

Okay. That's helpful, John. So second question is just on the increased tour activity that you did cite in some of the markets. Tenant demand, sounds like coming back in some cases. I guess just if you or Rob would mind going through some of the markets in terms of what you are seeing from tech, other sectors as you're thinking about space now in a post-COVID world, whether you're seeing any trends there? Any impact as well from this idea of unassigned seating and companies thinking about maybe a hybrid work model going forward, which could have some impact on number of deaths, number of people in the office and potential space impact as well.

John Kilroy

Rob, do you want to cover that one?

Robert Paratte

Sure. Nick, how are you. Let me start with just a highlight, a general highlight on the West Coast and what we're seeing. And I think it's -- there are 2 really important facts that are a reality right now, which is the job postings in 2021, thus far, are exceed 2020 in all of our submarkets. The second fact is that major tech has accelerated their plans, as John mentioned, to return to work. Some are moving back in May, some are coming back in June, some are coming back in July. And those move-ins will be progressive, it won't be all at once. But those 2 components are really important.

And the last piece you alluded to is tour activity, and this is very recent information, tour activity is either close to or at pre-pandemic levels. So when you couple these things together, that's what's going to create demand. And when you add hiring into that, I think it's -- and I'll get into it in a minute, but the job postings in Seattle, San Francisco and San Diego are just pretty amazing compared to years past, including 2019, which was a banner year.

I would say that STEM hiring, just starting with Seattle, STEM hiring in Seattle is up 21%. Right now, there are 57,000 job postings in the Seattle MSA, which is an incredible number, and that's in March of '21. If you look at submarkets, Amazon has been exceptionally busy with 3 deals in Bellevue that total over 2.6 million feet. So their need and desire for space continues sort of unabated, I would say. What we're also seeing in Seattle for the first time in probably 1 year to 1.5 years is that tours in Seattle exceeded tours in Bellevue. And you know that Bellevue is probably the hottest market in the country during the pandemic. So I think that's very notable.

There are several late round VC-backed firms such as Convoy and Remedy and Snowflake, all of which have requirements over 100,000 feet that are circulating in the market right now. And we're also seeing in Seattle, professional service companies making long-range commitments as their natural lease expirations occur. So things are looking good in Seattle. There is, like most markets, there's more sublease space on the market than that was in, in 2019, but we're fairly confident with the activity we see that the sublease space will get absorbed. There's about 2 million square feet under construction in the Seattle area that can deliver between now and '23; of that space, 17% is leased and has pretty good activity.

San Francisco was actually -- and I don't want to be overly optimistic here, but these are facts. So let me just give you some job posting information. In March of 2019, there were 64,000 job postings for STEM. In 2021 -- and remember 2019 was a banner year. In 2021, there's 68,000, and that's as of March. So that's a pretty healthy jump considering we're coming out of a pretty tough environment. I think some promising signs in San Francisco are that brokers are tracking about 6.3 million square feet of demand. Pre-COVID, we were running around 8 million to 9 million square feet. Right now, today, there are 17 tenants over 100,000 square feet, 10 of those 17 represent growth requirements. There are over a dozen law firms right now touring for over 15,000 feet. So there's a lot of change in what we've been reporting in the past quarters as we've come out of this pandemic.

So I think San Francisco, although it's undeniable that there's a lot of sublease space on the market and another 1.8 million got added in Q1. That sublease space is seeing activity. And 1 example would be the macys.com space has significant activity on a lot of that space. So I think touching on some of John's comments relating to sublease is that there is going to be a flight to quality whether it's direct or sublease space, but certainly, well-positioned, well-located, tech-friendly, fitted-out sublease space is going to do well.

In our markets in Los Angeles, Culver City and Hollywood, things have remained very strong due to the hiring from the content producers. There is little to no vacancy in the Hollywood market right now. Burbank has seen some growth. We're not in Burbank, but those 3 markets are really where the entertainment industry is very active. The west side of L.A. has some sublease space that they have to deal with. But in our experience with West L.A. tenants, they typically have not been the first to absorb space, they typically are a little slower to pick up. But we think that the quality sublease space in the market will be absorbed.

