Kilroy Realty Corporation

Thank you for joining today's Q3 2022 Kilroy Realty Corporation earnings conference call. My name is Dante, and I'll be the 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 would now like to pass the conference over to our host, Mr. Bill Hutchison, Senior Vice President of Investor Relations and Capital Markets. Sir, the floor is yours.

Thank you. Good morning, everyone. Thank you for joining us. On the call with me today are John Kilroy, Chairman and CEO, Tyler Rose, our President, Rob Peratt, EVP 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 also available on our website. John will start the call with third quarter highlights, and Elliott will discuss our financial results and provide you with updated 2022 earnings guidance. Then we will be happy to take your questions. John?

Thank you, Bill. Hello, everybody, and thank you for joining us today. I'll begin with some big picture comments and then review recent highlights. Over the course of the past several months, the economy has increasingly become uncertain while at the same time showing some encouraging data points. Labor markets remain strong, supply chain constraints are easing, and the consumer continues to spend. However, the unprecedented pace at which central banks are raising interest rates to tame inflation is by many accounts increasing the likelihood of a hard landing, resulting in increased volatility in the public markets and limited transaction activity in the private markets. While we cannot control the Fed or know for certain the ramifications its actions will have on the real estate market, we are laser focused on the items we can control. Just as we positioned Kerasi to play offense coming out of the 2008-2009 recession, we believe we are similarly well positioned this time around. Our leverage is low. We have no debt maturities until the end of 2024 and over $1.6 billion of liquidity, including a fully untapped credit facility. While no one wants a recession, Kilroy is cycle tested and prepared. During the third quarter, the push to return to the office intensified as many companies implemented stricter policies to encourage in-person work and collaboration. These efforts have been led by financial services and professional service firms, but we are seeing increasingly technology and media companies follow suit. Multiple large cap companies and their smaller brethren are requiring employees to be back in the office two or three days a week, which has generated tangible progress in both our physical occupancy and capital data, which recently hit a post-pandemic high. This has also driven steady improvement throughout the year in our parking income. Like many, we believe that softness in the labor market will likely strengthen employers' resolve around encouraging work from the office and will also result in employees adhering to those plans more closely. The bifurcation between high quality space and commodity space continues to grow, which bodes well for our young and modern portfolio. According to JLL, in the third quarter, 90% of the space added to the sublease market was in older and less desirable buildings. Furthermore, throughout 2022, nearly 50% of markets nationally set records for high water mark rents on Premier Class A properties. This includes several of our markets, such as San Diego, Austin, San Francisco. Companies that are making decisions today understand the importance of locating in modern, amenitized buildings, and we're seeing that. Turning to recent highlights, we've signed 390,000 square feet of leases since the end of the second quarter, with an average term of eight years and average rent roll-ups of plus 7% on a cash basis and plus 27% on a gap basis. Some highlights include a 63,000 square foot renewal of a financial services tenant in Menlo Park, 55,000 square feet of renewals and expansions from two apparel companies in Culver City, an 11-year, 28,000 square foot new lease with Boston Consulting Group at 2100 Kettner in Little Italy, a 10-year, 70,000 square foot renewal with a scientific research and development company in Del Mar, A 7 1⁄2-year, 35,000-square-foot renewal in San Francisco signed late yesterday afternoon with a major broadcasting company. In a 15-year, 51,000-square-foot lease with Page, a national full-service design firm at Indeed Tower, bringing this project a 68% lease. As we previously signaled, demand at Indeed Tower has increased over the last couple of quarters, and we expect to have more good news to discuss in the coming months. Life science demand, especially in top tier markets, has been holding up well. Vacancy is roughly 2% in South San Francisco and roughly 2% in the Del Mar Heights and UTC region are two biggest clusters. We have multiple prospects interested in Kilroy Oyster Point Phase II, which consists of three buildings and 875,000 square feet. Our 1,000 luxury residential units continue to perform well. Occupancy is approximately 94%, and rents increasing meaningfully compared to last year. Additionally, Los Angeles is removing the eviction moratorium effective early next year, which is another encouraging sign of policy moving in the right direction. On the capital market side, we closed the sale of 3130 Wilshire, a 46-year-old building in West LA for $48 million in gross proceeds, or roughly $500 per square foot. This property no longer fit our strategy given its age and future capital requirements. Bigger picture, the sales market was quiet during the third quarter. Asset level debt is hard to secure, especially for non-trophy assets, and capital, while plentiful, is generally on the sidelines. We are pleased to close the sale of 3130 Wilshire, but as we alluded to last quarter, we think it is prudent to let the capital market stabilize before selling additional properties. On the investment side, we are staying patient, waiting to see how market conditions evolve and whether motivated sellers come to market. While we expect there will be acquisition opportunities at some point, we are not there yet. Our operating premise over the past 25 years as a public company is that there are times to buy, times to sell, times to develop, and times like now to be patient. To that end, we said on our second quarter call that we were delaying the start of Santa Fe Summit, a 600,000 square foot plus life science development in San Diego. Similarly, we intend to hold off on the construction of Stadium Tower, or Austin development site until the economy gives us more confidence or we pre-lease a substantial portion of the project. As a reminder, the Stadium Tower site is fully designed and permit ready for a roughly 500,000 square foot building. Since we acquired the project earlier this year, we have done pre-construction work which reduces the lead time to deliver a completed building. Additionally, we have the right to add density now given our proximity to the light rail which we plan to study in more detail over the coming months. As I mentioned in my earlier remarks, in 2009, we positioned the company so that we could play offense as the economy improved, which resulted in some well-timed acquisitions and development starts in the Bay Area, Seattle, and Hollywood. We are doing the same today by curbing spin, bolstering liquidity, and getting our top-notch development sites shovel-ready so that we can be an early mover when the time is appropriate. In summary, our strategy can be summarized via three tenets. Best-in-class real estate, disciplined capital allocation, and fortress balance sheet. This recipe is cycle tested, having guided us through up and down markets over the past, and we are confident that adhering to these principles positions us to be opportunistic as circumstances warrant. Lastly, we want to remind you of our upcoming investor event in South San Francisco to be held on Monday, November 14th, right before New Year's Eve. We are eager to show everyone Kilroy Oyster Point and have some interesting speakers lined up to talk about the project, the overall market, and the company. If you need more details, please reach out, and we hope to see you all there. That completes my remarks. Now I'll turn the call over to Elliot.