Kilroy Realty Corporation

Hello and welcome to the Kilroy Realty Corporation 2Q23 earnings conference call. My name is Elliot and I'll be coordinating your call today. If you would like to register a question during today's event, please press star followed by one on your telephone. I'd like to hand over to Phil Hutchinson, SVP of Investor Relations and Capital Markets. The floor is yours. Please go ahead.

Good morning, everyone. Thank you for joining us. On the call with me today are John Kilroy, Chairman and CEO of Justin Smart, our President, Rob Perot, 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. The 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 second quarter highlights. Justin will review our in-process development pipeline, and Elliot will discuss our financial results and provide you with our updated guidance. Then we will be happy to take your questions. John?

Hey, thank you, Bill. Hello, everybody. Thanks for joining us today. As you saw in the press release we issued last night, we recently closed on a $375 million secured financing on a portion of our Juan Paseo campus in the Del Mar submarket of San Diego. The loan has an 11-year term and bears interest at 5.9% on a fixed-rate interest-only basis. We ran a competitive process that had a multitude of premier life insurance companies interested in providing the debt, and we're fortunate to execute with a terrific partner in New York Life that originated the entire loan. One Paseo is a world-class mixed-use campus that spans across 36 acres. As a reminder, the portion of One Paseo that we financed is on 23 acres, delivered in phases from 2019 to 2021, and is comprised of roughly 290,000 square feet of office, 95,000 square feet of high-end retail, and over 600 luxury apartments. On prior calls, we've talked about the flight to quality dynamic occurring in the leasing market. It is increasingly evident that this theme is also prevalent across the capital markets, and it played to our favor in our Juan Paseo transaction. Excuse me. Lenders are still open for business on competitive terms for the highest quality properties and went to say, oh, it certainly fits that description. Occupancy is approximately 95% across the entire project with market leading rents on the office, residential and retail. Consistent with our strategy, Kilroy places a premium on optionality. While our existing liquidity position is strong, we decided that being opportunistic and raising incremental capital today would result in better risk-adjusted execution as we pre-fund future needs and position for future opportunities. The additional liquidity we secured at an attractive rate bolsters our ability to play defense in a softer environment while affording us the option to go on offense when market conditions improve. Elliot will go through what this means for our sources and uses in his remarks. Shifting to the economy, We are increasingly seeing more green shoots. Inflation is cooling, and the labor market appears to be healthy. Near-term recession probabilities have been reduced, and the idea of a soft landing is becoming more plausible. Strategic deal flow is accelerating, and while not at the pricing we like, it is encouraging to see more transactions getting done. On the leasing front, while deals are taking longer, there is increased tour activity amongst tenants. Large cap tech companies which have been laying off employees are showing signs of stabilizing as stock prices have meaningfully outperformed and job postings are starting to slowly increase. Lastly, innovation is alive and well and continues to flourish in markets like ours with the right talent base and infrastructure. While markets change based on where we are in the cycle, the three pillars of our strategy have stayed constant. High quality properties, strategic capital allocation, and a fortress balance sheet. This simple approach allows us to play offense in the good times and defense in the challenging times. We believe there will be opportunities in the future, and we are taking steps to ensure that we are ready when the time comes. Our goal remains the same, own and operate the highest quality portfolio of mixed-use office and life science properties clustered in innovative supply-constrained markets. Turning to office fundamentals, In-person work continues to pick up momentum as major employers require their people to return to office. Recent announcements from Meta, Google, and ATT, amongst many others, demonstrate that management teams see the benefit the office has on productivity, collaboration, and culture building. The data is backing up the narrative as the percent of job postings that are remote has declined 900 basis points since 2022. As we've been saying, the key is getting employees back to the office. With more commuters and foot traffic, our cities are starting to come back to life. Seattle is a prime example, as Amazon employees have been crowding the streets of South Lake Union and the Denny Regrade since May. Looking at a recent study, Amazon commissioned for these two submarkets, which is where most of our Seattle properties are located, foot traffic is up 