Good afternoon, and thank you for attending today's Kilroy Realty Corporation First Quarter 2023 Earnings Conference Call. My name is Danielle, and I will be the moderator for today's call. [Operator Instructions] It is now my pleasure to hand the conference over to our host, Bill Hutcheson, Senior Vice President of Investor Relations and Capital Markets. Bill, you may now proceed.

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

Thank you, Bill. Hello, everyone, and thanks for joining us. First and foremost, while we're seeing strong signs in the economy and remain optimistic, we would like to acknowledge that we are still facing cyclical and secular headwinds. The macro environment today, I think I defined as -- it just lacks certainty. Sentiment is challenged in financial stocks, such as Silicon Valley Bank and the crisis was created related there to continue to dominate headlines in many areas. From a real estate perspective, we have seen the implications of the current economic backdrop translate into near-term obstacles. There has been a reduction of liquidity in the investment sales market, downward pressure on leasing fundamentals as tenants delay space requirement decisions and a pullback in financing and investment activity within the banking and venture capital community. However, despite these macroeconomic challenges, we are proud to announce that we delivered a strong quarter and record FFO per share. Elliot will go through the quarter in more detail when he gets to his remarks. Shifting to our markets, we would like to highlight encouraging trends and what we see are seeing with our boots on the ground in each of our regions. As we discussed on prior calls, physical occupancy in our portfolio continues to trend up and the share of job postings that are remote has been trending down. Austin and San Diego continue to lead the way with respect to physical occupancy with over 70% at quarter end. These markets continue to edge closer to pre-pandemic levels. San Francisco, a region which admittedly has been lagging in regards to return to office saw its highest quarterly increase of over 6% in physical occupancy since the start of the pandemic. The widespread return to office announcements from top tech firms have translated…

Thank you, John. FFO was $1.22 per share in the first quarter, the highest quarterly FFO in the company's history. This is up roughly $0.05 net from the prior period, mainly due to a full quarter of revenue from Indeed lease in Austin. Our results included both positive and negative nonrecurring items, which more or less offset each other. On a same-store basis, the first quarter cash NOI was up an impressive 16%, this includes roughly $12 million of tenant restoration payments tied to 2 properties. Excluding this nonrecurring revenue, same-store NOI would have been up about 9%. The strong same-store is due to free rent burn off at Phase 1 of KOP in South San Francisco and higher parking income. GAAP same-store NOI is up roughly 2% after adjusting for the nonrecurring items. At the end of the quarter, our stabilized portfolio was roughly 90% occupied and 92% leased. The decrease from the prior quarter was due to previously disclosed move-outs, including DIRECTV downsizing in [indiscernible]. Leasing spreads in the quarter were negative 4% on a cash basis, driven by one lease in San Francisco. If we were to exclude this lease, spreads would have been up approximately 8% on a cash basis. Net debt to first quarter annualized EBITDA remained about 6 times. I want to emphasize that we have no debt maturities until December of 2024 and limited interest rate exposure with over 90% of our debt fixed. As John mentioned in his remarks, our liquidity remains strong at $1.6 billion, which is comprised of $330 million in cash, $170 million in future term loan proceeds and $1.1 billion of capacity on our line of credit. One modeling note during the last week of the quarter, we drew down $150 million in term loan proceeds in accordance…

[Operator Instructions] The first question comes from Nick Yulico of Scotiabank. Please proceed.

Thanks. First question is just maybe you could talk a little bit more about leasing traction right now in South San Francisco? And if we should think about for Phase 2 there, voice [ph] your point? Could that be a longer leasing time frame now? And I guess, also from - just from a sort of NOI commencement possibility. If you could just remind us, let's say, if you got a lease done at some point this year, what - when would be the earliest you'd start commencing some NOI on that?

