Kilroy Realty Corporation

Good afternoon, everyone, and welcome to the Q4 2020 Kilroy Realty Corporation Earnings Conference Call. All participants will be in a listen-only mode. Should you need assistance, please say no to 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 and then one. To withdraw your questions, you may press star and two. Please also note that today's event is being recorded. At this time, I'd like to turn the comments call over to Michelle Ngo, TFO. Ma'am, please go ahead.

Thank you. Good morning, everyone. Thank you for joining us. On the call with me today are John Kilroy, Tyler Rose, Rob Peratt, and Elliot Trencher. 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 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 8K with the SEC, and both are also available on our website. John will start the call with a review of 2020 business conditions in our markets, and our objectives for 2021. I will discuss fourth quarter financial results and provide you with an earnings roadmap for this year. 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?

Thanks, Michelle, and welcome to your first call as our new CFO. Congratulations. Hello, everybody. Thank you for joining us today. I hope everyone is safe and healthy and has a brighter outlook for 2021. Let me start with a few comments about 2020. We entered the year in a very strong position. Leasing activity was solid, rents were increasing, tenants were expanding, and we had expectations of another record year. And while the pandemic upended our lives in the markets, we think our 2020 performance was very strong, all things considered. We moved swiftly to further strengthen our balance sheet. We worked with our tenants and workforce to adopt healthy and safety protocols. We executed our current development program largely on schedule and on budget. We delivered solid financial results and raised our dividends. and we achieved carbon neutral operations, a key pillar of our ESG program. Now in month two of 2021, we are seeing a number of signs of renewed positivity, which we will balance with discipline as we continue to differentiate KRC as best in class and a market leader within our industry. Let me review where we stand today. We have a solid balance sheet. We ended the fourth quarter with liquidity of approximately $1.5 billion and net debt to EBITDA of 5.8 times. Our under construction development remains largely leased and fully funded with cash on hand. We have a world-class tenant base supporting our stabilized portfolio results. Our average portfolio-wide rent collection across 2020 exceeded 97%, with office and life science rent collection at 99%. Many of our tech, media, and life science tenants, including some of the largest and most successful companies in the world, continued to grow last year and remain stronger than ever. Our lease expirations are limited. They average 6.3% per year through 2025, and our portfolio is 94.3% leased. Despite shelter-in-place restrictions, we signed more than 730,000 square feet of new or renewal leases in 2020, with strong average rental rates that were up 37% on a gap basis and 18% on a cash basis. Our development projects under construction are delivering substantial cash flow and value. We completed core and shell construction on $1.3 billion of office space and 371 residential units in 2020, including the fourth quarter completion of our $300 million Netflix on Vine project. By year-end 2021, we expect to complete an additional $770 million of office and life science space and 193 residential units. At that point, our development program, excluding 2100 Kettner, will be generating an estimated $140 million of annualized cash NOI. And our approximately $2 billion investment in these projects is expected to yield more than 7.5% on a cash ROC basis across office and life science. Based on market cap rates, we think we've created significant value. Our future development pipeline is diversified by market, by product, by start schedule, and even by industry, and it has an attractive basis. Our pipeline of projects aggregating approximately 6 million square feet, of which approximately 40% is life science. spans the most innovation-driven and attractive submarkets along the West Coast, including Seattle, San Francisco, South San Francisco, Los Angeles, and San Diego. We continue to make great progress on entitlements, positioning these projects for future starts when conditions make sense. Of particular note, we are fully entitled for an additional 2 million square feet of Kilroy Oyster Point in the city of South San Francisco, and continue to see strong interest from potential tenants. A phase two start this year is a strong possibility based on our ongoing discussions with multiple prospective tenants. Phase two totals approximately 900,000 square feet across three buildings and can be developed in phases. The incremental investment for phase two would be approximately $750 million with an estimated spend of approximately $275 million through the end of 2022. We remain committed to a prudent capital recycling program as integral part of our core business strategy. We completed 76 million of dispositions in the fourth quarter and realized a gain of approximately 36 million. Despite the issues created by the pandemic, We increased our dividend for the fifth year in a row, bringing the cumulative five-year increase to over 40%. We were one of only two office REITs to increase its dividend last year. Lastly, we continue to build on our strong leadership role in ESG. We achieved carbon neutral operations last year, multiple decades ahead of both California and federal standards. and continue to advance our leadership in the design and development of sustainable and healthy workplaces. We've been recognized year after year by many industry groups across the world, including GRESB, which has ranked us leading office developer globally and leading office company in the Americas across all asset classes for the past seven years. We have won the EPA's highest honor of Energy Star Partner of the Year. a Sustained Excellence Award for the past five years and an A-Reach Leader in the Light Award