82%, restaurant activity is up 86%, Hotel demand from Amazon alone was 26,500 room nights in May 2023, 130% increase over the prior two years. This activity not only brings vibrancy to the neighborhood, but it also enhances safety. Physical occupancy in Kilroy's portfolio is up 800 basis points from the beginning of the year and over 500 basis points from just last quarter. Our parking income is also a beneficiary with NOI approximately 20% compared to the first half of last year. Turning to second quarter results, we signed a total of 285,000 square feet of leases, similar to the last quarter, with cash leasing spreads up roughly 2.5%. Activity was robust in our Los Angeles portfolio, where we transacted 160,000 square feet of leases headlined by 50,000 square foot renewal and expansion with LeBron James' media company uninterrupted at our Columbia Square project in Hollywood. We also signed a 25,000 square foot new lease with Edelman, a world-renowned public relations company, at the same project. Our Hollywood portfolio is now 91% leased. Many of you have toured our mixed-use project at Columbia Square and understand the world-class quality of the project, which has led to our recent success. And in Long Beach, we continue to make progress on our recently renovated Arrow project. During the second quarter, a major financial service firm committed to take 25,000 square feet of the campus, bringing it to 89% leased. Arrow has taken a slightly different path to ultimately achieve similar results. The seven-building campus, developed by Carolian Theses beginning in the late 80s through the early 2000s, was redeveloped in 2020 after the move out of a major tenant. We spent roughly $20 per square foot improving and updating the lobbies and outdoor amenities. Since we commenced the improvement project, we have leased over 450,000 square feet and have achieved rents roughly $7 higher per square foot than pre-renovation. To remind everyone, we are in the process of rolling out a similar plan at our West 8th project in Seattle, and the early market feedback is encouraging with tour activity up significantly. In summary, both Columbia Square and Arrow are examples of best-in-class projects that are achieving solid capture rates and attracting world-class tenants across various sectors. The life science business remains well-positioned with healthy secular tailwinds. The population continues to age. New drugs continue to get improved, with 2023 on track to exceed last year's levels, and total funding during the second quarter approached $40 billion. increasing 15% from the first quarter. During the second quarter, we signed a 25,000-square-foot extension with NeuroCurrent Biosciences, a life science tenant in Del Mar, and we continue to have several prospects during the second phase of Kilroy Oyster Point in South San Francisco. As a reminder, our Kilroy Oyster Point project is not projected to stabilize until 2025 or about two years from today. We are pleased with our second quarter operating results and believe we are well positioned for continuing success. As we think about the future, Kilroy is focused on the things we can control and well positioned to be opportunistic when the time comes. Our primary focus for the balance of the year is leasing. The current environment will separate winners and losers through a combination of patience and strategically positioning our assets to be top tier choices for tenants We believe the Kilroy platform is well-positioned to create alpha as we lease up the portfolio. In addition, we are committed to maintaining our top-notch balance sheet and robust liquidity profile as we demonstrated with the Juan Paseo loan. As a reminder, over the last year, inclusive of the Juan Paseo financing, Kilroy has secured approximately $900 million of fresh capital at a blended rate in the high 5% range. Also, I would like to acknowledge that none of what we do would be possible without a best-in-class team. We have a deep and talented group of professionals that has been critical to our success. We're going to continue to invest in our human capital while also striving for ways to get better, always trying to get better. I want to personally thank all of my teammates at Kilroy for their hard work and dedication. To wrap up my remarks, we are encouraged by the green shoots we are seeing There continues to be more activity across leasing, investments, and finance for the best-in-class product that Kilroy is known for. Whether it's new tenants entering the market, existing tenants looking to renew and expand, or strategic transactions being made, the common theme is preferential demand for well-located, high-quality assets. Fundamentally, we expect this trend to continue, and the Kilroy platform could not be better positioned. At some point, there will be a time to play offense, and when that time comes, Kilroy will adhere to its core principles. We will allocate capital into acquiring, developing, and redeveloping premier assets in the right markets that will outperform well into the future while always maintaining a strong balance sheet. That completes my remarks. Now I'll turn the call over to Justin.