Sure, Nick. This is Rob Paratte. Let me give you a backdrop on South San Francisco. First of all, just to remind everyone, we have three buildings, about 863,000 square feet under construction. The buildings were purposely designed for Life Science, but they can accommodate single users as well as multi-tenant. With the current situation with SVB and just the general economy, decision-making has slowed down, no doubt. Deal size has gotten smaller but right now, in the market, there are 36 requirements that total about 2.3 million square feet. And I would say that's off from about 3.7 million square feet prior to some of these negative economic headwinds that we've had. Right now, we expect deal size, as I said, to be smaller. So I think probably average size right now is about 65,000 feet. Our floors are 44,000 feet. Some of the space that's in the market right now is a single floor is only 20,000 feet. So for us, we can accommodate 44,000 feet on 1 floor or 1.5 floors for a larger tenant in the 60,000-foot range. That makes it much more efficient for the tenant. So we've always looked at the project. I don't -- we never really anticipated that we would lease all 3 buildings to one single user. We market that way, of course, we go elephant hunting, but this is really going to be a multi-tenant floor by floor sort of block and tackle game, but there are large tenants in that market and continue to be despite what you may read in the headlines. So -- the other thing I'd say is that there is more sublease space on the market. Again, that's sort of -- and I'm looking at sublease space that's spread between Sierra Point and Oyster Point. And you know Oyster Point is really the main and main of the market. And that sublease space, again, is characterized, some of it's very usable. But again, it's 18,000 feet, 20,000 feet, no significant contiguous blocks of space in the market. So long story short, things will take longer but there are deals out there. And even with the VC funding environment, Silicon Valley Bank wasn't the only lender to the venture capital world, there's a lot of private equity including Blackstone and others that have moved into the space. So although funding has slowed down, I think everyone is just -- as John has said numerous times on our calls, you don't have to make a decision today, you won't make it.

With regard to, Nick, this is John speaking. Specifically to, does it change our stabilization dates, just to remind everybody, that there's three buildings, they sort of stagger a little bit. But the first building is scheduled to be completed as shell in mid-'24 and they sort of roll after that, the other three. And then it's a year there out from those dates that we anticipate stabilization pursuant to our pro forma. We don't see anything at this point that changes those. I mean, obviously, we'll update if we do, but we think those are probably still pretty good dates.

Okay. Thanks, John and Rob, Just second question is on this idea of maintaining the strong balance sheet, looking at evaluating some alternative sources of capital. Maybe just talk a little bit more about what that could look like? And what's going to drive that decision making? Is it -- it ends up being a slower leasing process at Kilroy Point? Has you consider asset sales just to raise some more liquidity as maybe the NOI gets delayed there? Or just how we should think about potential sales, JVs, types of assets you're thinking about? And what would be the reason to do that?

Well, as you know, we have a tremendous amount of liquidity and a great balance sheet and very little debt that's coming due. Eliott can give you the specifics. But we're going to remain flexible as we always do. We purposefully built the company to make sure that we have plenty of liquidity and a great balance sheet if we ended up with headwinds, and we do have headwinds. And I've always said that we're going to play offense, but we have got a first -- in order to play off and you've got to be able to play defense. So I think we're really well positioned. We don't feel like we have our backs against the wall on any of that. And as things sort of sort themselves out, we think that there'll be a much better functioning debt market, which will help the buyer market. As you know, last year, we decided not to proceed with some of the disposition activity that we had forecast just because we felt the pricing would be better if we waited. So do you want to cover Elliot, I mean in terms of potential sources, there's a lot.

Yes. And Nick, just to add to that, what we were trying to convey is -- we feel really good about where we are liquidity-wise, but that doesn't mean we're just going to sit here and wait, right? The way that we've gotten to this position is by being opportunistic. We didn't have to raise the term loan last year. We saw what we thought was an attractive opportunity, and we pursued it. And that's our mentality this year as well is that we don't feel compelled to do anything. But as we evaluate our alternatives, if there is something that's appealing and that could be on the secured side, that could be on the unsecured side, that could be on the sales side or the venture side. If we see something that we think is attractive, it helps the long-term situation for the company, we'll first do it.

Thanks. Just one last one. John, you've I think you outlined very well, and congratulations on the retirement. You outlined the reasons why you decided to retire. But I guess I'm just wondering the consideration to make that announcement before lining up the successor? Maybe you could just outline some of the thinking on that. Thanks.

