Kilroy Realty Corporation

Good day, and welcome to the second quarter 2020 Kilroy Realty Corporation earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a comfort specialist by pressing star then zero on your telephone keypad. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note, this event is being recorded. I would now like to turn the conference over to Tyler Rose, Executive Vice President and Chief Executive Officer. 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 a look at our industry and markets and then highlight second quarter activities and our priorities as we move through the second half of the year. I will review second quarter financial results, give an update on rent collections, and then review our current financial position. Then we'll be happy to take your questions. We are once again calling in from different locations, so bear with us if there are any delays in our responses. John?

Thank you, John. Thanks, everyone, for joining us. We hope you are doing well in this extraordinary circumstances that we find ourselves today. It's always not easy to navigate. I've had to tell all my children, please disappear. Daddy's got a phone call right now. I'm sure many of you have to do the same. Here at KRC, we remain vigilant in guiding our organization through the current crisis and positioning it to outperform in the future. We are working from a strong foundation. Financially, we have $1.3 billion of liquidity, no near-term debt maturities, and a well-capitalized tenant base. Our development projects are 90% leased and fully funded. Operationally, we have a well-designed, highly sustainable, and young portfolio, and we continue to make great progress on reducing our exposure to lease expirations. We've reduced our average annual expirations through 2022 to 4%, or approximately 575,000 square feet, which compares to 6% at the beginning of the year and 5% as of last quarter. We've received a lot of questions in recent months about how the pandemic could affect our industry, our markets, and our company. So before I get into second quarter highlights, let me share some observations and thoughts. We are in constant contact with our tenant base up and down the coast, and they are focused on reestablishing their work environment and getting back to the office while at the same time protecting the safety of their employees. The next 12 months is likely to be a transition period. There's likely to be trial and error, experimentation, and stops and starts as the pandemic runs its course. As businesses gain experience with what works best for them, the results could have some implications for our industry. For example, tenants will evaluate the quality of the physical workplace more than ever, with a particular focus on the ability to control their space, including lobbies, common areas, and elevators to minimize physical interaction with outsiders and enhance security. Buildings with fewer stories to minimize elevator usage. Larger spaces with bigger floor plates, higher ceilings, and larger common areas to accommodate social distancing. More flexible spaces that allow for greater creativity in how interior office space is laid out and how traffic flow is directed. healthier spaces, including better HVAC systems, more natural light and fresh air with increased access to roof decks and other outdoor spaces, and well-capitalized landlords, those willing to invest in people or infrastructure in their buildings in order to ensure a safe environment for all tenants. While some of these considerations are driven by short-term needs, it is our view that they have become industry norms continuing a flight to newer, higher-quality properties and accelerating the obsolescence of older buildings. We believe these trends not only distinguish our portfolio from our peers, but further validate our development strategy and our commitment to sustainability and wellness. Specifically, we have one of the youngest portfolios on the West Coast with an average age of 10 years. Forty-three percent of our portfolio is FITWELL certified, the highest certification of any company in the world. Eighty-five percent of our portfolio consists of low and mid-rise buildings. More than 90 percent of our buildings have large floor plates, allowing tenants greater flexibility for configuration. And approximately 90 percent of our portfolio offers rooftop decks and other outdoor common areas. Another topic of discussion in this transition period is how prevalent work from home will become. It is still early, but our view is that workplace flexibility will become more common, and it will be in conjunction with the office, not replace the office. We're seeing tenant study decrease density levels in the workspaces and consider additional kitchens, dining, and common areas that require more space. From a broader perspective, the office as we know it has been around as long as the modern corporation. And the role it plays in uniting a workforce around a common set of goals is as essential as ever. And while offices have evolved as organizational needs have changed, the successful corporate cultures that are in place today underscore the importance of communal workspaces and physical proximity. All of the most essential attributes of today's highly successful companies Effective collaboration, continued innovation, higher productivity benefit greatly from personal human interaction. A third question arising amid the crisis is how various real estate markets will perform. We believe that our West Coast markets are among the most attractive in the world amidst all the uncertainty of the last several months. One thing that has become clear is the strength and resiliency of the technology, media, and life science companies that drive our markets. These companies continue to grow their revenue, are well capitalized, and are positioned for growth. The NASDAQ is near an all-time high, the IPO market is open, and the M&A has resumed with Amazon and Uber announcing high-profile deals in recent months. These key industries are concentrated in our markets, are hard to duplicate in other areas of the country, and their success will help drive broader market recoveries. A recent Bloomberg analysis of the nation's 100 largest metro areas came to a similar conclusion. San Francisco, Silicon Valley, and Seattle all ranked among the top five regions best positioned for a relatively quick and strong recovery from the coronavirus recession. This strength is visible in our current tenant roster. Three-quarters of our annual rental revenue comes from technology, life science, and media companies. Most of them are publicly traded and investment grade rated. All of them rank among the world's most innovative and successful businesses, and their collective presence is constantly attracting more innovation-driven firms, building a deep reservoir of ideas and talent that is very difficult to replicate. Now moving to our second quarter highlights. Overall, rent collection remains strong across the quarter and into July. The average second quarter rent collection rate for all of our properties was 95% and a strong 98% for office and life science. And July's collection rate was also 95% across the portfolio and 97% for office and life science. Tyra will give a complete update in his remarks on these trends. We executed 286,000 square feet of leases in our stabilized portfolio. Approximately three quarters were renewals at rental rates that were up 11% on a cash basis. and 30 percent on a gap basis. This included two larger renewals, one in San Diego for 119,000 square feet and one in the Bay Area for 37,000 square feet. With the exception of an expiring Long Beach lease in the fourth quarter of this year, we have no expiration larger than 65,000 square feet until 2022. At the end of June, our stabilized portfolio was 96 percent leased. We continue to execute on our $2 billion of construction projects. The total remaining construction spent across this pipeline is fully funded with existing liquidity and the office and life science components of these projects are 90% leased. When stabilized over the next two years, the six projects will generate aggregate annualized cash net operating income of approximately $145 million. I want to give a shout out to our development team at last As last month, the National Association for Industrial and Office Parks, NAOP, selected KRC as its 2020 Developer of the Year. This is the association's highest honor and a significant acknowledgement of our company's ongoing efforts to lead through innovation. On the disposition front, we selected a few smaller assets earlier in the year to dispose of during the course of the year. We're unable to say exactly when these will take place because tours and lenders and things like that are unable to, in fact, come see the buildings given the restrictions. To wrap up, let me reiterate a few points. Leasing activity has picked up a bit from March-April lows, and we have not seen a material impact, if any, on economics. The company has never been better positioned to be both defensive as well as offensive Our stabilized portfolio is young, modern, sustainable, and leads the world in wellness. Our expirations are limited. Our tenant base is largely healthy, well-capitalized, and poised for further growth. Our under-construction development projects are fully funded and 90% leased. Our future development pipeline is diversified across product types as well as markets and has an attractive basis. And our balance sheet is solved with significant liquidity, low leverage, and no near-term debt maturities. Lastly, I want to recognize the entire Kilroy team who continue to do a phenomenal job, whether it's working with our tenant partners, with the communities in which we operate, or on internal corporate functions. Thank you all. Now I'll turn the call back to Tyler. Tyler?