Kilroy Realty Corporation (NYSE:KRC) Q2 2022 Earnings Conference Call July 28, 2022 1:00 PM ET
Company Participants
Bill Hutcheson – SVP, IR & Capital Markets
John Kilroy – Chairman & CEO
Tyler Rose – President
Rob Paratte – EVP, Leasing & Business Development
Eliott Trencher – CIO & Interim CFO
Conference Call Participants
Nick Yulico – Scotiabank
John Kim – BMO Capital Markets
James Feldman – Bank of America
Brian Spahn – Evercore ISI
Michael Griffin – Citi
Blaine Heck – Wells Fargo
Vikram Malhotra – Mizuho
Operator
Good morning, ladies and gentlemen. Thank you for attending today’s Q2 2022 Kilroy Realty Corporation Earnings Conference Call. My name is Tia and I will be your moderator for today’s call. [Operator Instructions].
I will now pass the conference over to your host, Bill Hutcheson, Senior Vice President, Investor Relations and Capital Markets. You may proceed.
Bill Hutcheson
Thank you, Tia. Good morning, everyone and thanks for joining us. On the call with me today are John Kilroy, our Chairman and CEO; Tyler Rose, our President; Rob Paratte; our Executive Vice President of Leasing and Business Development; and Eliott Trencher, our CIO and Interim CFO.
At the outset, I need to say that some of the information we will be discussing during this call is forward-looking in nature. Please refer to our supplemental package for a statement regarding the forward-looking information on this call and in the supplemental.
This call is being telecast live on our website and will be available for replay for the next eight days, both by phone and over the Internet.
Our earnings release and supplemental package have been filed on a Form 8-K with the SEC, and both are available on our website. John will start the call with second quarter highlights, and Eliott will discuss our financial results and provide you with updated 2022 earnings guidance. Then we’ll be happy to take your questions.
John?
John Kilroy
Thanks, Bill. Hello, everybody and thank you for joining us today.
I want to begin with some big picture comments and then review highlights from this quarter. The economy during the second quarter continues to show fits and starts. Elevated risk exists given stubborn inflation levels, bearish equity markets and heightened geopolitical tension. On the other end, unemployment remains low, the dollar strengthened, commodity prices are starting to decline and public capital markets remain open and functional.
The economic signals are mixed, in some ways complicated. In periods of uncertainty such as this, we believe it is prudent to err on the side of caution. Despite the mixed macro trend, the technology and life science sectors continue to demonstrate encouraging signs. VC capital deployment remains robust. In the first half of 2022, $144 billion was invested, which roughly matches the full-year deployment levels for both of 2018 and 2019.
While ICO expects that the VC backed companies have been slow, is not impacted capital raising in most cases when compared to historical volumes. Funds have raised a $122 billion year-to-date which is on pace to be the best year by a significant margin.
The labor market also remains competitive. Nationally there’s twice as many job postings as unemployed people. In our markets, postings are up roughly 40% year-over-year for large cap tech companies, highlighting the continued need for talent on the West Coast and in Austin.
While leasing in periods such as these is understandably choppy, we remain confident about the long-term health of these critical industries and are cautiously optimistic on the continued demand for space at our properties.
The progress of return to office continues across our portfolio with some differences across geography and industry. Austin and Southern California have been geographic leaders, while professional services, fire category and life sciences have been the industry leaders. Noticeably, these sectors have contributed to more activity in our leasing pipeline, highlighting the appeal of our properties to a range of tenants.
Physical occupancy in our portfolio and the overall market continues to improve, and based on conversations with our customer base, we remain optimistic this trend will continue. In light of the current economic uncertainty and the potential impacts on the labor market, the power dynamic is shifting to employers who have consistently expressed the preference for in-person work.
Additionally, it’s worth noting the pace on return to office data aggregated by Google, the UK, Germany, Japan, and Hong Kong are 15 to 30 percentage points ahead of the U.S. suggesting there’s upside of physical occupancy in the short and medium term.
Notwithstanding varying rates the preoccupancy in our markets tenants continue to show their commitment to the office by leasing space. According to JLL, second quarter office leasing nationwide was up slightly from last quarter, the sixth consecutive quarter of increasing volume with technology representing the largest industry of demand.