Yes. Well, at the Board level, we talked about this a lot. And the reality is that you can -- unless you have a specific individual that you have designated to be internally or externally for the person, you can wait. If you're going to go through a process, it's going to get out. It just is going to get out. There's nothing that doesn't get out today. Probably the fastest way to get something around tell somebody, it's a secret. And so our view is we want to be very transparent. We have some great candidates internally. We may find some great candidates externally, in order for that process to go about efficiently, it means that we want our senior management team to be involved in and whatnot. And it's just, we came to the conclusion that it was best practices to be transparent. So that's what we did. And we want to make sure we have plenty of time to go through the process and whatnot. And if you've come to know anything about Kilroy, we kind of tell it like it is and we tell as early as we think it's appropriate to do so. And once I've made my decision, basically, it was time to tell people. And it's always kind of a better swing, what's a great time to leave. It's -- for me, I have a lot of things as I put forth in my letter that I want to do in my life including sport and whatnot. I got a bunch of grandchildren. I see them about once a year. They all live in different countries. And so I want to spend some time. And I think this is a good process.

Thanks, John. Appreciate it.

The next question comes from the line of Georgi Dinkov of Mizuho. Please proceed.

Hi. Thank you for taking my question. Could you please walk us through non move out in the next 12 months? And in terms of your top tenants with expirations in '24 and '25, do you see any early termination risk?

So this is Elliott. We've touched on a few of the top of the known move-outs and we'll highlight the major ones. We've got Amazon that we've talked about at West 8th that's moving out in the second quarter. We talked about Pac-12 that's moving out in the Bay Area in the third quarter. And then Riot [ph] which is still TBD is a fourth quarter expiration. In 2024, we have two move-outs to over 100,000 feet, both of [indiscernible] TBD in terms of how those play out, and we have none in 2025 over 100k.

Great. Thank you. And just one more question on Austin. Given the high sublet space, do you see any downside risk in terms of early terminations?

Austin, our building is brand-new and all the leases that either just started or will start when the tenant improvements are done, and there's no termination right. So I don't see any termination risk at all. I might point out that I didn't in my comments, this is John speaking, by the way, is that we've been exceeding our pro forma rents quite substantially there. So I think all systems are go for Indeed Tower.

Great. Thank you so much.

Welcome.

Thank you. The next question comes from John Kim of BMO. Please proceed.

Thank you. Good morning and John, congratulations on building a great real estate company. I was wondering if you could discuss how involved you plan to be going forward with Kilroy, if you plan to remain as Chairman? And any characteristics you could share as far as your preference for a successor?

Somebody's smarter than me. I'm always a smart, [indiscernible]. You know that. So John, I can't get into the search and all the rest of some of the candidates who might be in this room. And - my old thing about team and teamwork has been pretty transparent, whether it's been in the sailings that was successful in or whether it's in an enterprise like Kilroy is that one of the benefits you have when you have a strong team that works well together is you can talk about who might be the next leader, whether it be from the inside or out in good opinions and it makes a stronger process. And so more to come on that. As regards to my continued involvement. I mean, I'm Chairman, I'm going to continue to be on the Board and so forth. I'm a big shareholder. I have a big mouth. So I'll probably talk to people here and there. We'll probably get a few inquiries occasionally. Ask me whether I think this is the right thing, the wrong thing, and I'm open to all that. But that kind of remains to be seen. I do believe that -- we've got a great management team, and I think about, again, back to my sailing analogy, when I was doing all my ocean racing and I was captain in the boat, I was a watch captain. I had another watch captain always listened to what they had to say. But sometimes, I overruled them and I would come up on deck and I could tell it made him feel a little bit on edgy because kind of to have two captains on deck at the same time. And you got to trust people. And I think we have a really terrific team of people here that have worked really well together. And it's the ultimate in collaboration -- so I'm available, but I'm pretty confident. [indiscernible] lot of the decisions to get made here, it may ultimately come down sometimes to me making the final decision. But generally, they arrived at pretty quickly by mostly consensus.