And lastly, San Diego is just amazing, particularly in the submarkets. We're in Del Mar, UTC and the Little Italy 2100 Kettner location downtown. As we've said on previous calls, and John has talked about quite a bit, we have this convergence of tech and life science competing for space, particularly in UTC, and UTC vacancy rate right now is about 2%. So that's causing a spillover into other desirable submarkets. And that's why, as John mentioned in his comments, the development projects that we're pursuing, we're really pleased about in terms of the activity we have.

I would say relating to the life science market, what's going on in San Diego is exactly what's going on at Oyster Point up in the Bay Area as well. 770,000 square feet of net absorption in Q1, and our vacancy rate went from 4 to 2. So that's pretty amazing.

And the last point I'd make about venture capital in the Bay Area is that about $5 billion of VC funding for life science in Q1 has been placed, and that's a record. So overall, I would say, based on all these markets, and I know I spoke quickly, but things are looking up. It won't be a linear progression, and we're going to have to keep monitoring sublease space, particularly in San Francisco. But things are certainly looking better than they have.

Operator

The next question will come from Jamie Feldman with Bank of America.

James Feldman

That was really helpful color on the markets. Can you talk about where you think the mark-to-market might be today? I know you guys had positive leasing spreads, but maybe if you go through the different regions, how much you think markets have moved on a net effective basis and how does that compare to your portfolio or what's rolling?

John Kilroy

Are you going to handle that, Michelle?

Michelle Ngo

Yes. I guess I don't think we have enough data points to comment on where net effective rents are today. We've provided what market rents pre-COVID, but I don't think that's as relevant.

John Kilroy

Okay. Jamie, this is John. If I could just add a little color to that. Obviously, I'm going to move around a little bit. In Bellevue, the rents we're doing today are the highest rents we've ever achieved in Bellevue, the highest in the market has ever achieved. We haven't done any leasing in downtown Seattle because everything is leased that we own. With regard to San Francisco, we're still seeing very strong rents for -- pre-pandemic rents for the quality space that we have. In Hollywood, we have some vacancy at the Columbia Square product and the rates we're negotiating our strong rates. Culver City has been very strong. In San Diego, our rents on office space are all-time high, and our rents on life science are all-time high. And then back to South San Francisco, where we have Phase 2 of KOP about ready to start, we think the rents will be up over what we did in Phase 1, which was around 67 triple net. We think rents will be up 10% or more.

James Feldman

Okay. And then when you go through your markets and kind of leased or occupancy percent in the quarter, CBD San Francisco was down but rest of the Bay Area was actually up slightly or flat to up slightly depending on the submarket. Is there something to read from that, that those -- I know the market stats for Silicon Valley have been better also. But what are you guys seeing on the ground? And how do you think that trends?

Robert Paratte

And Jamie, are you asking about -- I didn't hear the first part, is it occupancy? Or are you asking about demand?

James Feldman

Well, I guess both. My question was, if you look at the Bay Area stats from the quarter, the San Francisco occupancy rate declined, but your -- the rest of the Bay Area, the Silicon Valley peninsula that actually increased slightly. Is that indicative of what's really happening in the market? I know you don't have that much rolling quarter-to-quarter. So I'm just trying to get a sense of would you say that that part of the -- southern part of the Bay Area is really holding up much better than downtown San Francisco?

Robert Paratte

I wouldn't say it's holding up much better, but Silicon Valley has not had the severe shutdown. I mean everyone was shut down, but San Francisco is still only a 25% workforce that's available to occupy buildings and Silicon Valley has had -- again, you have to be really careful about how you generalize, but Silicon Valley in well-located transit centric locations has weathered the storm fairly well.

I would go back to what you were talking with John about and market rates and just what's happening. If you look at the premium Class A product in San Francisco, and as you know, we don't have a lot of space available, but 1 market, 555 Mission, Ferry Building, all have made deals over $100 a square foot, and that is -- those rates are pre-pandemic rates. So things are holding up. It's just San Francisco. Supposedly, next week, we'll go into the least-restrictive tier, and that coincides with companies also, I think, accelerating their plans to bring people back to work.