While some companies are showing or rather are slowing their decision making others including Google, Apple and Amazon, saying major leases in our markets this quarter. The headlines that many technology thought leaders are still figuring out what hybrid works like for their employee base in real estate and requirements is accurate. To that end, some users are slowing down their build-outs in order to experiment with different layouts and configurations. While this may create some noise in the short-term, it sets companies up to make better long-term decisions which will ultimately high quality and efficient buildings like those we own.
Political winds in our markets are also shifting. The actions taken by San Francisco voters over the past several months, starting with the recall of three Board of Education members, and most recently last month, recall a former District Attorney Boudin is a clear sign that people have had enough. The subsequent appointment of a law-and-order DA, District Attorney Jenkins, combined with major changes of her staff and increased budgets for police funding, so that increasingly disgruntled voters are demanding accountability from their elected officials and we’re happy to see that. These changes in San Francisco come on the hills of Seattle voters taking action late last year when they elected a business-friendly law & order mayor and city attorneys. In Los Angeles, similar movements are afoot.
The theme we continue to consistently see across markets is the preference for high-quality office space. Tenants have more choices today and they want to be in newer and highly amenitized buildings, leasing the best product is desirable and desirable locations is critical for companies to attract their employee base back to the office.
The data backs this up. According to CBRE effective rents in top tier office buildings nationwide are up roughly 8% since 2020, while lower tier office rents are down 3% over the same period. As more and more companies want the newest and best buildings we believe our modern and sustainable portfolio with an average age of 11 years is well-positioned to capitalize on this trend.
Turning to highlights from the second quarter. We signed roughly 250,000 square feet of leases with cash spreads in the stabilized portfolio of plus 21%. Subsequent to quarter-end, we signed additional 73,000 square feet in the stabilized portfolio highlighted by a five-and-a-half-year renewal of a financial services tenant in Menlo Park.
On our last earnings call we referenced 350,000 square feet of builds in late-stage negotiations. As of today, we have executed on more than 90% of that number with much of the balance remaining in ongoing discussions. The activity combined with our modest rollover increased our percentage lease by 60 basis points from last quarter to roughly 94%.
Looking forward, demand in the leasing pipeline is solid, both in our core portfolio and also for our projects under development. We have a number of transactions across the stabilized portfolio in various stages of negotiation and expect to have continued activity over the balance of the year.
Our development pipeline also has strong interest specifically in 2100 Kettner, Indeed Tower, and KOP Phase 2. Demanding is coming from life science, technology, finance, and professional services. Negotiations continue to progress despite recent market volatility. While there can be no guarantees until leases are actually signed, we are really encouraged by the many negotiations that are advanced discussions and expect us to translate into good news.
On the capital allocation front, we intend to use caution when evaluating new investments and new development starts. The bar for us to make meaningful acquisitions or start something new on a speculative basis is higher than three months ago.
Having said this, we remain — we maintain high conviction in our recent acquisitions of the site in Austin after the development of our Stadium Tower project and expected to begin construction later this quarter.
The Austin market remains strong and capable of supporting new development. The area around Stadium Tower is one of the most vibrant in the region anchored by companies including Meta, Amazon, and most recently, PayPal, who just signed 60,000 square feet this month.
Light rail, that will service areas fully fronted and hosted a groundbreaking last week or nearby 500,000 square foot — or nearly 500,000 square foot project will be state-of-the-art with the most desirable floor spaces, submarkets, vulnerable terraces, outdoor amenity areas and 50,000 square feet of walkable retail. Construction is projected to take 30 months and the project will be ready by the first half of 2025.
Now let’s shift to the real estate capital markets. Volatility in the debt market has made it tough for borrowers to get quotes and has limited price discovery. Additionally, landlords are much better capitalized today than in prior cycles. So there are not many poor sellers. As a result, very little is traded while we are maintaining our 2022 disposition guides of $200 million to $500 million we’ll only proceed with sales if we feel it is the appropriate capital allocation decision.
In summary, the company is very well-positioned for both defense and offense. Our downside is protected by our strong balance sheet, minimal lease and debt maturities, diversified tenant credit, and topnotch portfolio quality. And when the time is right, we expect that our development pipeline and capital allocation abilities will generate upside and create meaningful value for shareholders.
That completes my remarks. Now I’ll turn the call over to Eliott.
Eliott Trencher
Thank you, John.
