Kilroy Realty Corporation

Hello and a warm welcome to today's first quarter 2022 Kilroy Realty Corporation earnings conference call. My name's Emma and I'll be coordinating the call today. You have the opportunity to ask a question at the end of the presentation by pressing star followed by the number one on your telephone keypads. If you'd like to change your mind, please press star followed by the number two to cancel your request. It's now my pleasure to hand today's call over to Bill Hutchison, Senior Vice President of Investor Relations to begin. Please go ahead.

Thank you, Emma. 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 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 Form 8K with the SEC, and both are available on our website. John will start the call with first quarter highlights, and Elliot will discuss our financial results and provide you with updated 2022 earnings guidance. Then we'll be happy to take your questions. John?

Thank you, Bill. Hello, everybody. Thank you for joining us today. I'll begin with some big picture comments and then share highlights from the quarter. We recently passed a two-year mark from the start of the pandemic and are starting to see what a new normal looks like. People have moved back to cities, kids are attending school in person, and travel has returned. On that last point, it was great to see so many of you live at the City Group Conference in March. Physical office occupancy has continued to progress. Many of our largest customers started returning to the office in recent weeks, the effects of which are tangible in our markets. Traffic is up. Public transportation is more crowded. Cities are cleaning up and starting to feel more vibrant. Ridership on BART in the Bay Area was up roughly 20% versus last month and over 140% versus last year. We are encouraged by the initiative San Francisco took last month with their Welcome Back to SF plan, encouraging employers to return to the office. Those who signed the pledge, including many companies such as Google, Microsoft, Meta, Salesforce, Uber, and Kilroy, committed to implement in-person work policies beginning in March. So while we expect the coming months to have some fits and starts, we're feeling more encouraged by the progress to date. One thing that has not changed throughout the pandemic is the importance of technology and life science companies as an engine that drives our economy. Since the start of the pandemic over two years ago, the NASDAQ is up roughly 90%. VC funding is up 85%. So while there will be volatility year to year, access to capital for these industries remains robust. Hiring continues to be very healthy as well. Job postings for large technology companies in our markets is up roughly 75% year over year, highlighting the growth and competition for talent on the West Coast and in Austin. Despite all the headlines, companies continue to lease office space. According to JLL, leasing nationwide has increased for five straight quarters, and the first quarter of 2022 had leasing volume that represented approximately 75% of pre-pandemic levels. Technology and life science customers remain a major driver of demand, especially in our markets. A few examples include Meta signed a nearly 600,000 square foot lease in downtown Austin and a 200,000 square foot lease in Bellevue. Bristol Myers Squibb took over 400,000 square feet in the UTC sub market in San Diego. And Rob Lux, a gaming company, leased 200,000 square feet in the Bay Area, just to name a few. Not surprisingly, a disproportionate amount of this leasing has been in newer and more amenitized buildings. Our strategy has long been to buy and build the best office and life science buildings in our markets in order to attract big, sophisticated, and growing users. A Green Street report from last month analyzed portfolio quality among the publicly traded office companies, and Kilroy scored over 90 out of a possible 100 points, ranking us number one in our group of peers. Our commitment to modern, amenitized, and sustainable workplace environments differentiates our portfolio and positions us to succeed in multiple environments. On this note, we'd like to point out that earlier this month we filed our 11th Annual Sustainability Report. Sustainability, health, and wellness are integral to both us and our partners. Our efforts continue to earn global recognition from leading organizations, including GRSB, Dow Jones, and Energy Star. These initiatives remain central to Coed's values, and we plan to continue being a leader in these areas. But we are not without challenges. Geopolitical risk is elevated, inflation is accelerating, and the capital markets remain somewhat volatile. While these macro factors are beyond our control, our long-term leases, high concentration of creditworthy tenants, and low leverage provide a buffer to navigate any short-term choppiness. In summary, our portfolio quality, strong tenant credit, and fortress balance sheet position us for both defense and offense. Our