Eliott Trencher

Jamie, this is Eliott. Just to add to that, and your question on the difference between the city and the valley. For us, it's a function of our rollover and where there was rollover in the particular quarter, there really wasn't much to speak of in the valley. So I wouldn't read too much into the occupancy differences.

James Feldman

Okay. And when you think about all the capital that's been raised in the Bay Area and what that's going to mean for job growth and space demand? Do you think that you can parse that out by downtown versus the valley or it's too early?

Robert Paratte

Well, I think a lot of it is downtown right now. There's 12 active requirements that are VC-backed firms. They're relatively smaller, but they're strong, demonstrating a strong commitment to the city. There were also, I'd add. I just -- I can't add the names, but they'll be public soon, but 2 large firms did a study over the last 6 months about potentially looking at the East Bay as a location to relocate to and they've now shelved those plans. These are 2 separate companies, shelved those plans and have returned to focus on San Francisco.

So again, I think that especially if you look at the big tech that's in San Francisco, they pretty much all stated a commitment to the city and returning back to work. So -- and specifically, I mean Salesforce is coming back in some percentage form in May. Facebook is going to occupy 181 Fremont and Park Tower starting in June in a scaled fashion. And Google is doing the same thing. So there's a lot that's going to happen this summer.

Operator

The next question will come from Steve Sakwa with Evercore ISI.

Steve Sakwa

I guess I want to follow up on maybe Jamie's question just on demand. But Rob, maybe the sublease space has remained high in San Francisco. And I'm curious if your expectation is for that to start to really get pulled back as tenants start to come back. And maybe to that, Salesforce has put the majority of the space at 350 Mission on the sublet market. So I'm curious if you start to expect some of that space to come off maybe in Q2 or perhaps by the summer.

Robert Paratte

Yes. Steve, good question. I think one of the things that's encouraging about what we see going on with sublease space are 2 things, kind of opposite into the spectrum. Smaller tenants in the 10,000 to 20,000 foot range are looking at sublease space, and those are generally companies that either have a lease expiration coming up or have grown modestly, but they're starting to look at sublease space in order to give them flexibility and bring people back to work. On the other end of the spectrum, there are some larger deals over 50,000 feet looking at sublease space. So that we're watching closely. Right now, there's about 535,000 feet of pending deals that will be absorption in the city. So when those happen, that will be a very positive occurrence, obviously. And we still have a lot of sublease space to deal with.

And to the last point in your question, we are seeing some companies taking space off the market as they plan to move back in and others that have had space on the market were basically seeing if they could get anyone to nibble on it, and they've got very short and restrictive terms on the lease. So that in some cases, you see sublease space that is not for the term of the lease. It's actually 2 years or 3 years because the tenant wants the flexibility to move back in. And that last component of subway space is, I think, difficult to move in a market like this where there's a lot of options for tenants.

So I don't -- to your question, if we keep going at the pace we're seeing that we've been talking about San Francisco today, I think things could absorb quicker than people were thinking, but it's hard to pinpoint, is it second -- second quarter might still be a little early, but third and fourth, I think we'll definitely see some absorption of it.

Steve Sakwa

Okay. Great. John, I know you sort of outlined the exchange transaction and a lot of things still up in the air, whether you find an acquisition or 2 to 1031 into. But if you did not, making that kind of the base case, can you just maybe help us frame out what the special dividend might be and how much you'd be able to retain for the development at KOP 2?

John Kilroy

Yes. It's roughly 50%, a little bit more that we'd be able to retain. But I -- again, I don't think it would be appropriate for you to think that, that situation is likely to happen. But we were not going to get into discussing transactions in progress.

Steve Sakwa

I understand. But 50% of the total sales price might need to be special dividend if you couldn't find something?

John Kilroy

Yes, roughly. Maybe a little less.