FFO was $1.17 per share in the second quarter. This includes roughly $0.02 of non-recurring items from tenant catch-up payments and retail tenants going back onto accrual accounting. The increase in FFO relative to last quarter was mainly driven by the balance of 333 Dexter coming into service in mid-April.
On the same-store basis, second quarter cash NOI was up more than 10%. The growth was driven by free rent burn-off for some larger office leases, improved parking revenue and higher occupancy at One Paseo residential. GAAP same-store NOI was up 3.5%.
At the end of the quarter, our stabilized portfolio was 91% occupied and 94% leased. The increase in occupancy from the prior quarter was due to the balance of 333 Dexter coming into service and the transition of our 26th Street property in Santa Monica into the future development pipeline. The increase in percentage lease was driven by the deals we signed during the quarter, specifically in Long Beach and the I-15 corridor in San Diego.
Turning to the balance sheet. Our liquidity today stands at approximately $1.2 billion, including roughly $120 million in cash and full availability of our $1.1 billion revolver. Our cash on hand unused line capacity and projected dispositions are more than sufficient to fund the balance of our projects under construction.
Net debt to 2Q annualized EBITDA was 6 times. And we have no debt maturities until December of 2024.
Now let’s discuss our updated 2022 guidance. To begin, let me remind you that we approach our near-term performance forecasting with a high degree of caution given all the uncertainties in today’s economy. Our current guidance reflects information and market intelligence as we know it today. Any COVID-related impact or significant shift in the economy, our markets, tenant demand, construction costs or new supply going forward could have a meaningful impact on our results in ways not currently reflected in our analysis.
Projected revenue recognition dates are subject to several factors that we can’t control, including the timing of tenant occupancies.
With those caveats, our updated assumptions for 2022 are as follows: as always, no acquisitions are forecasted. We continue to assume $200 million to $500 million at dispositions. So we are now expecting the majority of these sales to happen in the fourth quarter. As John mentioned, if the capital markets are not supportive, we are not going to force the issue in 2022. Development spending for the balance of the year is expected to be $300 million to $350 million, a decrease from our prior full-year forecast due to the expectation of fewer new starts.
We expect to commence revenue recognition for 250,000 square feet of life science redevelopment during the fourth quarter of this year. Year-end occupancy is projected to be 91% to 92% for the office portfolio and residential occupancy is projected to stay around the current level of 94%.
It is important to note that 2100 Kettner will be coming into the stabilized portfolio next quarter. As the building is not yet leased, stabilized occupancy for the company will be impacted for the balance of the year. As a result, we expect to be at the lower end of the occupancy range.
Same-store cash NOI growth is still expected to be between 5% and 6%. As implied by our guidance, same-store will decrease in the back half of the year due to some tenant concessions that kick in and some one-time items in the prior period.
Putting this all together our updated 2022 FFO guidance is projected to range between $4.53 and $4.63 with a midpoint of $4.58, which is a $0.07 increase compared to our prior guidance. The increase is due to the solid second quarter results and the adjusted timing on our dispositions.
Similar to what we discussed last quarter, guidance implies a drop of roughly $0.04 from the $1.17 achieved in the second quarter. These $0.04 can be broken down as follows: $0.02 from non-recurring items previously discussed and $0.02 from dispositions.
That completes my remarks. Now we’ll be happy to take your questions. Tia?
Question-and-Answer Session
Operator
Absolutely. We will now begin the question-and-answer session. [Operator Instructions].
The first question is from the line of Nick Yulico with Scotiabank. You may proceed.
Nick Yulico
Hi everyone. First question, it was just in terms of Oyster Point, maybe you could frame out, where you’re seeing leasing demand in that market right now because I know there’s been a sense that going on — what’s going on with biotech index and DC funding, et cetera. There’s been maybe a slowdown in demand, but hoping you can just kind of frame out how you’re seeing demand in that market let say now versus earlier this year.
Rob Paratte
Sure. Nick, this is Rob Paratte. How are you doing? So recently within the last 20 days, two leases in the South San Francisco region, life science leases have been signed the total in excess of 435,000 square feet both are great tenant names. And I think that’s an indicator of where the market is for very high quality space.
As John mentioned in his comments, we’re seeing a lot of activity at Kilroy Oyster Point Phase 2, our team there is actively engaged. We had meetings yesterday with a large user. We have a few users that could take entire buildings that we’re talking to. And we’re also speaking to tenants that could take portions of buildings.