Okay. To clarify, you're not necessarily going to stand as Chairman?

I don't know, I'm Chairman for now. Do I at some point decide that, that's not the right thing or whatever? I don't know. I mean, I haven't gotten there yet. It's - I'm going to do what is in the best interest of Kilroy.

On the Sorrento space, I just wanted to ask if there was anything unique about that build out that would make it difficult to lease or re-lease quickly? Or if something like that, it's almost ready to move in is attractive to tenants in the marketplace today?

John, this is Rob Paratte again. So the Sorrento space, just to frame it a little bit is in the UTC submarket. And as you've heard us talk about before, UTC has both technology and life science. And this project, in particular, was renovated with a Life Science use in mind. We are doing some upgrades. It was an existing assets. So we're doing some upgrades like the lobbies and some of the exterior and mechanical systems. We haven't gotten control of the space yet. But we think it's very marketable and we - because we haven't started TIs and that sort of thing, we can go either way. And I think one thing I'd remind you of also is that, as you've seen before, whether it's our exchange project or others, they can play both ways. They can accommodate life science or they can accommodate tech and tech frankly, loves the robust systems that life science requires.

Thank you.

Thank you [Operator Instructions] The next question comes from the line of Caitlin Burrows of Goldman Sachs. You may proceed.

Hi, good morning. Maybe just on pricing back in November, you mentioned an estimate of like 10% to 15% mark-to-market across the portfolio. So just wondering if you could give your latest view on that and also clarify whether that assumes flat market rents going forward?

Caitlin, it's Elliot. We're between 5% and 10% today. And if you think about the difference between then and now, we've had rent bumps in our leases, and we've signed leases that in the large part, we're rolling up. So that's where we stand today versus then we have no future growth assumed in that number. That's a snapshot of where we are right now.

Okay. And then maybe separately on the dividend. I mean some peers have reduced suspended or commented that they could cut if the environment persists or weakens. So could you just comment on how you feel about Kilroy current dividend coverage and under what scenario Kilroy could consider modifying the dividend?

So our payout ratio is quite low. We think our dividend is very well covered. And obviously, we have requirements to pay out a certain portion of taxable income. So while ultimately this is a Board decision, we're comfortable with where we are today.

Thank you. The next question comes from Michael Griffin of Citi. You may proceed.

Thanks. First, congrats John on a great career. Pleasure working with you. Maybe starting on leasing going to Rob. It looked like leasing was down in the quarter, but second gen lease was up take out last quarter found leasing. Cash rent spreads look down, the retention ratio is a bit low, I think Eliott talked about in the last quarter. Maybe give us a sense of what the expectations for this are? For the remainder of the year, Rob, I think you talked about a little bit in the prepared remarks, but any additional color around leasing activity would be helpful.

Sure. Let me touch on a few things. What I would say big picture, Michael, is that we're in this great rebalancing right now. We've gone from a very employee sort of dominated market to one where it's now pushed back to the employer, meaning power leverage is back to the employer. And so you see this across the board with companies bringing their employees back to work. That rebalance is underway, and it's going to take time to settle out. But in San Francisco, since you were last out there, there's a marked change once again in terms of the numbers of people downtown, and that's just by analogy, and our parking garages are full. So you have that going on. And I'd like to focus a little bit of this on San Francisco because it has been so beat up in the press and some of it is justified. But San Francisco is still a thriving city, and it has a very strong attraction to young educated workers in the market. Right now, there's approximately 152 tenants in the market with a total demand of about 3.3 million square feet. Now that's down obviously from the high end 2019 where that might have been 8 million square feet. But I want to point that out just because people have a sense that everyone is sitting on the sidelines, and that's -- that's not the case. Of those 152, 120 of them are active and 32 of those are pending, meaning they're in close to getting a lease executed. A lot of the activity in San Francisco is generated by AI. And I think that while AI companies have made headlines, I don't think it's appreciated that. The majority of AI companies founded since 2020 are located in San…