Steve Sakwa

And then just lastly, Michelle, I just wanted to circle back. You made a bunch of comments, and you said something about 333 Dexter, and I know that the remaining 51%, I thought was supposed to be rent commencing in Q4. But it sounded like you were a little hesitant on that as being kind of a hard date. It sounds like maybe there's some kind of TI build out issues. Is it sounding like that might slip a little bit into first quarter of '22?

Michelle Ngo

Yes. It's hard to tell right now. We're saying, hopefully, it should come in by the end of the year, but it's going to be driven by TI build out that we're working with the tenant on.

Operator

The next question will come from Emmanuel Korchman with Citi.

Emmanuel Korchman

John, I think you mentioned this in your prepared remarks about just the amount of people talking about and doing life science. A couple of questions related to that. One, given the large amount of square footage that you outlined in your own portfolio that will be that life science nature. How much of that is going to be lab versus office lease to a life science or science tenant? And the second question is when tenants are out there looking for space, how much work and/or other ways are they underwriting that who the landlord is going to be before signing a lease?

John Kilroy

Yes. The ratio of lab and office varies, obviously, by tenant. So it's hard to predict what that will be. So I really can't give you a specific there, Manny. But we expect the buildings that we talked about is life science, all have quite a bit of lab. And then with regard to your second question, I'm sorry, could you repeat it for me?

Emmanuel Korchman

Just how tenants are thinking about who the landlord or maybe the specific location in buildings are rather than saying, "Oh, good, look, this is a life science development. They told me it's life science." It's someone that's been office before how much experience you really need?

John Kilroy

Yes. Well, life science isn't as tricky as a lot of people think. Obviously, you have to have the right floor ratios and ceiling heights and structural, mechanical systems and so forth. So the bones or the square, like triangle, square and circle, the bones, the physicality is important. You can't make an 11-foot floor-to-floor space a 15-foot or a 14-foot floor, just physically you can't unless you carve-in the floor above. So some buildings physically won't adapt to it or they don't have the right ratios or the structure and so forth.

And what we're seeing is a lot of stuff being marketed -- we've mentioned this on previous calls to questions. We see a lot of stuff being marketed as prospectively convert to life science that we look at and we just go, this is baloney. Could you do it? Maybe. Would it be ideal? No. Would it be top tiered? No, and we don't want that kind of product. It's on the fringe.

With regards to your issue of landlord, I think it's pretty important. These people are generally very sticky in their occupancy. They tend to stay for a long time. And back to the lab issue that it's not unusual for these companies to spend $400, $500 a square foot or more, have their own money on top of $100, $200 of landlord provided TI. So they have a huge investment that causes them to be very sticky. And the thing that we're seeing in life sciences, and we've talked about this for a number of years now, is that the life science community is looking for the same thing that the tech community has been looking for over the last 10 years, which are modern facilities that attract and retain the best-in-class employees with -- the life science stuff is looking a lot more like the tech campuses now, notwithstanding their special needs, but they want that same kind of feeling and the same kind of vibe and the same kind of amenities inside and outside and so forth. And we think that's what Kilroy does best.

And a lot of this conversion stuff that people are talking about, doesn't really have that vibe. That doesn't mean that in some cases, it can't be developed, especially if you're having a property. And then finally, a lot of stuff is being marketed as life science because people know that market is hot. And I think we're going to see a number of folks that have been buying stuff for "life science" falter based upon some of the deals that we've seen in our markets that we've looked at and you drive up and you just go no way or you go through, I can go through the math, and you go no way or you go, yes, you could do it, but you're going to end up with product that is not going to be highly desirable either for leasing, which means you're going to have to then compete on rent and economics, which is a lousy place for us to be. And ultimately, its valuation is going to be far less.

So I just think that we're ideally positioned with the properties, the 3.6 million square feet of development within our portfolio right now on property we own, that's entitled, that's in terrific locations that we can build brand-new product that's state-of-the-art and has all the bells and whistles that the life science user wants.

