Kilroy Realty Corporation

Good day and welcome to the third quarter 2021 Kilroy Realty Corporation earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference 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 Michelle Ngo, Senior Vice President, Chief Financial Officer, and Treasurer. Please go ahead.

Good morning, everyone. Thank you for joining us. On the call with me today are John Kilroy, Tyler Rose, Rob Perot, 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 an update on our market conditions and review our operational and strategic activities. I will discuss third quarter financial results and provide you with updated earnings guidance for 2021. Then we'll be happy to take your questions. John?

Thanks, Michelle. Hello, everybody. Thank you for joining us today. I'll start with some macroeconomic comments before getting into our leasing and capital allocation. It's been just over a year and a half since the pandemic began, and we are really starting to see the revitalization of cities across the West Coast. City dwellers are returning to their urban apartments and once again embracing city life. After a tough 2020, residential net absorption is approaching 100,000 units in our five markets, driven in large part by high density areas like Hollywood, South Market, downtown Seattle, and downtown Austin. Restaurants, bars, coffee houses are full, concerts and sporting events have returned, and slowly but surely more companies are coming back to the office. The recent easing of the San Francisco mask mandate is another step in the right direction that we believe will continue to encourage more in-person gatherings and collaborations. The technology and life science companies that make up so much of our portfolio continue to thrive. Stock prices are near all-time highs and VC fundraising is on track for a record year, which is translating into a war for talent, growth in job postings, and additional real estate procurement. Improving market conditions help to drive a strong and productive leasing quarter for Kilroy. We signed more leases in the third quarter than the first two quarters of 2021 combined. Since the second quarter, we have signed just under 600,000 square feet of development, new and renewal leases. For the 510,000 square feet in the stabilized portfolio that were signed, gap rents were up on average 26% and cash rents were up 14%. Additionally, we have a number of leases under documentation. And in Austin, we're very encouraged with the market and our early stage lease negotiations. A few facts according to recent reports about Austin. There are 185 people moving to Austin on average each day. And interest among companies wanting to move to Austin and those that want to expand in Austin is above pre-pandemic levels. Let's look at some of these transactions. In the office sector, we signed a long-term 71,000 square foot lease in the UTC submarket of San Diego. The lease is for a new development project, which we commenced construction on just last month. So now it's 100% leased just a month after starting construction. The competition between technology tenants and life science tenants remains healthy. Both sectors continue to grow and seek more modern, efficient work environments. In life science, the third quarter was particularly active for us. we signed three leases totaling 330,000 square feet of headquarters space with publicly traded companies in San Diego, including Tandem Diabetes Care, DermTech, and Sorrento Therapeutics. The mark-to-market rent increases on these three leases were approximately 45%, with an average term of approximately 12 years. In residential, we now have fully leased all 608 units of our One Paseo project at rent levels that have increased 25% since the beginning of the year. Jardine, our Hollywood luxury tower that was completed last quarter, is now more than 60% leased, well ahead of projections. With respect to leasing, I'd like to highlight the following trends, which we feel bode well for the future of our enterprise. Sentiment amongst corporate real estate executives is more positive than it has been the past 18 months. We're experiencing significantly more tours and requests for proposals within our portfolio. This is both for existing and development projects. Rental rates in strategically located modern buildings are on the rise as the result of tenants seeking the best space in the market. Vibrant and distinctive office, curated retail, and residential experiences are drawing a talented labor force back to metropolitan areas. Moving to our capital allocation activities, we made two significant announcements during the quarter. First, in September, we completed the off-market acquisition of West 8th in the Denny Regrade sub-market of Seattle for $490 million. West 8th is a 539,000 square foot LEED Platinum office tower situated on a full city block, just steps from Amazon's 5 million square foot headquarters campus. We like the opportunity for a number of reasons. The location is terrific, with unmatched transit access and proximity to numerous retail amenities. Rents continue to increase in this submarket, and we see significant rental upside. And given the quality and condition of the building, we expect limited capital investment in any releasing scenario. Year to date, this brings our total acquisitions to $1.2 billion, which have been funded by our $1.1 billion dispositions. The second announcement relates to our continued allocation of capital to our life science platform. Earlier this year, we commenced construction on the second phase of our approximately 50-acre, 3 million square foot Oyster Point project, which is a life science campus in South San Francisco. KOP 2, which totals just under 900,000 square feet across three buildings, will be home to numerous amenities that will serve all phases. We are particularly excited about Phase 2 given the strong demand, rising rental rates, and timing. No other competitive project will be delivering in this timeframe. We are in early discussions with multiple prospective tenants interested in securing major portions of the project, and expect even more interest in the buildings once construction goes vertical in the first quarter of next year. In addition to KOP, we are expanding our San Diego life science significantly. Availability for top tier space in the region's most sought after life science submarkets is essentially non-existent. Barriers to entry are high and rental rates are at historic levels. And we are capitalizing on these dynamics in Del Mar, UTC, and the I-56 corridor, where we have modern, highly convertible assets and a land pipeline. In the UTC and Del Mar submarkets, as I noted in my earlier remarks, we signed 330,000 square feet of pre-leases across three buildings, which will be converted to life science use. And just a few miles east on the 56 corridor, We expect to commence construction next year on the first of two phases of our Santa Fe Summit project. Each phase consists of approximately 300,000 square feet. To summarize, we will deliver 2.5 million square feet of state-of-the-art life science facilities over the next 30 months. And over time, the three future phases of Kilroy Oyster Point will expand our life science portfolio by another 1.5 to 2 million square feet. When completed, we have assembled a best-in-class life science portfolio in the strongest locations, which will total 5.5 million square feet with an average age under five years. With full build-out, life science and healthcare tenants will be 25 to 30 percent of our NOI. Lastly, delivering our in-process development and positioning our future development projects remain a high priority in our capital allocation strategy. We have 2.6 billion of in-process projects on track for completion over the next two years. This pipeline is 52% leased and 74% leased when excluding the just commenced KOP2, which we started five months ago. They will generate approximately $170 million in incremental cash NOI when stabilized, which will grow our current annual NOI by more than 20%. all else being equal. The cost is fully funded through the year end 2022. I'll wrap up with a few final observations. In nearly every conversation we are having these days with our tenants and potential tenants, one big theme emerges. Companies want a work environment that attracts, excites, and motivates their workforce. They want location, scale, a contemporary design, a healthy environment, and relaxed ambience that will draw people in and support their creativity and productivity. This is the most profound impact the pandemic has had on the office sector, and we think KRC is well-positioned to capitalize on these conditions. Over the last 10 years, we created the youngest, best-in-class platforms across office life science and residential, and we are poised to deliver strong growth and value creation over the coming decade. We're more encouraged every day about our market's recoveries. The reopening is going to happen in fits and starts, but it is happening. And a final comment on sustainability. In GRESB rankings, we have been named number one in sustainability across all publicly traded companies across all asset classes in the Americas for the eighth year running. That completes my remarks. Now I'll turn it back over to Michelle.