Kilroy Realty Corporation

Good afternoon and thank you for attending today's Kilroy Realty Corporation first quarter 2023 earnings conference call. My name is Donyell and I will be the moderator for today's call. All lines will be on mute on 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 followed by one on your telephone keypad. It is now my pleasure to hand the conference over to our host, Bill Hutchison, Senior Vice President of Investor Relations and Capital Markets. Bill, you may now proceed.

Thank you. Good morning, everyone. Thank you for joining us. On the call with me today are John Kilroy, our Chairman and CEO, Justin Smart, our President, Rob Prott, 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 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 our first quarter highlights. And then Elliot will discuss our financial results and provide you with our updated guidance. Then we'll be happy to take your questions. John?

Thank you, Bill. Hello, everyone, and thanks for joining us. First and foremost, while we're seeing strong signs in the economy and remain optimistic, we would like to acknowledge that we are still facing cyclical and secular headwinds. The macro environment today, I think I defined as it just lacks certainty. Sentiment is challenged, and financial stocks such as Silicon Valley Bank and the crisis that was created related thereto continue to dominate headlines in many areas. From a real estate perspective, we have seen the implications of the current economic backdrop translate into near-term obstacles. There has been a reduction of liquidity in the investment sales market, downward pressure on leasing fundamentals as tenants delay space requirement decisions, and a pullback in financing and investment activity within the banking and venture capital community. However, despite these macroeconomic challenges, we are proud to announce that we delivered a strong quarter and record FFO per share. Elliot will go through the quarter in more detail when he gets to his remarks. Shifting to our markets, we would like to highlight encouraging trends and what we are seeing with our boots on the ground in each of our regions. As we discussed on prior calls, physical occupancy in our portfolio continues to trend up and the share of job postings that are remote has been trending down. Austin and San Diego continue to lead the way with respect to physical occupancy with over 70% at quarter end. These markets continue to edge closer to pre-pandemic levels. San Francisco a region which admittedly has been lagging in regards to return to office, saw its highest quarterly increase of over 6% in physical occupancy since the start of the pandemic. The widespread return to office announcements from top tech firms have been translated to noticeable increases in physical occupancy in our San Francisco portfolio, and we expect this trend to continue. Los Angeles and Seattle both saw positive physical occupancy trends during the quarter, increasing to approximately 50% and 40% respectively. This reflects another encouraging update for our markets, and we anticipate this trend to accelerate as more return-to-office mandates are implemented. The antidotes back up our portfolio data. Recently, JP Morgan told senior bankers to be in the office five days a week, Amazon three-day-a-week policy is set to begin next month, and others are following suit. Many companies are realizing the inefficiencies of remote work and are starting to demand change. As Amazon CEO Andy Jassy wrote in his recent shareholder letter, we've become convinced that collaborating and inventing is easier and more effective when we're working together and learning from one another. And I can tell you at Kilroy, we feel exactly the same way. The actions of these companies and others across a cross-section of business sectors, including Apple, Disney, Starbucks, Deloitte, Capital One, and many others, highlight the long-term importance of the office in increasing productivity and enhancing collaboration and culture. As return to office continues and companies have real data to support the power of in-person work, our portfolio is well positioned to capitalize on the resurgence of demand and flight to quality dynamic. As evidence, since the end of the fourth quarter, we've signed approximately 338,000 square feet of leases with an average term of approximately five years. In many of those, we had no capex. In Austin, we signed another lease at Indy Tower for 20,000 square feet with a national wealth management firm, bringing our occupancy to 74%. We have had great touring activity in the building and demand for space in Indeed Tower has increased over the last couple of quarters, which we expect to turn into good news. We have also executed notable leases across our Bay Area and San Diego portfolios. In San Diego, we leased a 65,000 square foot new lease with MediaTek USA and a 25,000 square foot renewal with Intrepid Studios. In the Bay Area, we leased a 50,000 square foot new lease with Reddit and a 65,000 square foot renew with 23andMe. In addition, innovation continues to happen in our markets. The ecosystems on the West Coast took many decades to build and continue to have all the ingredients for success. Engineering, computer science, and medical students are attracted to world-class universities like Stanford, Cal Berkeley, and UCSD. The most prestigious venture capital funds are headquartered in Menlo Park, and the biggest technology companies in the world are based in San Francisco and Silicon Valley. This recipe results in the formation of new, innovative companies such as fintech, social media, self-driving cars, and more recently, artificial intelligence. The Bay Area in particular has been the birthplace of many of these businesses, and AI is no exception. as over 40% of AI companies are based in the region. While it's still early days in this translating to demand for office, the bigger takeaway is innovative companies still want to be in the city and San Francisco Bay Area. Moving on to life science, there continues to be long-term themes that have prevailed which bear mentioning. 