Mike Bilerman

John, it's Mike Bilerman. I know the main focus right now is identifying new investments for the cash that you've been able to raise, either new assets, new opportunities or existing development opportunities. I want to get your perspective of how you think about your stock as a potential investment, if you're not able to identify those opportunities. And thinking about it, while you have a distribution of the gain that you need to be made, you could do that distribution 90% in stock. And so could you think about doing a large-scale share repurchase, Dutch tender or something else, to effectively take advantage of buying into your existing portfolio and buying more of effectively your development sites. How does that rank in your mind? And where does that sit overall as you think about deploying your capital?

John Kilroy

Yes. Well, I don't want to take anything, Michael, off the table with regard to the direction we might go. We do have some significant -- a fairly significant period of time within which to determine whether we're going to do exchanges. You can imagine that we've been busy looking at various opportunities in the markets we like best for a product that we feel meets our criteria. And if it's 1031, most of that will be into existing products, some could be into the occasional land site where we think we can create substantial value. So we are evaluating everything, and I'm going to be able -- or the company will be much better able within the next few months to address your question and the questions that others have raised, but understand that we're looking at everything.

Mike Bilerman

It was more so a specific question about your stock and how your discounted shares today, which -- you know your portfolio better than anybody else and the value of it, I would imagine that has to be a pretty attractive. And 4, 5 months down the road, the stock may not be at these levels, if all of these other things that you're talking about come to fruition. So you may have a moment in time where today, that may be your best alternative. That's what I was trying to get you to sort of focus on.

John Kilroy

Yes. I just don't feel comfortable giving you a specific answer to that question. Obviously, if we go that route, we internally need to go through a process, but understand that we look at everything all the time. We'll be diligent with regard to where we allocate our capital. We pride ourselves on that and more to come.

Operator

The next question will come from Craig Mailman with KeyBanc Capital Markets.

Craig Mailman

Just kind of curious on the exchange, obviously, the buyer paid a pretty healthy price per pound there and the talk as they want to kind of go life science or maybe get Dropbox out. I guess just kind of curious what you think if someone went that route, how much more they would have to spend per foot to kind of get to an all-in basis on that building. What that kind of tells you about the value creation that you guys have within the 3.5 million square foot entitled life science pipeline that you have?

John Kilroy

Yes. Let me say that we obviously, when we consider selling something, we take a look at not only what we're selling it for and is that an attractive price, we also take a look at what we might do with the money with regard to redeploying it and what that might create in the way of added shareholder value. Specifically to the conversion, I'm just going to give you order of magnitude numbers that could be off by 10% or 20%. But if you take a look at it, the property was improved with tenant improvements. So many of those tenant improvements would remain, but many of them wouldn't and it already has the backbone because it was developed for life science. But I would think you could probably spend $100 a square foot, possibly more in TI, place you'd have downtime, place you'd have to move people out, plus you'd have -- by downtime, you'd have probably a year of tenant improvement construction, that sort of thing, in which you wouldn't have rent. You might end up with a buyout or something.

But we didn't -- we took a look at all the various options that one might consider and felt that the transaction we did was a very appropriate and excellent transaction for Kilroy. I don't know what the return thresholds are for the buyer of the building and what their plan is. They never discuss that with us, to my knowledge. And the building certainly would perform well for life science. We did not go down that route, obviously, because we sold it. So I can't speak specifically to what the ultimate cost would be, but you've got carry on your -- I mean, if you just look at the quick math, you'd have carry on your -- you'd have the vacancy and no return on your money, while that was happening, credited by any kind of buyout one might get. You'd have the tenant improvement costs and the soft costs associated with that. And then you'd have whatever the lease economics are, whether there's free rent or whether there's a phased move in or that sort of thing. And you can get into all kinds of assumptions.

We felt, again, to the transaction that we did, that it was really a good transaction for an asset that we stated when we announced it that we thought building it's value to us today at $1,440 a foot was greater for us and more certain for us than what we might do with it in the future. But others may have a different point of view. That's the beauty of business.

Craig Mailman

That's helpful. But needless to say, relative to the basis, you guys are paying at KOP, it feels like life science assets, you're going to create a significant amount of value.

