Kilroy Realty Corporation

Hello and welcome to the Q4 2021 Kilroy Realty Corporation Earnings Conference call. My name is Alex and I'll be coordinating the call for today. If you would like to ask a question at the end of the presentation, you can press star 1 on your telephone keypads. If you would like to withdraw your question, you can press star 2. I will now hand over to your host, Michelle Ngo, Chief Financial Officer. Over to you, Michelle.

Good morning, everyone. Thank you for joining us. On the call with me today are John Kilroy, Tyler Rose, Rob Perod, Elliot Trencher, and Bill Hutchinson, Senior Vice President of Investor Relations and Capital Markets, our recent addition to the team. Welcome, Bill. At the outset, I need to say that some of the information we will be discussing during this call 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 highlights from 2021 and where we stand today, then move to operational and strategic activities going forward. I will discuss fourth quarter financial results and provide you with initial earnings guidance for 2022. Then we'll be happy to take your questions. John?

Thank you, Michelle. Hello, everyone. Thank you for joining us today. We've always believed that dislocations in the market brings opportunities, and last year we executed on several large opportunities, which I'll discuss later. The disruptions to normal work life created by the pandemic accelerated changes already underway, and we saw all of our key strategies validated. Location, product design, and age, tenant base, wellness, and sustainability have all become vital ingredients in modern high quality properties. As the economy experience fits and starts through 2021, We remain steadfast in our core principles of creating value for our shareholders through development, executing leases, recycling capital into higher growth projects, all while maintaining a strong balance sheet and elevating our leadership position in ESG. I'm proud of our team for delivering a strong performance on all fronts. Now, one month into the new year, evidence continues to grow that COVID is fast becoming a manageable virus. Underlying economic conditions in our markets continue to improve, and the trends that drove market success last year remain firmly in place. Urban neighborhoods that are highly amenitized continue to attract younger, educated workers. That is translated into record residential leasing and all-time high rental rates in some markets, including our One for Sale living project in San Diego, where we are fully occupied. Leasing continues to accelerate at our recently completed Jardine in Hollywood, where we are now just under 85% lease up from around the mid-60s last quarter. Major technology and media companies competing for talent continue to expand, bidding up rents for premium quality workspace that addresses new design, wellness, and sustainability requirements. We continue to see big tech Google, Meta, Apple, TikTok, and many others commit to expanding their real estate footprint in our markets. The continued path of flight to newer, higher quality office properties is supported by record rental rates and price per square foot on investments, activities in our markets. Demand for life science facilities and lab space continues to grow. Vacancy rates are less than 2%. and rural rates are approaching record levels or have exceeded prior records in our markets. VC funding continues to flow into the innovation-driven companies and startups. Our West Coast markets in Austin received a disproportionate share of record funding in 2022. Life science funding was also at record levels. Demand for talent, demand for space, and strong funding continue to underpin the premium asset valuation for high quality in our markets. In light of these drivers, we believe our portfolio, operating platform, and development pipeline will continue to differentiate KRC as the best in class owner, operator, and developer in our markets. Our stabilized portfolio has grown in quality and value. At an average age of 11 years, our office life science and mixed use portfolio is among the youngest portfolios with features that adapt well to our tense evolving needs for flexible multi-use space that offers natural light, fresh air, and outdoor access. It is also an industry-leading portfolio in terms of wellness and sustainability measures. Our portfolio of more than 1,000 luxury residential units in Hollywood and San Diego are performing quite well. We've limited near-term expirations that average 7.1% annually through 2025 and our stabilized portfolio is 93.9% leased. Our in-process development program is well-positioned to drive growth and long-term value creation. We have $2.3 billion in various stages of construction, and 45% is comprised of life science. Once stabilized, we expect this pipeline will generate approximately $165 million of cash in OI annually. With the exception of KOP Phase II, that commenced last year, we expect the NOI to come online within the next 24 months. Our future development pipeline is well diversified by market and product type. It spans