I just want to pipe it here, Michael, and thanks for the comments. It's really a tale of 2 cities, so to speak. We've been talking about and others have talked about the differential between Premier product and non-premier to flight to quality and so forth. Last week, a bunch of us met with all our management teams. A matter of fact, the entire offices in each region over the last six, seven days. And when I was just blown away from in San Francisco is we reported -- I think it was probably the fourth quarter -- rather -- yes, fourth quarter call, that the difference between post Labor Day and pre-Labor Day was just extraordinary that there were so many -- so many more people back to work. The utilization rates have gone up quite a bit. The traffic has gone up, et cetera, et cetera. Well, there's been another quantum jump, frankly, in San Francisco and Seattle and certain areas of L.A. since that last call, over the last 3 months, that is. And it literally -- I couldn't get into our parking structure where our offices, we have a big parking structure there in San Francisco the other day, I was totally full. The lobby was totally full. The elevators we're up and down. People were all over the place, looking at Salesforce Tower next door in their lobby from where my office is, it was the same thing there, the same thing over $350 million and you just see so many more people. Now we still have homeless problems. We still have prime problems. We still have a bunch of other problems. Those are being chipped away at but there's some really positive things going on with people coming back to work. And it's going to be, I think, materially -- and I think there's another quantum jump ready to occur over the next three months or so with the big announcements like Amazon up in Seattle and some of the others in the Bay Area of getting back to work. Now contrast that with San Diego, which is, in most cases, booming, and often when we were there, I mean, it's just on fire with people. So I have a feeling, particularly in the Premier properties where people want to be, that we're going to see some material improvements in this whole thing about right return to office. But I would also say, on the other side, the tale of two cities. There are a lot of buildings that are just going to have problems. When I was in San Francisco, I was walking around in certain areas where we haven't invested and it was a wholly different world in terms of much fewer people walking around, garages that weren't full and nobody in the lobbies. And I think that's what you're going to see more and more, and we've been forecasting that for some period of time.

Just a quick follow-up on Seattle. John or Rob, any update on West 8th with Amazon there? I think the lease expired this month. I just didn't see any news about it. So anything you can comment would be helpful.

Michael, I don't want to comment on Amazon specifically, but we - I think as we pointed out on either at NAREIT or different meetings, we literally the week of January 1, we had a group up in Seattle, John, Justin, Smart and others, and we evaluated the West 8th project from a - what do we need to do, if anything, to refresh it. And after that meeting, we've come back with a program that we think is really going to put the project kind of - it's already a great location and great project, great bones, but we're going to modernize a few areas that we think are going to be really attractive to tenants. We've already had since we've announced the fact that we're going to be doing some renovations, we've had several tours and inquiries coming up. So we're very busy right now in terms of generating, renderings and imagery to help sell the story of what West 8th will become. And again, I'll remind you, it's situated in just at the Denny Regrade [ph] which is on the border of South Lake Union, where all the technology companies are, not just Amazon. So we feel good about it.

Great. And then just one follow-up. I know I'm breaking the two question rules, apologies. The Google announcement down the Peninsula, San Jose, the pause on the mega campus. Is there any benefit maybe in your [indiscernible] fully leased, but any benefit you can maybe have from them pausing that?

Well, I don't know if specifically, it will help, Kilroy, in any instance I can tell you. But any time people don't proceed with new development generally is good for existing product, right. Just because it doesn't rob others or whatever. So I know more about some of these companies' plans, and I can share or we do. I was with a major tech executive yesterday and last evening for dinner. And - there definitely is a - I think it's a very healthy view coming out, which is we don't need to own everything ourselves. We don't need to develop everything all at once. We really need to demonstrate to the market that we're serious about cost containment and so forth. And if people delay major facilities, then it probably means the people that we're going to go in there are going to stay somewhere else or go somewhere else.

Thank you. The next question comes from the line of Blaine Heck of Wells Fargo. Please proceed.