John Kilroy

Yes. I mean if you think about KOP, the first phase, 650,000 feet was roughly, I think, around $900 a foot. Is that right, Michelle?

Michelle Ngo

Yes, that's right.

John Kilroy

And the second phase is roughly $1,000 a foot. And there are various things with regard to the different sites and so forth that contribute to that. Obviously, some cost escalation, but the rents have escalated nicely. And you take a look at what one of our competitors bought properties that recently or in the last 12 months, whatever it was on the other side of the 101, which is a location that's fine. It's not nearly as quality location, in our opinion, as KOP. We're sort of main and main. And I think they paid, what was it, $1,350, $1,400 a foot. And that was on rents that were lower than the rents we achieved, as I recall, in our first phase, and we're thinking we're going to achieve higher rents, pretty significantly higher rents in Phase 2.

So if you apply sort of a cap rate to top-tier life science, which would be dear or lower than office and you look at the rents and whatnot, I think we create a massive amount of value through the product that we will be developing over the next couple of years. So you're right.

Craig Mailman

Yes. And just -- I know I've asked this question in the past, and you guys have said you're looking outside of your core markets, potentially for life science. Is there any update on that today? Are you any closer with this capital infusion? Or is it -- are you guys still kind of doing due diligence at this point?

John Kilroy

I'm going to be able to -- we, as a company, should be able to speak to that much better within a couple of months.

Craig Mailman

Okay. Fair enough. And then just one last 1 for Michelle. You had mentioned AT&T and DIRECTV. Is there anything that you guys are reserving or anything on the balance sheet for that? Or kind of how does that play itself out from an earnings perspective?

Michelle Ngo

No. We are not including any reserves in our second quarter guidance. And as we said, we're in a legal dispute. So we'll know more, but nothing at this time.

Craig Mailman

Would that one just be out of the numbers? Or are you guys still accrue it for that 150,000 square feet?

Tyler Rose

We're still collecting rent on that at this point. So the option is to expire in the beginning of '22. So no matter what, they still pay rent for '21.

Operator

The next question will come from Derek Johnston with Deutsche Bank.

Derek Johnston

Most of my questions were answered. So forgive me for getting a bit creative. Are you concerned that the work-from-home and hybrid model begin a snowball effect? And start to become viewed as a way for companies to address the S in their ESG programs and that would be by offering a greater work-life balance and possibly the need for less office space now. I'm not smart enough to come up with this, but I've heard it tossed around. Do you mind weighing in?

John Kilroy

You're asking a wild question. I don't think that's the way it's going to play out at all. Everything we're hearing, this is John speaking, everything we're hearing is that people are exhausted by work from home. They want to get back. They can't wait for the schools that haven't reopened to reopen so they can get their kids back into school, both to be educated and socially be advanced and for themselves to get back to a productive life and not just living your part within your house. So we're not -- will there be some of that at the margin? Sure. There's always been a work-from-home crowd, particularly amongst independents and so forth. There will certainly be some work-from-home options that people -- companies are going to provide. But I think that's a nice question to have around a cocktail or a glass of coffee in a coffee house or on a college university sort of intellectual speak. No offense.

Derek Johnston

No, I understand. There's just not a lot more left.

John Kilroy

It's not overhearing.

Derek Johnston

How about the 1031 exchange elimination, that continues to come up more frequency -- more frequently. I mean, how do you feel about the potential elimination? Do you think it has any legs or merit to it? And do you think the administration understands the CRE implications? What do you think about that, John?

John Kilroy

Yes. Well, it is a concern. Any time, either these crackpot parties put up things like that, it can have an implication. We're members of the real estate roundtable. Obviously, we're members of NAREIT and other trade groups, BOMA, et cetera, they're all working to defeat the concept of the 1031 elimination. I think it would be harmful. And I'll tell you what I think it happens. I think we're a reasonably big-sized company as are most REITs. And I think what the elimination of 1031 will do was just consolidate more power in the bigger companies, all at the expense of the families and smaller operators, and I think it would be a travesty. I think it probably, in some ways be an advantage to the big companies, but it will be terribly harmful to smaller operators. And I think it's just bad policy.