So for the product we have and the type of tenant we’re seeking, our activities still remains very encouraging. Our — physically on the site tower cranes will be up and visible from the freeway by within the next 30 days to 45 days. So a lot is happening on site and it’s having a — the — just the visibility of what’s having on site is having an impact on the conversations we’re having with tenants.
Nick Yulico
Okay. Thanks, Rob. And a follow-up on that is, I think that the stabilization date got pushed out a bit farther on the project this quarter. Can you just talk about what drove that?
Eliott Trencher
Hey Nick, this is Eliott. I can take that. The reason for the adjustment was because there was a change in the timing tied to the removal of an existing gas line by the utility company. They just took a little bit longer to remove the gas line than we had anticipated. So one of the buildings because remember there’s three buildings, they’re going to deliver in stages. So one of the buildings will come in a little bit later because of that adjustment. The other two are not going to be impacted to the same degree.
And as a reminder, our stabilization dates have 12 months of leasing — lease up baked into them. So just I guess the takeaway here is it was more tied to that removal of a gas line than our view on the market.
Nick Yulico
Okay. Thanks. Just one last question is, as we’re thinking about heading into next year, major expirations you have to deal with next year. I mean is there any update you have there on car leasing traction just as we’re trying to think about how occupancy could trend next year. I know it’s early, but some companies are starting to get a little bit of a feel for that. Thanks.
Rob Paratte
Yes. Hi Nick, it’s Rob again. So we have four expirations in 2023 that are over a 100,000 feet. Three of them were in active negotiations with and the fourth one, which is the smallest of the four, we expect will be a move out, but that’s not a 100% certain yet.
Operator
Thank you. The next question is from the line of John Kim with BMO Capital Markets. You may proceed.
John Kim
Thank you. I was wondering, John, if it’s a pullback in tech hiring and potentially office space, do you think the newer non-headquartered markets like an Austin will be impacted more of retrenchment or would the losses be more significant in Silicon Valley, just given the higher cost structure?
John Kilroy
I don’t know. I mean, I can speculate a lot, but I just don’t know. I mean, I — the things that we’re hearing right now is that people want to be back in the office, they want to be in these areas where they can attract the talent that they need. In Austin, we know of a number of companies that are looking to either expand dramatically or move into Austin, with that of Indeed Tower and we’re seeing that in our early-stage negotiations or I shouldn’t say negotiations, but, RFPs, and so forth in connection with our to-be-built Stadium Tower.
So I think our market is going to do just fine. It’s everything we’re hearing there, as people are continuing to expand. When we talk to law firms and others that are there, some of them are VCs in connection with Indeed Tower, they’re projecting their business activity; their book of business in Austin is going to increase. So I think that feels pretty good.
In terms of the city, there’s a lot of stuff going on the San Francisco. Some recent headlines about people both expanding as well, as some just put stuff on to sublease. It’s just really hard to say. But trend-wise, I think that we’re going to continue to see a repopulation of buildings in Downtown San Francisco and elsewhere. We’re seeing big growth in San Diego and more to come. We’re seeing big growth, as I said, in Austin. In LA, it’s — the things have ticked up. There’s been a bunch of lease deals done. It’s just kind of all over the map. And it remains to be seen, but I am cautiously optimistic because we are seeing more tours by big users and them seriously interested in property.
I will say the decision timing for a lot of these companies has been elongated. There are more hurdles they’ve got to go through to justify stuff. And as I mentioned in my formal remarks, they’re trying to figure out exactly how they’re going to improve their space, which model is going to be the model that they’re going to utilize. And we’ve seen a couple of tenants reconfigure their designs for space they’re going to occupy and make significant changes. So there’s just a lot of things at play. Not all is positive, but incrementally, I’m seeing more positive now than I saw last quarter, and so forth. So I think the trend is going to be better. Not sure [ph] — if you only got a stock market chart even if it’s going up, it doesn’t go up every day. It goes up and down. We’ll see what happens.
John Kim
I appreciate your honesty in your comments. My second question is on Blackstone. They’ve had a position in your company for last couple of years. And I’m wondering if you had any direct conversations with them either as a long-term shareholder, or potentially as a strategic partner?
John Kilroy
I’m sorry, John, for some reason. You cut out a lot on that. And I’m not sure I got your question. Could you restate it please?
