Kilroy Realty Corporation

Good afternoon. Thank you for attending today's KRC 4Q22 earnings conference call. My name is Tamiya and I will be your moderator for today. 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 1 on your telephone keypad. It is now my pleasure to pass the conference over to your host, Bill Hutchison, investor relations and capital markets. Please proceed.

Thank you, Tamiya. Good morning, everyone, and thank you for joining us. On the call with me today are John Kilroy, Chairman and CEO, Tyler Rose, President, Justin Smart, our incoming President and current President of Development and Construction Services, Rob Perotte, our Chief Leasing Officer and Senior Advisor to the Chairman, and Elliot Trencher, our CIO and CFO. At the outset, I need to say that some of the information we will be discussing during the 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 fourth quarter highlights, and Elliot will discuss our financial results and provide you with our 2023 earnings guidance. Then we will be happy to take your questions. John?

Hey, thanks, Bill. Hello, everybody. Thanks for joining us. 2022 was a year of transition, as evidenced by substantial increases in interest rates, that impacted the economy and the capital markets. But as we enter 2023, there are signs of inflation cooling, the Fed slowing down, the pace of interest rate hikes, and a resilient consumer. Kilroy is focused on things we can control. Our portfolio is top-notch, our balance sheet is strong, and we are patiently waiting for opportunities to allocate capital. The theme of Transition can also be seen in the office market as more companies are adjusting to post-pandemic life, and many are reestablishing in-office policies. Disney, Paramount, Netflix, First Republic, Salesforce, Starbucks, and Twitter are among some of the most recent to mandate a return to the office several days a week. This follows Microsoft and Apple, who have been leaders among such tech companies in returning to in-person work. In a recent conversation about remote work, Tim Cook, the CEO of Apple, stated, you collaborate with one another because we believe that one plus one equals three. We have all heard the recent announcements regarding corporate layoffs. While layoffs are never a good thing for office companies, we believe that they have and will continue to drive an increase in physical office occupancy. For many of the biggest technology companies, headcount exploded during the pandemic, growing upwards of 50%, while office footprints grew only 10%, according to JLL. The recent layoffs are only a small fraction of those hired during the last few years and seem to consist of many folks that never went into an office nor had any office space dedicated to them. The well-reported flight-to-quality trend continues to get more pronounced uh with trophy rents generally holding and commodity rent softening according to jll newer buildings generate a 60 premium in rent compared to commodity properties and this premium has the potential to grow even larger with the vacancy rate for older space in markets like seattle and silicon valley nearly twice as high as the vacancy rate on newer buildings in addition There is and will continue to be a scarcity factor that exists with quality space as new supply is slowing. Per JLL, square footage under construction fell by 7.5% quarter over quarter and 50% year over year, and we suspect the new construction in 2023 will fall even further. Over multiple cycles, Kilroy has strategically assembled a portfolio in premier markets that have the talent base and infrastructure to continuously pursue innovation. And innovation is alive and well. As an example, in San Francisco and Seattle, there have been compelling breakthroughs in artificial intelligence and machine learning, punctuated by the recently reported Microsoft cumulative investment of $14 billion into ChatGBT, a local San Francisco company. The Bay Area remains the largest market for venture capital, and represented over 30% of U.S. funding in 2022. As this or other innovations translates into demand, we believe our portfolio is well positioned to capitalize on this growing technology sector. As we highlighted at our investor event in November, our portfolio is young, well-located, amenitized, and attractive to many of the best companies in the world. A flight to quality dynamic has never been more pronounced, and should drive outsized market share for Kilroy in the years to come. Turning to recent highlights, we've signed approximately 460,000 square feet of leases since the end of the third quarter, with an average term of approximately seven and a half years. Some highlights include a five-year, 65,000 square foot lease with MediaTek USA, a semiconductor company in San Diego, a five and a half year 50,000 square foot lease with Reddit, a technology company in San Francisco, a 7.5, 35,000 square foot renewal in San Francisco with NBC Universal, a premier broadcasting company, and over 70,000 square feet of leasing in Indeed Tower in Austin with Page Sutherland and HNTB Corporation bringing the project to 71% lease. This year we anticipate some challenges in office leasing. As you likely saw in our earnings release, our occupancy will be lower in large part due to a move out at our West 8 property in the Denny Regrade Submarket of Seattle. We planned for this possibility when we bought the building in 2021 and have begun implementing our plan to re-tenant the project and roll up the rents to market. We believe West 8 is very well positioned in the market It occupies nearly a full city block at a centralized location, and it's surrounded by lots of amenities, making it appealing to many types of companies. Turning to life science, which now makes up over 15% of our NOI, demand continues to be resilient. We have multiple prospects interested in Kilroy Oyster Center Phase 2, Kilroy Oyster Point Phase 2, which consists of three buildings totaling 875,000 square feet. Upon delivery of this project, our life science NOI will grow to more than 20% of the company total. And over time, we expect this number to grow to over 30% as we deliver future life science projects currently in our pipeline. Our retail and residential portfolio, which comprises approximately 5% of our NOI, has been steady. Residential occupancy is approximately 94%, with rents increasing meaningfully compared to last year. and limited new supply expected to deliver in our submarkets. The investment market remains spotty, and we continue to be patient and disciplined. We have yet to see meaningful opportunities of interest. To that end, in 2022, we pause the start of new speculative developments, thereby reducing our near-term future commitments by over a billion dollars. However, there will be a time to play offense, and having substantial liquidity will be key. In summary, our strategy is based upon three key tenets, best-in-class real estate, disciplined capital allocation, and a forecast balance sheet. This simple but effective approach is cycle-tested and proven to work in various environments. On the people front, in December, we announced that Tyler Rose will be leaving at the end of this month. I want to thank Tyler for his 25 years of service And I know all of the Kilroy team joins me in wishing him the very best. Justin Smart, a nearly 30 year veteran at Kilroy and currently president of development and construction will be assuming the role of president effective March 1st. We know all of us, I know all of us are excited to work with Justin in his expanded role. I would also like to acknowledge Rob Perot's expanded role of chief leasing officer and senior advisor to the chairman. Rob has been with Kilroy for nine years and is not just an excellent dealmaker, but also a leader within the company and a trusted advisor. As Bill mentioned in his introduction, Elliot Trencher has been serving as our interim CFO for nearly a year and named our full-time CFO effective as of yesterday. I'm delighted to have Elliot be our permanent CFO. The Kilroy bench is deep and talented and cycle-tested. In conclusion, I want to congratulate Justin, Rob, and Elliot on their added responsibilities, and I also want to thank the entire Kilroy team for its hard work and dedication. And for all of our listeners, we at Kilroy are back in the office. That completes my remarks. Now I'll turn the call over to Elliot.