Kilroy Realty Corporation

Good afternoon and welcome to the third quarter of 2020 QROI Realty Corporation 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 telephone keypad. To withdraw your question, please press Start and 2. Please note this event is being recorded. I would now like to turn the conference over to Tyler Rose, Executive Vice President in CFO. Please, Tyler, go ahead.

Good morning, everyone. Thank you for joining us. On the call with me today are John Kilroy and several other 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 third quarter highlights and an update on our market conditions. I will discuss third quarter financial results. Then we'll be happy to take your questions. John?

Hey, thanks, Tyler. And hello, everyone. Thank you for joining us today. This is our third call during the COVID period. I don't think any of us thought at the outset that we would still be in the pandemic at this point. But having said that, we continue to perform well and remain optimistic about the future. Here at KRC, we remain focused on several key areas that position us well to play both defense and offense over the coming months and years. These include maintaining a strong financial foundation, proactively managing lease expirations in our stabilized portfolio, executing our under construction development projects, positioning our future development for starts, working with governmental agencies to influence policy as much as possible, and preparing for a post COVID future, which includes continuously enhancing the quality of our portfolio from a sustainability and wellness perspective. While we believe we are doing well in all these areas, we also continue to do well both financially and operationally. Here are our third quarter highlights. We ended the quarter with $1.4 billion of liquidity. This includes the successful completion of $425 million green bond offering in August. Our under construction development is now fully funded with cash on hand. Our high quality tenant profile continues to demonstrate its value. Overall rent collection in the third quarter exceeded 96%, with office and life science rent collection north of 98%. These strong rent collection levels have remained consistent across the seven months of the pandemic, as our well-capitalized technology and life science tenant base continues to outperform. We continue to make progress in addressing our near-term lease expirations, signing renewal leases in our stabilized portfolio during the quarter, on approximately 115,000 square feet. While leasing volumes were light, rental rates on these leases were up 15% on a cash basis and 34% on a gap basis. Our average annual lease expirations through 2023 now stand at approximately 6.5%. With the exception of a fourth quarter expiration this year, we do not have any expirations greater than 60,000 square feet through the end of 2021. New leasing activity continues to be impacted by shelter-in-place regulations that make it difficult to tour. In development, our $1.9 billion of construction project remains on track with the expected delivery of the Netflix on Vine office project in the fourth quarter. When stabilized, the pipeline is expected to generate $140 million of annualized cash net operating income. That's an update on the quarter. Moving forward, while it's still early days in understanding the pandemic's lasting impact, we do see some important themes developing. These include the physical makeup of commercial workspace in the industries that drive its use. The first theme is life science. It's not a secret that the life science industry has positively impacted by COVID, and we believe it will continue to benefit for the foreseeable future. B.C. investment in life science has been averaging $20 billion annually for the past five years. Healthcare expenditures have risen to approximately 20% of the annual GDP as our nation's population ages, and the FDA has become increasingly proactive in driving new drug development. The pandemic is moving more private and public investment into the sector and encouraging the creation of a range of new start-ups. We believe they will want to locate their labs and their talent in current life science clusters. Looking at the West Coast markets we serve, current square footage dedicated to life science use totals about 20 million square feet, with direct vacancy rates that range from 2% to 3%. We estimate current demand in these markets at approximately 5.5 million square feet. We've been building the capabilities to serve this market for more than two decades, and are well positioned to continue to capitalize on opportunities. Today, our pro forma life science footprint, which includes existing properties, life science capable assets, and entitled life science development, totals approximately 5 million square feet. We have the third largest portfolio of life science and healthcare tenants among publicly traded REITs as a percentage of total base rent. Several life science tenants within the KRC portfolio continue to do quite well, including Neurocrin, our largest San Diego tenant that last quarter had two medicines approved by the FDA, and LabCorp, a South San Francisco tenant that reported strong earnings last quarter driven by increased COVID-19 testing volume. We believe our life science portfolio deserves more appreciation than as it is essentially fully leased to strong tenants such as Acadia, Stanford University, 23andMe, and so forth. Recent market activity highlights our portfolio's embedded value. In addition to the strong valuation of the Biomed recapitalization, the sale of the Genesis buildings located on the west side of the non-traditional side of the 101 freeway in South San Francisco for approximately $1,275 per square foot is a great comp for the Kilroy Oyster Point, particularly given that these buildings are not as ideally located or as modern. KOP is our 39-acre, 2.5 million square foot life science development project in South San Francisco. We are in construction on phase one, a 650,000 square foot project that is 100% leased and built with state-of-the-art life science infrastructure. It will have a total basis of approximately $865 per square foot and is clearly worth substantially more today. KOP Phase 2 through 4 are fully entitled for another 2 million square feet of lab space and office space. We currently are seeing strong interest in KOP Phase 2 from a variety of tenants and are looking carefully at the possibility of a Phase 2 start sometime next year. To quantify, Phase 2 is approximately 900,000 square feet, and we have considerably more interest with active discussions than we do square footage. The second theme is wellness. We've been in constant contact with our tenant base since the pandemic began. The leaders of these entities are focused on physical design, space adaptability, environmental health, safety and comfort, and increasing square footage per person. While some of these concerns are driven by short-term needs, we believe that workspace wellness is an issue that is here to stay. We will see a large premium place in office properties that can provide larger, more light-filled floor plates, greater flexibility in the layout, traffic flow, and use of interior spaces, stronger integration of workspace with the outdoor world and nature, and top-quality, state-of-the-art operating systems that not only protect but enhance employees' health. Tennis will want to partner with well-capitalized landlords who are willing and able to invest in both innovative design and advanced infrastructure in their development. We believe these trends will give KRC a big competitive advantage in our markets. Our existing portfolio is among the youngest and best designed to meet these needs. We have been a leader in understanding and adopting design practices and systems that enhance the wellness of our buildings occupants and we now have the highest number of fit well certified properties of any company in the world we have deep experience in pursuing new development concepts that integrate the best most innovative thinking and sustainability and wellness we believe that these attributes make here see a top partner of choice going forward let me wrap up with a few additional thoughts on today's markets and what may lie ahead Amidst all the uncertainty in 2020, it remains clear that technology, media, and life science will still be the growth engine of our economy. Many companies in these industries continue to thrive in what is an otherwise challenging time, and the biggest concentration of these sectors is on the West Coast and in our markets. We remain confident that the cluster of intellectual capital, top-notch universities, and a good quality of life found in our markets is tough to replicate, and a differentiating factor for Kilroy. I don't have a crystal ball, but from a continued discussion with our customers, I'm fairly confident that companies, both large and small, established in startups, are going to want to bring their people together in communal workspaces when the pandemic has passed. Having been through a few cycles, I cannot stress enough the importance of leadership teams during down cycles for companies, as well as municipalities. Well, in good times, a rising tide lifts all boats. Markets like these are best suited for those with high conviction, a track record of success, and the ability to adapt. Last cycle, we believe we differentiated ourselves from the competition through our entry into San Francisco and Seattle, and we look forward to the challenge of differentiating ourselves again in this cycle, and I'm confident we will. And we've never been better positioned. Our stabilized portfolio is young, modern, sustainable, and leads the world in wellness. Our explorations 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 a very attractive basis. And our balance sheet is solid with significant liquidity, low leverage, and no near-term maturities. Now I'm going to turn the call back to Tyler. Tyler?