John Kim
Sure. Blackstone, they’ve been a shareholder of your company for a while. I’m wondering if you’ve had any direct conversations with them either as a shareholder or as a partner.
John Kilroy
I’m not aware of any.
John Kim
I thought it’s announced. Thank you.
John Kilroy
Well, I only say that, but it’s sort of a question. I don’t think anybody else in the company — anybody else in on from Kilroy on the call had any conversations with them? I haven’t. Haven’t heard of any?
Eliott Trencher
No.
John Kim
Thanks.
Operator
Thank you. The next question is from the line of James Feldman with Bank of America. Please go ahead.
James Feldman
Thank you. I guess I’m starting with 2100 Kettner, I mean, can you talk about the potential pipeline for that project? And you think it’s the location? Do you think it’s the timing? I know, it’s kind of a new sub market for you guys, so want to get some more thoughts?
Rob Paratte
Hi, Jamie, it’s Rob. Let me answer the last part first, which is, timing. The project really was ready for tenant improvements in the midst of the pandemic, which didn’t help. But that said, throughout, towards the end of the pandemic, and into this current quarter, we’ve had continued activity and interest from a variety of tenants, whether it’s professional services or technology. And I think, because this Little Italy submarket borders downtown San Diego, which has just in general, those two markets have been slower to repopulate that’s impacted some of the leasing demand, not only at Kettner, but elsewhere at Diamond View and other projects in Downtown San Diego.
All that said, we’ve made meaningful progress with a very well-known company. I don’t want to go further than this comment about it, but we feel like we’re making very good progress with them. And more will be — we’ll be able to share more with you in the near future.
James Feldman
Okay, thank you. And maybe just I mean, San Francisco —
John Kilroy
Jamie.
James Feldman
Sorry go ahead.
John Kilroy
Sorry. This is John. The other thing is, and I think I’ve talked about this before, but, originally, we thought we would end up with a likely big tenant that we were talking with, with regard to that property. Their requirements were bigger than what we could deliver. And we’ve made the decision to break it up and go multi-tenant, which is kind of the same path we went down when we came on stream or when we were under construction in late-stages with our One Paseo office space, because we didn’t have the pandemic to deal with for that — for those buildings. That’s a very similar path. And I’m confident we’re going to end up with really very successful rental rates and client base at 2100 Kettner.
James Feldman
Okay. And when do you have to start capitalizing that project assuming you don’t have a tenant?
Rob Paratte
It’s going come into service next quarter, so by next quarter.
James Feldman
Okay. So if it’s still there 4Q, you’re no longer capitalizing?
Rob Paratte
Correct.
James Feldman
Okay. And then maybe just to shift gears to CBD San Francisco, I mean, we all see the headlines and then you made some comments, it get slower. But I mean, can you just give more color on what it’s really like just try to do business there right now? I know you’ve got a high quality portfolio. Just any more information on, how you’re thinking about, kind of how that market is going to look the next six to nine months?
Rob Paratte
Sure, Jamie. This is Rob. Again, I’ll direct — I’ll answer that. Let’s frame up Kilroy’s position in San Francisco first of all. Right now we’re 95% leased in San Francisco. Our portfolio is. And I’d remind everybody that we have very minimal role between 2023, 2024, 2025 averaging about 7%. So I just like to set that as sort of the groundwork.
Leasing volume in the second quarter in San Francisco rebounded up to about 1.7 million square feet. And I think two very notable transactions happened within the last, again, 20 to 25 days. One is Google, taking 295,000 square feet of very high quality sublease space in Soma. And secondly, Wells Fargo Bank, renewing 661,000 square feet in San Francisco CBD. So those are two very notable transactions. And again, I think you have to separate what the headlines say into the facts about specific submarkets, but I think those are very indicative.
The best buildings in San Francisco have an 11.6% vacancy rate. So meaning the premier assets in the city are 11% versus the 20% vacancy rate reported, by brokerage firms. So, on the ground how things are feeling as John said, it’s sort of up and down. It’s not linear. Tuesday, Wednesday, Thursday are very busy. Last week at a 101st where Bill and I are speaking to you today one of our tenants had a major event for their employees, the elevators and the lobbies were completely full with people. They looked like they were having a really good time. That’s spilled over into Thursday. And so we’re seeing that not only at a 100 first, but in other parts of our portfolio.