downside will be protected in tough times as seen by the resilience of our portfolio during the pandemic, and we are prepared to be opportunistic when appropriate as we demonstrated through active capital recycling this past year. Turning to the highlights from the first quarter, Leasing was headlined by the renewal and expansion of Neuro for 114,000 square feet in Mountain View through 2032. We are pleased to be able to grow with this innovative company, which represents another VC-backed company expanding in the Bay Area. After a slow start due to Omicron variant, activity improved throughout the quarter, and we are currently in late-stage negotiations on more than 350,000 square feet of office. in our core portfolio across multiple markets. While there are no guarantees these leases get done, it demonstrates the improved tenant confidence in the market. Overall, leasing spreads on deals signed during the quarter were plus 7%. It's worth noting that our leasing spread stayed positive every quarter throughout the pandemic, a testament to the quality of our real estate and the built-in growth within our portfolio. And our lease rollover remains modest with an average of 7% expiring per year through 2025. We continue to see strong residential demand in our markets, which is good for our multifamily portfolio in the near term and encouraging for our office portfolio in the longer term. Our roughly 1,000 residential units are 97% leased as of today. Jardine, our most recent project in Hollywood, now sits at 94% leased a mere 11 months since delivery, and is achieving top of the market rents at nearly $6 per square foot. Life science continues to be a point of strength across all markets, with vacancy rates in the low single digits. Leasing activity for life science projects remains robust, and we continue to have good interest in both Tilroy Oyster Point and our future start in San Diego Santa Fe Summit. As to remote developments, NOI from life science properties could get as high as 30% of total company. On the capital allocation front, we began construction on the last two San Diego life science redevelopments we discussed last quarter. In total, we now have three life science redevelopments which have an estimated total cost of $115 million or roughly $60 million of incremental spend. All three projects are fully leased and upon stabilization will generate $20 million and total NOI, or 10 million above, pre-redevelopment levels. Additionally, during the quarter, we continued our expansion in Austin by acquiring a land site and a stadium district for $40 million. The stadium district, together with the adjacent Domain Submarket, have become Austin's second downtown, with 4,000 apartments, 50 restaurants, 900 hotel rooms in close proximity. The Class A office market is roughly 3 million square feet and 99% leased to several customers, including Amazon, Meta, and Indeed. Our site is kitty corner to the southern end of the domain, close to a future light rail stop, which connects to downtown. And most importantly, is directly adjacent to the brand new Q2 Stadium, home to Austin FC, Austin's major league soccer club, and the only professional sports team in the region. As part of the land acquisition, we have a permit-ready, high-quality design from one of our favorite architects, which allows us to lock in a GMP contract, which we've done with the builder. We expect to start construction later this year. In total, we expect to spend just over $700 per square foot, including the entitled land, which, as I mentioned, we previously closed on, to develop what we believe will be the best building in the sub-market that will complement or indeed tower the best building in the Austin CBD. We also made progress building out our team in the region. We recently announced the addition of Fernando Arrutia, Senior VP of Leasing for our Austin-based team. Fernando, a graduate of UT, has been in the Texas commercial real estate for over a decade and brings to Kilroy Austin market relationships, leasing acumen, and transaction expertise. We also have two very seasoned Kilroy executives who will be relocating from the West Coast to oversee asset management and construction in the Austin market. To recap, since June of 2021, we have acquired two projects in Austin that will total 1.2 million square feet, or roughly 5% of total company NLI, and put together the foundation of a local team that will facilitate our continued expansion in the region. In closing last quarter, I outlined five objectives for the year. Complete and lease our development projects, proactively manage the operating portfolio, look for external growth opportunities, maintain a conservative balance sheet, and lastly, engage politically when necessary to help shape public policy. While it is still early in the year, we are pleased with the progress on several of these initiatives, and we remain committed to these goals as the year progresses. That completes my remarks. Now I'll turn the call over to Elliot.