Thanks. Just a couple of quick ones for me. We noticed the right games upcoming lease expiration increased in size by about 30,000 square feet. Can you talk about the situation there? What caused that change? And any color on the likelihood of renewal or move out at that space?

Yes, Blaine, this is Elliott. So just on the 30,000 feet, nothing actually changed there. If you look at our lease expiration schedules in '20 and '21, there's no uptick. We clarified the footnote. Last quarter, we called out the major piece of Ritas [ph] They have a few smaller suites that are part of that. So we just wanted to clarify to be a little bit more inclusive with the number.

And Blaine, this is Rob. In terms of Ritas, I'm not going to be real specific, but they are in space actively using it, and it's too early. They don't expire until November of this year. So more to come.

Okay. That's helpful. And then, Elliot, I think you talked about parking income being one of the drivers behind the strong same-store results. Can you just talk about that a little bit more? Was the parking income higher than your original expectations this quarter? And how should we think about that income trending for the rest of the year?

Yes, it was both higher than our expectation and higher than last year. And I think that, that's a testament to what John said in his prepared remarks that we're just seeing better physical occupancy. So it's our hope that as that continues, we continue to benefit on the parking side as well.

Great. Thanks.

Thank you The next question comes from [indiscernible] of Evercore ISI. Please proceed.

Great. Thanks for taking my question. I'm just curious if you could provide a little bit of color on the Austin market and just any interest you're seeing at Indeed Tower. I saw maybe a little bit of progress this quarter in terms of leasing that any part of there would be great.

Sure. This is Rob again. As we've said before, the beauty of the Indeed Tower that we have in the CBD is that, that part of town attracts not only tech but finance, insurance, professional services firms and all of our leasing other than Indeed most of our leasing has been in those categories. We're very pleased with the activity we have. Some of it is taking a little longer to get signed off on. But we're going to do well and there are other tenants in the market. There are, as of yesterday, another big tenant popped up. I'm not sure they're a CBD tenant, but Austin continues to attract companies that are not located there and the companies that are in Austin are, I would say, being cautious about taking new space, but the conversations we've had indicate that they want to bring more people to that market. So I would summarize to say we're really happy with where we are, both in terms of rents, lease-up and what we have in the pipeline.

There's slight to call, this is John, [indiscernible] is still alive and well in Austin as well. Some of the deals we've done are people that had much lower rents in older buildings. And they just decided it didn't work for their workforce. They need to step up. We've got a bunch of that in the hopper. But every time there is a bank crisis or whatever, people just say, well, let's go get some more authorities. So some of these things have been approved by senior management two or three times, and it just takes a while. It's that's a little frustrating from our standpoint, but we've got a lot of paper we're exchanging and it's - that building is amazing, and it's drawn a really great crowd. The retail or the restaurant situation there, we've come to - we haven't completed the documentation, but we've come to a deal with one of the best restaurant operators. And the other thing is like this is just amazing. It's exactly our clientele. I was - as I said, we were there last week, last Thursday and Friday and [indiscernible] I know some other stuff I can't share with you, but I think it's all -- most of it's pretty much I think, understood the number of companies that are looking to come to Austin right now is breathtaking. I mean it's breathtaking.

That's helpful. Thank you. And then just one quick follow-up question. I think on the last call, you mentioned that Indeed Tower is going to be placed into the portfolio in the fourth quarter, if I remember that correctly?

That's right.

Thank you. The next question comes from Camille Bonnel of Bank of America. Please proceed.

Curious to get your latest thoughts on the transaction market and views on pricing for office. We understand there's a lot going on in the negotiation process, but we're seeing more headlines out there about bids for assets valuing office anywhere from 20%, 50% to 80% down from pre-pandemic levels, particularly in the West Coast market. So just given that many of these transactions are still pending, I wanted to get your perspective on how much we should really be reading into this?