2013 marked the beginning of a 10-year run which radically shaped life science as we see it today. The critical driving factors that define this burgeoning industry included aging population, improved FDA approval processes, rapid M&A activity, and the availability of funding to catalyze research and development activities. After record years of venture capital funding in 2021 and 2022, these funds still maintain large levels of dry powder, with some deals getting done, but not all at the clip we have recently witnessed. That said, we believe increased capital will eventually be deployed as business conditions improve and will provide a powerful boost to the life science ecosystem. The acceleration of technological advances within the life science space is creating breakthroughs, pushing the frontier of what can be accomplished. Sciences such as gene therapies, mRNA, and immunotherapy are in the midst of rapid change that will redefine the art of what is possible. Also, we believe the convergence of artificial intelligence and technology companies focused in the life science space will move the needle even further. These types of hybrid companies are in their infancy and have yet to fully mature. Gilroy has high conviction in the underlying long-term life science fundamentals and will play the long game as we increase our exposure to the sector. As a reminder, life science will make up more than 20% of our NOI after KOP Phase II delivers, and over time we expect this number to grow to over 30% as we develop and lease future life science projects. Zooming out to our platform and current mentality, we at Kilroy have built a company that is positioned for both offense and defense. This is not accomplished overnight, but it's been a core principle of our strategy spanning across cycles. As we sit here today, Kilroy has one of the strongest balance sheets in our sector, headlined by a moderate leverage profile, robust liquidity, and limited term debt maturities. Our portfolio is young and modern, comprised of high-quality, well-located assets that we believe will prove to be resilient over time. Lastly, the management team at Kilroy is cycle-tested, managing through periods of economic uncertainty, and has a proven ability to take advantage of market conditions as they unfold. We remain opportunistic in our ability to create value for our shareholders as we have done through previous cycles over time. As we think about how to move through the current downturn, I would like to share with you how we have positioned the company in this current environment. In previous downturns, Kilroy has emerged stronger. A case in point, the steps we took during the great financial crisis of 2008-2009 led to a total transformation of the company. We enhanced the quality of our assets and pursued product expansion in new high-growth markets, creating significant value for our shareholders. And we are not done yet. We are focused on the following actions to ensure that we emerge from the current downturn in a place of strength. Maintaining a strong balance sheet and opportunistically evaluating alternative sources of capital to further enhance our already significant liquidity position. Providing certainty to our tenant base in today's environment. Prospective tenants are increasingly evaluating landlord capabilities and financial strength. In essence, tenants want to know that their landlords have the financial capacity to fulfill their needs and obligations while being able to provide an exceptional level of service. Positioning our assets to be top tier choices when the time comes for tenants to making leasing decision is another important focus. If there are 20 choices in the market, or there may be more, we intend to be one of the top three. heightening our focus on driving organizational efficiencies and reducing our capital spend where appropriate, and positioning the company for its next 2010 moment. Periods of change always present opportunities, and we intend to be opportunistic when the time is right. In summary, our strategy is based upon maintaining best-in-class real estate, disciplined capital allocation, a fortress balance sheet, and the team to execute. We have adhered to this principle, rather to this simple but effective approach over multiple cycles, which has given us the ability to play defense on the downside while maintaining the wherewithal to be opportunistic when it makes sense. And lastly, as I'm sure you all saw, last month I announced my retirement effective at the end of the year. 2023 marks my 28th year as CEO of Kilroy Realty and 54th of the company, including its predecessor. I've dedicated my career to Kilroy and I'm pleased to be able to retire with the company having the best portfolio amongst our peers, an impressive capital allocation track record, a solid balance sheet, and very importantly, a deep and talented team. I'm confident that we have the pieces in place to continue executing at the level investors have come to expect from Kilroy, and as a significant shareholder, I'm incredibly invested in the continued success of the company. That completes my remarks, and I'll turn it over to Elliot.