And as you know, we’ve said on previous calls or at NAREIT or what have you, that a lot of this year is going to be focused on making, coming back to work fun. So you’ll see a lot of aside from bringing teams back together to actually do work, you’re going to see a lot of entertainment and hospitality type focus.
The last thing I’d say is that the streets in the CBD in south of market and parts of north of market are in much better shape than they have been. And I think that’s a function of more people being back in the CBD as well as increased police activity and enforcement.
James Feldman
Okay. And then just going back to the four large expirations next year, can you remind us where they are? And then the one that sounds like could be a move-out. Can you give a small color on that one?
Rob Paratte
I don’t really want to give more color. It’s in the smallest of the four that we think may be a move-out is in San Francisco. The others are in Southern California kind of spread throughout the portfolio.
Operator
Thank you. The next question is from the line of Brian Spahn with Evercore ISI. You may proceed.
Brian Spahn
Hi, thanks. Just going back to the stadium project, John, I was wondering if you could talk to, what’s given you the confidence in starting this project, just given the economic slowdown and what you’re seeing on construction costs and the growing competitive supply pipeline down in Austin?
John Kilroy
Yes. I think we have a pretty good mouse trap and we have a lot of conversations going on with full floor users, a handful of those that are all big names. And I think we’ll end up in a very good timeframe versus where competitors are delivering space, either those that are underway or those that would follows assuming they start.
So that gives us confidence. You have to make choices and we have we have postponed to start a Santa Fe Summit down in San Diego. We’ve taken a pause on that. We’re ready to go whenever we want to push that button. We’re entitled and pretty much ready to go with 26th Street in Santa Monica. It’s a smaller project, maybe a couple hundred thousand square feet. And we think Austin is if that location is going to be a winner and so that’s our thinking.
Brian Spahn
Got it. Okay. And just on the disposition target for the year, Eliott or John, can you just talk to your confidence level in hitting that number, where we’re at, you haven’t done any so far this year. And maybe just more broadly, what interest are you seeing in the transaction market today for office product?
John Kilroy
You want to take that Eliott?
Eliott Trencher
Yes, sure. So I think kind of breaking it down into pieces, we — as we sort of described in our remarks, we’re in the market with various transactions. We are adjusting the timing of them. In terms of the confidence, we’re kind of approaching it as if we see that there’s a market that we like and there’s enough depth to it that we think we’re executing at prices that are commensurate with where values ought to be. Then we’re pretty confident we can get $200 million to $500 million done. But we obviously are not — we obviously are adjusting the timing, so we’ll have to see how that plays out. And if it doesn’t make sense to sell, we’re not going to sell. So we’re not going to force the issue. And we’re kind of seeing the market real time and evaluating it.
I think bigger picture, there is still a bid for lots of different types of assets. And I think it’s a little bit stronger for those that are all cash buyers. The levered buyers are a little bit more reliant on the debt markets. And as John described, the debt markets are changing by the day.
Operator
Thank you. The next question is from the line of Michael Griffin with Citi. You may proceed.
Michael Griffin
Hey, thanks for taking the question. Just wanted to go back to the 26th Street redevelopment adding it into the pool this quarter sort of kind of what drove that and sort of what are expectations for that going forward?
John Kilroy
For the start of it, the construction –?
Michael Griffin
Yes.
John Kilroy
Yes. Well, the LA market the West LA market is cleaning up pretty nicely. You just have to make decisions from as a capital allocation — from capital allocation standpoint. And I feel like this is — it’s kind of similar to a period that frankly the markets were in better shape, but when you might recall, when we had the exchange of construction, which was three quarters of a million square feet in South San Francisco, we were looking to get starting.
And I think we had Dexter, which was roughly 700,000 feet up in Seattle under construction. We didn’t have either lease. And we were being asked, would we start a 100 Hooper, which and my point was, well, it’s right. It’s the same market as the exchange, we’ll start it if we have a tenant for it, or if we’ve made significant leasing at the exchange, but we’re not going to just add it other 400,000 feet on top of 700,000 square feet that was underway in the same market spec.
And so I look at it, I say to myself from a company standpoint, we’ve got KOP. We’re confident, we’re going to lease that up, but that’s a big project. That’s roughly 900,000 feet. We’ve got Kettner down in San Diego. We’re starting the Stadium. We’ve delayed south of the Santa Fe Summit. And we’re going to delay the project you inquired about 26th Street and they’ll come on stream. I mean we’ll start at some point.