the most attractive sub-markets along the West Coast, including our 6-0 project in Seattle, the Flower Market in San Francisco, Kilroy Oyster Point Phases 3 through 5 in South San Francisco, and in San Diego, our East Village and our Pacific Avenue sites. and Santa's Space Summit in San Diego as well along the 56 corridor. Our attractive basis gives us the flexibility to be patient and start construction when conditions make sense. Our rapidly expanding life science platform has vaulted KRC into a leading position in the West Coast's most sought after life science markets. In South San Francisco, we were early in recognizing the tremendous potential value of what is now Kilroy Oyster Point. The 50-acre waterfront property purchased in 2018 will encompass roughly 3 million square feet of state-of-the-art lab space when fully built out. It will represent a total investment of more than $3 billion and is expected to generate an overall cash yield of approximately 7%. Our first development phase at KOP was fully leased within two quarters of our construction start, and we fully stylized it in the fourth quarter. We believe we have created about twice the value of our original investment. The second phase, totaling just under 900,000 square feet, is currently under construction. We expect vertical construction to commence this quarter. In San Diego County, the West Coast's second largest life science market, driven by the region's top universities and medical research centers, We're now operating at frictional vacancy rates with rents reaching historic heights in UTC, Torrey Pines, and Del Mar. The path of growth is now moving further northeast on the 56 corridor where our Santa Fe Summit development site is entitled for approximately 625,000 square feet of life science space in two phases. We expect to initiate construction in the late spring or early summer of this year. and will be on schedule for delivery in approximately 24 to 30 months. In summary, our total life science and health care portfolio on properties we now own will be approximately 5.5 million square feet when completed and fully leased. We will more than double our revenues from life science and health care tenants from 17% to more than 30%, all else being equal. Our entry into Austin opens an important new market for our continued growth. Our $580 million acquisition of Indeed Tower in the second quarter of last year allowed us to grow earnings and will give us the opportunity to create value through additional lease up. Indeed Tower is a fantastic, new, well-located asset that has created a high visibility platform for our future growth in the Southwest region. Austin is a city with all the characteristics and growth potential that we look for. And what we saw in San Francisco in 2010, Seattle, 2011 and Hollywood in 2012. There was a broad technology presence, a young educated workforce, and it is in the early stages of a tremendous growth boom as companies move into the Austin market. Leasing activity is nearing pre-pandemic levels. Rents continue to escalate. Many major technology companies we work with have established or are planning to expand their footprint in the city. Our strong balance sheet gives us an important advantage when opportunities arise. We're able to act quickly and place transactions in a timely manner, and our careful fiscal management has allowed us to increase our dividend for six years in a row, most recently a 4% increase in 2021. That represents a cumulative 48.6% increase since the first quarter of 2016. Lastly, our determination to lead our industry in establishing and meeting increasingly ambitious ESG standards continues to prove its value to our company, our tenants, and our employees. This focus has made us a more innovative, forward-looking company. Time and time again, the industry has recognized us as a leader in sustainability. So while we are proud of these accomplishments, we will continue to look new for doing better ways to engage our communities and minimize our environmental impact. In closing, let me share our five key objectives for 2022. First, complete and lease our remaining in-process development projects as we prepare for new development starts when appropriate, including Santa Fe Summit. Secondly, continue to maximize the value in our operating portfolio proactively managing lease expirations and boosting sustainability and wellness. Third, look for unique external growth opportunities as we monitor market dynamics and evaluate our capital allocation decisions. Fourth, maintain our conservative financial foundation with sufficient liquidity from various sources to allow us to grow. And fifth, continue to work with government agencies and others to positively influence public policy. Once again, we are entering a new year that is sure to be filled with unique challenges and opportunities. We are well positioned to capitalize on opportunities that arise and continue to build a strong, flexible organization capable of delivering long-term value for our shareholders. That completes my remarks. Now I'll turn the call back over to Michelle.