In terms of rating or whatever, it's too early to tell. We've obviously seen a lot of stupid ideas come out of the administration as well as amongst the states. And it just gives me more, as everybody knows, it's on this call and certainly speak, I have no use for most people in government, like 0, and this just further causes me to feel that way because the policy implications that are being discussed here are, in my mind, insane.

Operator

The next question will come from Dave Rodgers with Baird.

David Rodgers

John, just a couple of follow-ups for me. One was obviously, 9455 was not a lab deal down in San Diego. So curious on comments around Kettner and the demand and progress that you might be making there. And then I think the second question, you had talked about in the last couple of quarters doing asset sales, clearly achieved a big one this quarter. I guess notwithstanding reinvesting those proceeds, what's your continued view on monetizing assets here if you're able to reinvest those proceeds, does that continue this year? Does that get pushed out?

John Kilroy

Yes. At the margin, there might be something that goes out this year. But I -- Dave, I don't think there's going to be -- it's unlikely that there's going to be anything that's significant, at least at this point. We're always trimming the margins around the portfolio. You're right, 9455 wasn't life science. We had a big life science company, and we had an even bigger tech company and the tech company won. And that's probably a good thing because we've done a lot with that particular company and probably likely to do more.

In terms of the Kettner progress, it's hard to lease a building when you can't do any tours until we had -- I don't know what Rob, you could help me out here, but we had a handful of tours in 2020. It was hard to even get our broker to come to the building because everybody was all taking COVID very seriously as we continue to take it seriously. But now we're seeing a lot of tours. We're seeing a lot of interest from 1-4, 2-4, 3-4 users. We're seeing a lot of interest from big companies that would take the whole thing. I can't wait for us to be able to have all the people that are on this call that want to come out and come through and see what we're doing in San Diego.

Eliott and I are sitting in our San Diego office, which is at One Paseo. And I'll tell you, I'll put our One Paseo project against anybody's project in the country or the world. I think it's the most amazing thing I've ever seen, and everybody sees it says that. And as you can tell, the leasing performance, both in the retail and the office has just been extraordinary. We're getting the highest rents in resi, the highest rents in retail and highest rents in office in San Diego's history and by a huge margin. What we've done in 2100 Kettner. That building is -- the shell will be done, Eliott, second quarter, I guess, later -- yes, midyear. I'd invite all of you to take a look at -- and you tell me what you think about that building. I think it's going to be a very high rent achiever and I think the value creation there will be enormous as a percentage of our investment. It's not that big of an asset. So it's only a couple of hundred thousand square feet. What's that 100 -- how many million?

Michelle Ngo

It's 200,000 square feet.

John Kilroy

And how many million, roughly?

Michelle Ngo

It's a $140 million project.

John Kilroy

Sorry, I can't remember all these numbers anymore, but I think we'll see -- that's likely to be another exchange in terms of value creation. I'm not saying we're going to sell. But we're very keen on what's going on in San Diego here. As Eliott, Rob and, I guess, in my comments made earlier in our formal part of the report with regard to life science, we're seeing life science move into Carmel Valley. They've always been here. That's also called Del Mar, it's where One Paseo is and where other assets are here at the intersection of the 56 and the 5. We're seeing life science really come in here strongly. We're seeing them go out to 56. And I think we're going to see values in UTC, obviously, Torrey Pines here in Del Mar and up to 56, climb dramatically in the years ahead. I'm going to make the prediction that we're going to start seeing San Francisco pre-pandemic rents in these markets in the not-too-distant future.

Operator

The next question will come from Frank Lee with BMO.

Frank Lee

Can you provide an update on the tenant demand in terms of square footage you're seeing at KOP Phase 2? And also city still owns several hundred thousand of development rights there. Just wondering what is the likelihood and if there's even an opportunity to acquire additional square footage from them?

