Kilroy Realty Corporation

Good morning, ladies and gentlemen. Thank you for attending today's Q2 2022 Kilroy Realty Corporation earnings conference call. My name is Tia, and I will be your moderator for today's call. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. If you would like to ask a question, please press star one on your telephone keypad. I will now pass the conference over to your host, Bill Hutchison, Senior Vice President, Investor Relations and Capital Markets. You may proceed.

Thank you, Tia. Good morning, everyone, and thanks for joining us. On the call with me today are John Kilroy, our Chairman and CEO, Tyler Rose, our President, Rob Peratt, our Executive Vice President of Leasing and Business Development, and Elliot Trencher, our CIO and Interim CFO. 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 available on our website. John will start the call with second 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?

Thanks, Bill. Hello, everybody, and thank you for joining us today. I'm going to begin with some big picture comments and then review highlights from the quarter. The economy during the second quarter continues to show fits and starts. Elevated risks exist given stubborn inflation levels, bearish equity markets, and heightened geopolitical tension. On the other hand, unemployment remains low, the dollar is strengthened, commodity prices are starting to decline, and public capital markets remain open and functional. The economic signals are mixed and in some ways complicated. In periods of uncertainty such as this, we believe it is prudent to err on the side of caution. Despite the mixed macro trends, the technology and life science sectors continue to demonstrate encouraging signs. VC capital deployment remains robust. In the first half of 2022, $144 billion was invested, which roughly matches the full-year deployment levels for both of 2018 and 2019. While IPO exits for VC-backed companies have been slow, it has not impacted capital raising in most cases when compared to historical volumes. Funds have raised $122 billion year-to-date, which is on pace to be the best year by a significant margin. The labor market also remains competitive. Nationally, there are twice as many job postings as unemployed people. In our market, postings are up roughly 40% year-over-year for large-cap tech companies. highlighting the continued need for talent on the West Coast and in Austin. While leasing in periods such as these is understandably choppy, we remain confident about the long-term health of these critical industries and are cautiously optimistic on the continued demand for space at our properties. The progress on return to office continues across our portfolio with some differences across geography and industry. Austin and Southern California have been geographic leaders, while professional services, fire category, and life sciences have been the industry leaders. Noticeably, these sectors have contributed to more activity in our leasing pipeline, highlighting the appeal of our properties to a range of tenants. Physical occupancy in our portfolio and the overall market continues to improve, and based on conversations with our customer base, we remain optimistic this trend will continue. In light of the current economic uncertainty and the potential impacts on the labor market, the power dynamic is shifting to employers who have consistently expressed a preference for in-person work. Additionally, it's worth noting that based on return to office data aggregated by Google, the UK, Germany, Japan, and Hong Kong are 13 to 30 percentage points ahead of the U.S. suggesting there is upside to physical occupancy in the short and medium term. Notwithstanding varying rates of preoccupancy in our market, tenants continue to show their commitment to the office by leasing space. According to JLL, second quarter office leasing nationwide was up slightly from last quarter, the sixth consecutive quarter of increasing volume, with technology representing the largest industry of demand. While some companies are showing or rather are slowing their decision-making, others including Google, Apple, and Amazon saying major leases in our markets this quarter. The headlines that many technology thought leaders are still figuring out what hybrid works like for their employee base and real estate requirements is accurate. To that end, some users are slowing down their build-outs in order to experiment with different layouts and configurations. While this may create some noise in the short term, it sets companies up to make better long-term decisions which should ultimately benefit high-quality and efficient buildings like those we own. Political winds in our markets are also shifting. The actions taken by San Francisco voters over the past several months, starting with the recall of three Board of Education members, and most recently, last month's recall of former District Attorney Bo Deen, is a clear sign that people have had enough. The subsequent appointment of a law and order DA, District Attorney Jenkins, combined with major changes of her staff and increased budget for police funding so that increasingly disgruntled voters are demanding accountability from their elected officials. And we're happy to see that. These changes in San Francisco come on the heels of Seattle voters taking action late last year when they elected a business-friendly law and order mayor and city attorney. In Los Angeles, similar movements are afoot. The theme we continue to consistently see across markets is the preference for high-quality office space. Tenants have more choices today, and they want to be in newer and highly amenitized buildings. Leasing the best product in desirable locations is critical for companies to attract their employee base back to the office. The data backs this up. According to CBRE, effective rents in top-tier office buildings nationwide are up roughly 8% since 2020, while lower-tier office rents are down 3% over the same period. As more and more companies want the newest and best buildings, we believe our modern and sustainable portfolio, with an average age of 11 years, is well-positioned to capitalize on this trend. Turning to highlights from the second quarter, we signed roughly 250,000 square feet of leases, with cash spreads in the stabilized portfolio of plus Subsequent to quarter end, we signed an additional 73,000 square feet in the stabilized portfolio, highlighted by a five-and-a-half-year renewal of a financial services tenant in Menlo Park. On our last earnings call, we referenced 350,000 square feet of deals in late-stage negotiations. As of today, we have executed on more than 90 percent of that number, with much of the balance remaining in ongoing discussions. The activity combined with our modest rollover increased our percentage lease by 60 basis points from last quarter to roughly 94%. Looking forward, demand in the leasing pipeline is solid, both in our core portfolio and also for our projects under development. We have a number of transactions across the stabilized portfolio in various stages of negotiation and expect to have continued activity over the balance of the year. Our development pipeline also has strong interest, specifically in 2100 Chetner, Indeed Tower, and KOP Phase II. Demanding is coming from life science, technology, finance, and professional services. Negotiations continue to progress despite recent market volatility. While there can be no guarantees until leases are actually signed, we are really encouraged by the many negotiations and our advanced discussions and expect this to translate into good news. On the capital allocation front, we intend to use caution when evaluating new investments and new development starts. The bar for us to make meaningful acquisitions or start something new on a speculative basis is higher than three months ago. Having said this, we maintain high conviction in our recent acquisitions of the site in Austin for the development of our stadium tower project and expect to begin construction later this quarter. The Austin market remains strong and capable of supporting new development. The area around Stadium Tower is one of the most vibrant in the region, anchored by companies including Meta, Amazon, and most recently PayPal, who just signed 60,000 square feet this month. The light rail that will service the area is fully funded and hosted a groundbreaking last week. Our nearly 500,000 square foot project will be state-of-the-art with the most desirable floor plates in the sub-market, multiple terraces, outdoor amenity areas, and 50,000 square feet of walkable retail. Construction is projected to take 30 months, and the project will be ready by the first half of 2025. Now let's shift to the real estate capital markets. Volatility in the debt market has made it tough for borrowers to get quotes, and has limited price discovery. Additionally, landlords are much better capitalized today than in prior cycles, so there are not many forced sellers. As a result, very little is traded. While we are maintaining our 2022 disposition guides of $200 million to $500 million, we'll only proceed with sales if we feel it is the appropriate capital allocation decision. In summary, the company is very well positioned for both defense and offense. Our downside is protected by our strong balance sheet, minimal lease and debt maturities, diversified tenant credit, and top-notch portfolio quality. And when the time is right, we expect that our development pipeline and capital allocation abilities will generate upside and create meaningful value for shareholders. That completes my remarks. Now I'll turn the call over to Elliot.