Kilroy Realty Corporation

Hello, and welcome to the Kilroy Realty Corporation Q1 2020 Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touchtone phone. To withdraw your question, please press star then two. Please note, today's event is being recorded. I now would like to turn the conference over to your host today, Tyler Rose. Mr. Rose, please go ahead.

Good morning, everyone. Thank you for joining us. On the call with me today are John Kilroy and several other senior members of our management team who will be available for Q&A. At the outset, I need to say that some of the information we will be discussing is forward-looking in nature. Please refer to our supplemental package for a statement regarding the forward-looking information in 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 8K with the SEC, and both are also available on our website. John will start the call with the actions we have taken to protect our employees, support our tenants, and sustain our organization through this unprecedented health pandemic. He will then review the impact COVID-19 has had on our business, markets, and development plans, and we'll wrap up with our priorities as we move through the remainder of the year. I will provide brief first quarter financial highlights, give an update on rent collections, and then review our current financial position. Then we'll be happy to take your questions. We're all calling in remotely, so bear with us if there are any delays in our responses. John?

Thanks, Tyler, and hello, everyone. Thank you for dialing in today. We appreciate that many of you are juggling a lot of personal and professional challenges right now. This is the first time I can honestly say that I've taken the load out of the washing machine five minutes minutes before a conference call. All of us at the company here hope that you and your loved ones are safe and healthy. And importantly, we want to acknowledge the men and women who are servicing the most critical elements of our society during this time. We're so grateful to everybody, medical professionals, researchers, grocers, truckers, all the rest. They're helping us stay well in shelter in place. Here at KRC, we have been in daily communication with our employees, our tenants, and our construction team since the West Coast began shutting down non-essential business activity roughly six weeks ago. Our corporate team, largely working from home, has adjusted its operating protocols to ensure that everyone, from our engineers to our board of directors, is getting the guidance and support they need to make good decisions. All of our operating properties are open and staffed with on-site property managers and security and all are following CDC recommendations for virus mitigation, including frequent high-touchpoint cleaning and daily disinfecting. To start, let me review where we stand financially and operationally. For those of you who follow our company closely, you know that we operate from a core set of business principles that emphasize financial strength, top-quality markets and assets, and strong credit tenets. We have basically built a moat around this company and came into this crisis in a strong position. We have significant liquidity, limited expirations, a young portfolio, access to multiple sources of capital, no near-term debt maturities, almost no secured debt, and a well-capitalized tenant base. Let me review this in more detail. Our balance sheet is solid. We have $1.4 billion of immediately liquid assets. This includes $1 billion of cash from the $725 million drawdown in mid-March of all our equity forward sales and $350 million from the recent issuance of private placement debt. We also have $370 million available in debt capacity under our credit facility. Further adding to our balance sheet strength, we don't have any debt maturities until 2023, excluding our credit facility, which matures in the third quarter of 2022. Our stabilized portfolio was in excellent shape heading into this crisis and remained at 97 percent leased at the end of March. We have only 5 percent of our leases rolling annually over the next three years, and our average lease term is approximately seven years. Having said that, we are seeing some stress in primarily non-office revenue streams, which I'll discuss in a moment. Our 2 billion of projects under construction, including the three projects now in the tenant improvement phase, have been effectively de-risked and fully funded. The Office of Life Science component of these projects is 90 percent leased to large technology, media, and life science companies. The projects have a total remaining construction spend of approximately $2,725 million that is fully funded with the liquidity I discussed above. The properties are located in the submarkets of Seattle, South San Francisco, Los Angeles, and San Diego, and all remain under construction. Our relationship with large, stable, innovation-focused customers are proving to be an advantage. Our pro forma top 15 tenants account for approximately 50% of our annual revenues. They are, for the most part, publicly traded and investment-grade rated. These leases have an average term of longer than 10 years with average annual rent escalators of 3%. Some of our top tenants are even in the business of making stay-at-home life a little bit easier, including DoorDash, Apple, Amazon, and Netflix. While we are in solid shape financially and operationally, the most immediate impact to our business is largely in the non-office components of our company, including