John Kilroy

I got the KOP Phase 2 square footage demand. What was the second part of your question?

Frank Lee

I'm just wondering the city still owns several hundred thousand of development rights. Just curious to see if there's even an opportunity to acquire the square footage from them.

John Kilroy

Yes. I'm not going to comment on that. But with regard to KOP Phase 2, Rob, do you want to take that? I don't know sort of the exact square footage, but I know it's several multiples of the size of the project.

Robert Paratte

Yes. So Frank, Phase 2 is about 900,000 square feet, 3 buildings. And we've said this -- actually said this on our Q4 call also that we've got activity and interest in more space than we're delivering. So we're pretty excited about it. I'm being a little bit cautious because I don't want to divulge too much because this is a public call, but we're really pleased with the activity we have.

And when you look at this project, it's, again, as John was going -- talking about One Paseo, this one for life science on the Bay is incredible. And you -- there is a big distinction between 30-plus acres adjacent to San Francisco Bay as a life science campus and other life science product in and around the market, whether it be Sierra Point or other parts of South San Francisco that are more adjacent to industrial areas. I think it's just going to be a tougher challenge for those projects to lease because life science companies are after talent, just like tech. So all those bright biologists, scientists, et cetera, are highly sought after. And these companies are doing exactly what tech has done, which is to provide an environment that helps attract and retain people. And that's what we're helping them do by building the type of layout and campus that we're doing. I hope that answers your question.

Frank Lee

Yes, it definitely does. And then last one for me. Just want to touch on the acquisition opportunities you're evaluating with the exchange sale proceeds. What is the appetite for value-add opportunities versus more core Class A?

John Kilroy

This is John. We're looking at a range of things that are some are core but have leasing, therefore, value to add in markets where we think the rents are going to grow tremendously. There are value-add opportunities that are more traditional. There's ground-up development in a few. And it's going to be a mix. We're not looking to just buy an asset at a low cap rate and sit on it. We're value-add or value creators, and we pride ourselves at that. There's lots of ways to create value. You can buy an asset that is core at a low cap rate that is where it's going to roll, the rents are going to skyrocket. You can add -- do physical things to it. You can expand properties. All the kinds of things that we have done and you know us to do are under consideration.

And just back to the Bay Area life science demand, there's about 4.2 million square feet of demand in the life science area in San Francisco, most of that is in South San Francisco, where there's a vacancy rate of under 2%. So you can imagine, we're talking to a lot of folks.

Operator

The next question will come from Omotayo Okusanya with Mizuho.

Omotayo Okusanya

This one is kind of more for Michelle. Michelle, I'm just trying to understand 2Q guidance a little bit better. I mean 1Q you're at $0.98. You add back the $0.01 charge at $0.99. You take out $0.13 for exchange, you're at $0.86, you have higher G&A by $0.01, you're at $0.85, but the guidance range is $0.80 to $0.86. So I'm trying to understand the range as kind of what gets you to that low end of $0.80 versus you potentially moving higher from kind of like the $0.85 starting point.

Michelle Ngo

Yes. So on the walk to the midpoint, starting with the first quarter, we said we're at $0.98 plus you add back the $0.01 for the COVID charge. So you're at $0.99, less the impact of the exchange, which we said is $0.13, less the remaining of about $0.03 for both G&A as well as the lease-up of Jardine gets you to $0.16, getting you to the midpoint.

And with respect to the range that we provided of $0.80 to $0.86, we just think there's still a lot of uncertainty in the marketplace right now as our markets are starting to open up again. So we wanted to give ourselves flexibility.

Tyler Rose

And this is Tyler. Just on the difficulty of providing guidance in this market, I think this is an example of that. I mean you've got seasonality. You've got uncertainty in the markets. And for us, the 3 drivers that Michelle just went through, which were the exchange, G&A and Jardine, those are all temporary adjustments to our FFO. So theoretically, over time, we're going to be picking all that back up. So it's just another example of why guidance is difficult right now.

Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Michelle Ngo for any closing remarks. Please go ahead.

Michelle Ngo

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

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.