It’s just that we don’t feel compelled to start anything. We’re in great shape in our balance sheet. We’re not like a merchant builder that if you don’t build it, you’re not going to get your fees or whatever. We’ll just split the market continue to improve. And we’ll pull the trigger when we think it makes sense both with regard to that specific project and as you know, and in looking at the company and it’s — in its total context.
Michael Griffin
Thanks for that. Appreciate the color on it. And then, John, just coming back to what you mentioned in your prepared remarks about sort of political wins shifting in a lot of your markets with the recall the DA and San Fran and the runoff for mayor and Los Angeles coming up. I’m curious if you believe that this will be a big driving factor to people feeling more comfortable coming back in the office, or do you think that it’s too quick a shift and then it might take sort of longer to play out?
John Kilroy
I think it’s a major component of the solution. I mean there’s a lot of things going on as you know, and if you have all this homelessness and all this lawlessness, I was looking at the statistics the other day that were put together and I don’t have them with me. But in order of magnitude, nine might be off 10 percentage points on any one of these by directionally. Murder is up in every major city, hugely this year. Violent crime is up major in every major city. Car theft is up in every major city.
They don’t even in most cities deal with any thefts or snatch and grab under a $1,000. So those statistics, I think would be off the chart. People are sick and tired of this stuff. They’re sick and tired of it. In San Francisco, the four Republicans that live there probably voted for this, but I say they’re kiddingly. There may be a few more, but the reality is this is a broad-based disenchantment with this woke sort of stuff. And people are just off and cleaning up the streets.
And for companies seeing that streets are starting to clean up, for companies seeing that law and order is being on the forefront of people’s minds and being restored is a major part of the equation. It’s not the only thing, of course. There’s the whole work from home situation, but I think this is component of that.
So I’m very encouraged by the fact that it’s not one political group. It’s a broad, lots of people, every age, every background, every — not every but most political affiliations or whether they’re in some of them, of course are like me and they’re independent. But the fact is you needed to get people just off in the change of stuff. And I’m really encouraged by it. It’s not going to happen overnight, but what companies, what I’m hearing is that we’re very encouraged by seeing that it is moving forward. There’s a lot of work to be done. But it’s a huge first step. But — and it’s not going to mean the crime goes away at day one it won’t, because there are lot of bad people out there, and they need to be dealt with.
Operator
The next question is from the line of Blaine Heck with Wells Fargo.
Blaine Heck
Great. Thanks. Good morning up there. I was hoping you guys could give us an update on the mark-to-market at each of your markets and whether you’ve seen any change in our metric recently, especially in Los Angeles where you have a pretty large proportion of your explorations in the next several years?
Eliott Trencher
Hey, Blaine, this is Eliott. I can handle that. No material change in our mark-to-market from what we’ve talked about. Previously, it kind of ranges on the West Coast between 10% and 20% by market, in Austin, it’s 30% mark-to-market and it kind of blends somewhere in that 10% to 15% range.
Blaine Heck
Okay. Great. Second question is, it sounds like the beat this quarter was largely due to early revenue recognition at 333 Dexter, and we looked back and saw the revenue recognition on developments have been earlier than guidance four times in the last two or three years. Obviously, this has a positive impact on actuals versus guidance, which is great, but I’m wondering if there’s anything specific going on that’s enabling you guys to consistently beat your expectations for the timing of revenue recognition on developments, or is that just a matter of staying, kind of, conservative on guidance, and building in a bit of a cushion for those move-in?
John Kilroy
Yes. This is — go ahead, Eliott. Go ahead, but I want to make a comment afterwards.
Eliott Trencher
Yes. There’s definitely — you know, we talk, we give a lot of the disclaimers in our prepared remarks about calculating the timing of revenue recognition because there’s definitely a lot of art behind it. So we try our best and to try to project when the TI’s will be spent by tenants in place and that we can actually start to recognize revenue, but there’s certainly — there’s no exact science that goes to it and we’ve been fortunate as you point out to have beaten it in the last few instances. But that doesn’t necessarily mean it’ll happen next time, but we’re certainly going to try our best to do better.
John Kilroy
Yes. When I make — this is John, I make this comment, Justin Smart, our EVP, or now President of Development — Construction and Development, at Kilroy, and his team, his group; they’re the best I’ve ever seen. They really, really work with the tenants along with the rest of our deal making squad to move these things along, and make things easier for tenants to decide on.