retail, co-working, transient parking, and residential. While none of them by themselves is that material, the impact from some may stay with us longer than others. Our exposure to retail is approximately 3 percent of our revenues, and most of that is concentrated in a handful of properties, most notably One Paseo in San Diego. As of now, we have established a program with approximately 90 percent of our retail tenants that provides them with two months of rent relief and gets added on to an extended term. Our co-working exposure is approximately 1.8 percent of our revenues, with most of it in one very high-quality property in Hollywood. Tyler will discuss this component further in his remarks. We also have transient parking that makes up approximately 2% of our revenues. We estimate that this revenue stream, which includes daily, short-term, and event parking, will be impacted while the stay-at-home orders are in place, but will ramp back up as people come back to work. Lastly, leasing activity has quieted in our residential portfolio, which makes up approximately 2% of our revenues. Before the crisis hit, Columbia Square was 95% occupied. The first phase of Juan Paseo was already 70% leased, and the second phase reached over 15% leased just a few weeks after opening. We have implemented a virtual tour and leasing program, and we have made some success, but until the stay-at-home orders are lifted, we expect the pace of leasing and move-ins to be slow. Notwithstanding the stress we're seeing in our non-office components, we're still making some leasing progress throughout the portfolio. Just in the last two weeks, we've signed two leases and are close on a third that total approximately 123,000 square feet. They include a lease with a life science company in San Diego, a lease with a gaming company in Los Angeles, and in Seattle, we are in advanced negotiations with a major technology company. Given the unprecedented challenges we are working through, it is difficult to give a roadmap today for the next six to 12 months. And while we have always endeavored to provide clarity, this is not one of those times where we can. However, here are four key areas in which we will be laser focused as we may move through this crisis. First, we will continue with our conservative approach to balance sheet management. We are focused on maintaining a strong profile with low leverage and diversified access to capital. This includes continuing the effort to complete 150 to 300 million of dispositions, which was the guidance range we had communicated on our last call. Before the crisis began, we were making good progress on two of the dispositions. However, given the current environment where lenders are unable to appraise and buyers unable to tour, we'll have to take a wait and see. approach. Second, we are highly focused on completing our $2 billion of under construction development. We are in the fortunate position of having largely secured construction materials and are now in the tenant improvement phase in several projects. We will continue to stay close to the construction ordinances across the various jurisdictions to ensure our projects are moving ahead safely and as close to on time as possible. Third, our leasing teams are unwavering in their efforts to lease up vacant and expiring space. While new tenant tours are on hold, we continue to see progress with existing tenants for renewals and expansions. We have not seen a material retrading of economic terms across the office and life science transactions and expect those sectors to see continued growth. And as we've previously reported, we only have one expiration over 100,000 square feet this year That's the 130-some-odd thousand square foot lease, our Long Beach property, where we are in discussions to lease a significant portion of that space to a credit tenant. Fourth, we are looking ahead. Well, at this point, demand patterns for real estate sectors are unpredictable. In our discussions with our Office of Life Science customers, it is clear there will be a flight to quality. They will focus on buildings that are sustainable, have modern systems, and that can accommodate the changing protocols that companies are implementing. As you've seen over many years, we have been leaders in the functionality of space. We were one of the first to embrace sustainability, and most recently, we began focusing on fit well and well buildings. All of this, we think, differentiates us from many of our peers, and we are now taking the lead in creating best practices for the future. We have already brought a hygienist on board. We are rethinking how people enter a building and what they touch. We are evaluating how to manage elevator occupancy levels. We are studying ways to improve filtration systems. And we are working on new policies and procedures that emphasize personal space and adhere to social distancing guidelines. A lot more of this to come. To wrap up, I want to make the point that our employees have done a phenomenal job in responding to rapidly changing circumstances. One of the few pleasures of this crisis for me has been to witness how effectively they have adapted on the fly and the level of commitment and concern they have shown for our tenants, our business partners, and one another. That's the picture of where we stand today at KRC. We believe that our organization and our people are well prepared to focus through this crisis. and that our company is well positioned to move ahead. That completes my remarks. Now I'll turn the call over to Tyler. Tyler?