Kilroy Realty Corporation

Good day, and welcome to the Kilroy Realty Corporation first quarter 2021 earnings conference call. All participants will be in a 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 this event is being recorded. I would now like to turn the conference over to Michelle Ngo, Chief Financial Officer. Please go ahead, ma'am.

Thank you. Good morning, everyone. Thank you for joining us. On the call with me today are John Kilroy, Tyler Rose, Rob Prott, 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 the 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 the quarter and business conditions in our markets. I will discuss first quarter financial results and provide you with earnings guidance for the second quarter. Then we'll be happy to take your questions. John?

Thank you, Michelle. Hello, everybody. Thank you for joining us today. We're pleased to see optimism beginning to take hold in the economy as economists are forecasting strength in corporate earnings, housing, and job growth. And global growth is rebounding more quickly than expected. These indicators all bode well for real estate, and we are increasingly positive on tenant demand. While we understand there will be headwinds ahead, it appears we have turned the corner. We've seen the frequency of property tours significantly increase across all our markets. In San Francisco, for example, brokers are reporting tour activity approaching pre-pandemic levels, with Seattle, San Diego, and Los Angeles reporting similar increases. Further, new requirements are starting to appear more regularly with tenants looking to renew their leases, expand their workforce, and upgrade inferior work environments for modern buildings and superior space. In our portfolio, we signed more than 200,000 square feet of leases in the first quarter compared to 61,000 square feet last quarter, and we are beginning to see traction on 2100 Kettner in San Diego. High-quality, well-located assets in our markets continue to command strong valuations, in many cases with record pricing. And with respect to life science, demand in the San Francisco Bay Area and San Diego is very robust. The combined trends of the flight to newer, higher-quality properties and the acceleration of obsolescence of older buildings work in our favor. They validate our development strategy and our commitment to sustainability and wellness. And we are increasingly hearing from companies that they are advancing return to office plans. Google, Amazon, Facebook, Microsoft, and Netflix are among the many technology and media companies that are moving their entry timelines forward. With that overview, let's take a closer look at three key objectives that underpin our past, present, and future success. First, we continue to focus on a disciplined and thoughtful approach to capital allocation. Looking back, we completed more than $12 billion in transactions over the past decade that have fundamentally reshaped our portfolio, diversified our market footprint, and produced one of the most valuable development pipelines in the country. And last month's sale of the exchange is another milestone in these efforts. We acquired the land site for $95 million in 2014, invested an additional $490 million to develop the 750,000-square-foot property and leased it to Dropbox while under construction for a 15-year term in 2017. We completed the sale of the property late last month for $1.1 billion, or $1,440 per square foot, nearly doubling our total investment. It was a record price for commercial real estate in San Francisco. We chose to sell the exchange because it monetized the full value of an asset with limited options for us to add incremental value. It also provided us with substantial capital for new investment. And I'd like to point out that the transaction also demonstrates the significant disconnect between public and private market valuations. The second objective is the strategic expansion of our life science portfolio, primarily focused, at least for the near term, on entitled land that we already own. The forces currently driving growth in the life science market are substantial, but effective capital deployment in the sector at this point requires caution and discipline. We continue to see properties marketed and acquired for life science that we believe will not be successful. With the expertise we have built in the sector and the pipeline of land sites we have accumulated in several of the best-sell markets, we believe we are well positioned for a new round of significant value creation. Later this quarter, We plan to commence construction on the second phase of our roughly 50-acre, 3 million square foot Kilroy Oyster Point Life Science Campus in South San Francisco. Phase two will include 900,000 square feet of space across three buildings and will represent a projected total investment of $900 million. Approximately $150 million has already been invested in land and infrastructure. We believe we are ideally positioned with the Phase 2 and are already in negotiations with several prospective tenants. In addition to KOP Phase 2, we are also planning three new life science projects in San Diego on properties we own. Santa Fe Summit on the 56th Corridor and two others in the UTC Submarket. At Santa Fe Summit, we have full entitlements to build approximately 650,000 square feet of life science products And in the heart of UTC, we plan to develop a 60,000 square foot property at 9514 Town Center Drive, as well as redevelop 4690 Executive Drive, a nearby 50,000 square foot building, when its existing lease expires in 2022. And like KOP Phase 2, we are in negotiations on all three properties in San Diego. In the aggregate, These four projects will add approximately 1.7 million square feet to our current life science portfolio. In the longer term, Phases 3, 4, and 5 at Kilroy Oyster Point will expand our life science portfolio by an additional 1.8 million square feet. Adding this all up, we have a future life science development pipeline fully entitled for close to 3.5 million square feet. When completed and fully leased, it would increase our revenues from life science and healthcare tenants from 14% to more than 30%, all else being equal. We will have assembled a best-in-class life science portfolio of approximately 5 million square feet with an average age of three years in the best locations. A third objective is our commitment to build a portfolio and a company that leads in wellness and sustainability. and meets the highest expectations for diversity, equity, and inclusion. As most of you know, this has been a passion of ours for some time. We are the industry leader in every measurable category of sustainable property and company operations, culminating last year in the achievement of carbon neutral operations. We are making substantial progress in enhancing the health and wellness profiles of our stabilized portfolio and we now have the most certified FitWell projects underway of any non-government property owner. Across our company, we continue to prioritize a number of human capital management initiatives, including diversity in hiring, career development, and strong team building and mentoring. We are dedicated to these actions because they benefit our tenants, our communities, and importantly, our shareholders. They make our properties more attractive and more durable and They make our enterprise smarter, better managed, and a more rewarding place in which to work. I'm always proud to note the many accolades and awards we receive each year for our efforts in these areas. To wrap up, let me reiterate a few points. One, demand for quality space in our markets is increasing, both from a leasing perspective as well as an investment perspective, highlighting the embedded value across our portfolio. Two, we have been successful with our capital allocation program, which focuses on assembling a young, modern, well, and sustainable portfolio located in strong growth markets. And lastly, we are well-positioned to monetize entitled life science sites that we already own through our development program. This provides us with a clear advantage to develop best-in-class product with superior returns. That completes my remarks. Now I'll turn the call over to Michelle. Michelle?