I try to think that, that could — I don’t know if we’ll have the success that we’ve had in the past with that. We’ll see. But companies are experimenting more with the way they are using space to sometimes they’re slower now in moving forward with their improvements because they’ve all gone scratching their heads saying, is this mix now the right mix or should we try something else and maybe do a pilot and then see about the rest of the space. So it could bounce around.
Operator
Thank you. The next question comes from the line Vikram Malhotra from Mizuho. You may proceed.
Vikram Malhotra
Hi thanks for taking the question. And sorry, if I missed this, I just wanted to go back and maybe get some more color on your thoughts around capital deployment. You mentioned the higher bar for assets. Just can you maybe give the bit more specifics what are you changing in terms of underwriting or maybe what you’re looking for? And then given the quality divide that you highlighted, any thoughts on where the value differential is for say high-quality A grade office versus the average product out there?
John Kilroy
Yes. Those are good questions. The fact is that as people are utilizing space differently now, there is probably an increased element of view towards two buildings. I’ve always said, the buildings have a physicality for the modern tenant. You may need to improve things, but do they have the physicality, the actual dimensions and whatnot. That’s probably ratcheted down to a — or ratchet up rather to a higher threshold of what is acceptable physically.
But the other thing is that it’s just to me doesn’t make a lot of sense to buy stuff today. Assuming you’re going to have big rent increases over the next several years, which we did see that punctuated most of our markets for the last several years. And in periods like this, it could be that we don’t see the level of rent increases, so your underwriting is going to jump — is going to be more conservative.
And then you taking a look at, if you — we always look at, if you were to sell the assets, what’s the pool of buyers and so forth. The flight to quality is not just a tenant-based phenomena. It is an investor-based phenomena. The sophisticated investor is looking to deploy capital to assets that have a lot of running room that are going to be performing well for many decades, much of the existing stock doesn’t have that. So there’s just a higher bar in a context of demand, in the context of underwriting rental increases and in physicality and so forth.
With regard to development, the nice thing about development is that we generally get to develop pretty much what we want, and we’re pretty good at developing excellent properties, but we also have to take a look at where construction costs are and they vary dramatically between our markets. Everything we have our construction from the development standpoint, we have a guaranteed max price with the contractor. We’ve — we’re very comfortable with that same thing on major tenant improvement work. It — we have that for example at the Stadium Tower that we want to build-out at the domain in the Austin.
In other areas, and we had that by the way, at Santa Fe Summit in the project, we elected to slowdown and not proceed with right now. But you — for example, in Seattle construction costs have probably been higher there than any other — the increases higher there than any other major market in the United States. That’s because of all the construction of Amazon and others, primarily in Bellevue.
And to be us, it makes no sense notwithstanding whether the market bank sensor does it. It makes no sense. You go out and start a building when you’re at your all-time peak in construction costs and labor costs. We think those will moderate. So we’re also going to look at how we time things not only based upon for demand — visible demand, but also based upon what costs are going to be. And whether we think those costs might go down. So there’s a lot of different things.
And then finally, there’s just about capital allocation. We don’t want to sell stock. We don’t want to add a lot of debt. And so the likelihood of this having a whole bunch of acquisitions and development going forward is also more remote. So those are the big factors that are in our thinking.
Vikram Malhotra
That’s helpful. And then just talking of timing, you highlighted the robust demand still for quality life sciences, the two big users or two big opportunities I think you referenced. Just thinking about the opportunities in life science in the Sunbelt you clearly made the push there in Austin. I’m just wondering like are there specific life science oriented opportunities that, that, that you can share with us?
John Kilroy
No. And I say that that’d be a smart out, like just because we don’t have any in the Hopper right now. And the life science while there’s some tremendous cancer research and so forth down in Houston and whatnot. It’s an emerging area in much of the South. So of course, you’ve got the — a lot of activity down in North Carolina, but we’re not down there. So we don’t have any plans right now on life science in those markets might be in the future quite possibly, but nothing in our consciousness right now.
Operator
Thank you. There are no additional questions at this time. I will pass it back to the management team for closing remarks.
John Kilroy
Thank you very much for joining us and for your interest in Kilroy.
Operator
That concludes today’s conference call. Thank you. You may disconnect your lines.
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