for the past seven years. We are included in the Dow Jones Sustainability World Index and the Bloomberg Gender Equality Index. And we have the largest FitWell portfolio in the world among non-government organizations. While we are proud of our accomplishments, we will continue to look for new and better ways to foster a diverse and inclusive work environment engage our communities, and minimize the environmental impact. Switching gears, I'd like to comment on the current business environment and the implications on our company and strategy. First, we believe companies and employees want to return to work. Rob's going to talk about this further in our report. Based on our discussions with tenants, companies are focused on bringing their employees back together in productive, common workspaces where they can collaborate in person. In the short term, companies will adjust their space to address heightened health and safety concerns. They'll exert more active control over workspace access and layout. They'll have heightened expectations about the quality of ventilation systems. They'll seek ways to give their employees more access to natural light, fresh air, and personal space. Longer term, we expect these tenant preferences will get incorporated into the commercial real estate landscape. and will help reshape property design standards for operational systems and management practices. For the largest and most influential tenants, generic office space is a non-starter. They'll require environments tailored to their specific needs. These trends all favor our young and modern portfolio, our development experience, our track record of partnership with innovative and creative companies, and our demonstrated ability to adapt. Second, the economic demand drivers continue to be technology, media, and life science companies, most of whom remain headquartered in or committed to the West Coast. Public market returns and VC funding for tech, healthcare, and biotech have surpassed other industries by more than two times over the past decade. Further, they have demonstrated the range and depth of their value throughout the pandemic, and they derive huge benefits from clustering in locations that support their constant need for talent, capital, and exposure to new ideas. These industry clusters are in the West Coast markets. The pandemic experience brought new thinking about how and where people can work. Companies may be more willing to experiment with diversifying their workspace location and densities, but the speed, scale, and growth for these innovation-driven industries will drive strong demand for workspace in multiple competing markets. We believe the West Coast with its intellectual capital, world-class universities and research institutions and unique quality of life will continue to win that competition. Specifically, we believe life science industry represents a huge opportunity for our company. The pandemic has highlighted how critically important medical innovation is to our economy and to our health. The attention is now driving big increases in private and public investment The growing demand for quality lab and workspaces in preferred West Coast life science submarkets has driven vacancy rates to 2% or lower. We've been building the capabilities to serve life science tenants for more than two decades, and we are now in a strong position to capitalize on additional opportunities. We currently have the third largest portfolio of life science and health care tenants among publicly traded REITs, approximately 14% of our total base rent. In pro forma for the development of the entirety of KOP, our life science and healthcare tenant base will roughly double in size. Third, from a political landscape, most state and local governments on the West Coast remain focused on managing the negative impact of the coronavirus. As the virus is controlled, we expect them to move quickly to restore the economic health and the highly valued quality of life of their major urban centers. We plan to take an active role in that work. We fought hard along with others to stop the destructive economic impact of Proposition 15 here in California. We will be just as active going forward in supporting business-friendly initiatives for civic recovery and pushing back against destructive ones. Lastly, having operated through multiple cycles, we believe we are uniquely qualified to navigate through this downturn given our track record of unlocking value and our ability to adapt. Last cycle, we believe we set ourselves apart from the competition through our entry into the San Francisco and Seattle markets, where we recognized early on tenants' preferences for inspiring and collaborative workplaces as strong growth drivers of office demand. Then in 2018, we were deliberate in increasing our life science footprint in a meaningful way with the acquisition of Kilroy Oyster Point land, We are focused on differentiating ourselves again this cycle, bolstered by a strong balance sheet, an experienced team, and a high-quality portfolio. Let me close with our five key objectives for 2021. One, maintaining a strong financial foundation with sufficient liquidity that allows us to play defense and offense. maximizing the value in our operating portfolio through proactively managing lease expirations and boosting sustainability and wellness profiles. Three, completing and leasing our remaining under construction development projects and preparing for new development starts as they make sense, including KOP phase two. Four, staying agile and continuing to evaluate our capital allocation opportunities and strategies, and fifth and final, working with government agencies to positively influence public policy. All of us here at KRC are energized. We're ready to tackle this new year. We appreciate the many challenges and uncertainties that lie ahead of us. It will likely be a tough transitional period, but we have never been better positioned to take on the year's challenges and opportunities. We're financially strong, operationally sound, and prepared to act decisively as events unfold. That completes my remarks. Now I'll turn the call over to Michelle. Michelle?