Well, this is John. I made it pretty clear in my comments at the various conferences and our public things that around 70%, as we calculated of the office stock in the United States is either obsolete or soon to be obsolete. And if something is trading, as I haven't heard anything trading at 80% off. But if you've got a lousy building and nobody wants it, and it's vacant, it may not be worth anything, maybe worth what the land value is less the demo costs. And so I can't really comment without specifics. In terms of the valuations being down, well, that's always going to happen when you have interest rates go up - cap rates go up and so forth. So I would say, yes, values are down. There's no -- there's not the degree of a functioning market that we'd like to see, and that won't really be there other than for high-quality stuff until the interest rates sort themselves out and availability of debt and so forth sorts itself out. Having said that, I think that if you are on the high-quality asset at the great location, whatever it's off, it's going to be off a lot less. Then if you are at the other end of the spectrum, which are -- you're not in the right location or you don't have the right quality of building or a combination of both, there's just a whole bunch of stuff that's come on the market that's -- that people have tried to put on the market, we wouldn't even look at it. It was a stinker at the best at times, and it's even worse today. There have been some assets that people have wanted to trade. I can't speak too specifically because we signed an…

I appreciate the color. And on a separate topic, it was touched on a bit earlier around the subway space you see in the market. But could you talk about what that activity is within the portfolio? And has there been any material pickup in any of your markets over the quarter?

Yes. We have - Camille, this is Rob. We have about -- and this is available sublease space in our entire portfolio. It's just under about 1.5 million square feet. And again, what we found is that the best sublease space in any market is going quickly. So for example, 350 Mission last year, Salesforce is subleasing both to Yelp and to Sephora, that space move quickly, and that's what you're going to see. Sort of tacking off what John has said earlier, when you look at a market like Seattle, 82% of the leasing that happened in Seattle in the quarter was Class A space, while the Class B space struggles. So you're just going to keep seeing that trend. And that quality sublease space will burn off quickly and then we'll be going back to more direct space that's Class A in the market over time.

One of the problems with the sublease space and that's not to say that these things are positive. I mean the reality is sublease space is a bit tricky. Let's say, a tenant has -- I don't know, 500,000 feet -- make it 100,000 feet, make it easy. 100,000 square feet of direct obligation, and they have 3 years left, 5 years left on their lease, and they have options to renew and you have a tenant comes in, you're subleasing it for 20,000 square feet, and they want options to renew. Well, the primary tenant, the sub-lessor is not going to say, well, I can give you options to renew and obligate themselves to exercise as an obligation to create an obligation to exercise their own option. So depending upon a particular building, not just the quality of it, but the structure of the lease that the primary tenant has with the landlord, it can trip people up. If it's ready-to-go space and you're looking for something for fairly short term and you can get it cheap, that's a great deal for somebody. But it's generally more complicated than that.

Thank you for the explanation and taking my question.

You're welcome.

Thank you. The next question comes from Tayo Okusanya of Credit Suisse. Please proceed.

Good morning, out there. Let me add my congratulations about your retirement, John, and I can bet we'll still be hearing much more from you going forward. My question has to do more with - my question has more to do with the occupancy guidance for the year. I'm just trying to understand what's going into that number, whether it's just the new and move out and whether there's some type of buffer in that number for kind of anything else that may be coming? And I ask that in the context of trying to understand what your watch list looks like today, just kind of given some of the incremental challenges in the tech and biotech industries right now.

Tayo, it's Elliot. So similar to what we talked about last quarter, the occupancy guidance factors in the move-outs and the move-ins that we projected and the big ones are the ones that we've talked about earlier, but Amazon, Pac-12, et cetera. We do have some move-ins. Those are weighted towards the later part of the year. So as we think about the average occupancy, so we dropped a little bit in the first quarter. We expect to drop more in the second quarter because that's when Amazon will happen. It gets a little bit steadier in the back half of the year. But as we think about the average, that's really what's driving it. And then in terms of your second question on the watch list, the majority of our watch list is still concentrated around retail tenants although we have seen a modest uptick in kind of our office and life science tenants, it still makes up a pretty small part of the overall portfolio, though.

But is there any factoring of some of dosing at terminating this year like a Sorrento example, like the stuff like that, that may be on the watch list and ultimately become a move out or stuff like that?

No. I mean we -- obviously, there's a range of outcomes, but we don't project watch list tenants leaving the portfolio.

All right. Thank you.

Thank you. The next question comes from Dylan Burzinski of Green Street. Please proceed.

Hi, guys. Thanks for taking the question. Just curious because I know face rents have been able to hold base rents over the last several years. So just given that availability rates across most of your markets are rising and leasing backdrop is likely weakening. Do you see a scenario playing out where we actually start to see pressure on face rents in 2023?

Yes. This is John speaking. I think that's a good question. I remind to be played out for sure. The concessions can change the amount of TI you put up, things like that. So net effective rents will they deteriorate that's probably likely if we continue to see this thing persist. But against that backdrop, that's also a question to how much availability is there. And so -- having gone through this for a long time in my life, I'd always say that more availability is not generally a good thing unless you're a tenant. On the other hand, we have this other factor that has become so important, which is it's all about the people of being able to track and retain the right people. It's becoming more binary. This building fits and I'll pay up for it and just building even though it's cheap, I don't want it. And that's always been a factor amongst different qualities or locations. But now it's become a much bigger factor with regard to just what people want for their student body. I mentioned in my prepared remarks that we want to be one of the three or four different buildings that are shown. If you've got 20 vacant or 20 possibilities or 50 possibilities or 100 possibilities or whatever it is in the market. People are - as Rob has mentioned in prior calls, you're not going to go to all those buildings. You're going to two or one, two or three, and you want to make sure that you've got the presence, whether it's your outside areas, your lobby areas, your common areas, if you have conference centers or gyms or things like that, you really want to present yourself well so people could see that it's a plug and play, and that's what we do really well. So we really are -- we feel that we're going to continue to do well. How it plays out on rates? I don't know. I've seen less resistance to paying higher rates in this last year or two than I had anticipated. I can't tell you if that holds.

That's helpful. Thanks. And then just maybe one bigger picture one because I think in the last several conference calls, you guys have mentioned AI as a potential positive for San Francisco leasing activity. But I guess just from looking at what the technology will be used for, right, the displacement of white collar jobs, could also be viewed as a potential risk to future office demand?

Yes. I think you're right. I think that takes a long time. And I'm not an expert in this area, I have a lot of friends that are and some of them are extremely well known in the space. And it seems to me that -- and again, I'm not an expert. I think what's going to happen is back office kind of things are going to be decimated. Anything that's mostly processed and not brain is going to be materially impacted. That's what's going to happen first. And you can get into all kinds of questions about AI, about its potential for reducing the workforce and creating a new level - a higher level of what's considered full employment - meaning higher level of unemployed, you can get in all kinds of moral discussions about it as well, which I don't want to do. But the nature of technology is it's disruptive. If you want to make money from it, you figure out how to utilize it. And if you're in the real estate business, you figure out how you present yourself as a property of choice. How big it's going to be? I don't know, but everything I hear is it's going to be huge. It's so early, how do you know.

Dylan, this is Elliot. One thing that I'd add to that is when you look at a lot of the innovation that has come from places like the Bay Area, you could argue that some of that should have displaced jobs, white-collar jobs as well. And what in turn -- what often winds up happening is it just makes it more efficient for people and allows them to innovate in different ways, right? And so if you think about AI helping somebody code or an engineer, right? That engineer can be a lot more productive. And now the realm of options or possibilities that they can innovate has grown exponentially that allows for a greater multiplier effect. So it could actually really go the other way where it helps more innovation, more company growth, et cetera.

Well, that's exactly what's happened over the last 20 years. All these technologies that came along that we're going to put everybody out of work and so forth actually went the other way and they become the biggest consumers of the space, right, and the biggest hires. If I knew the answer to that question, I'd be investing in a different area.

Thank you. There are currently no additional questions registered at this time. So I will pass the conference back over to Mr. Hutcheson for any closing remarks.

Danielle, thank you for your assistance today, and thank you, everyone, for joining us. We appreciate your continued interest in Kilroy.

And with that, we will conclude today's conference call. Thank you for participating. You may now disconnect your lines.