Kilroy Realty Corporation

Excuse me, everyone. Please remain holding and the conference will begin momentarily. Again, please remain holding. The conference will begin momentarily. Good afternoon. Thank you for attending the KRC 3Q23 earnings conference call. My name is Victoria, and I'll be your moderator today. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. I would now like to pass the call over to your host, Bill Hutchinson, FVP Investor Relations and Capital Markets with KRC. Thank you. You may proceed, Bill.

Thank you, Victoria. Good morning, everyone. Thanks for joining us. On the call with me today are John Kilroy, Chairman and CEO, Justin Smart, our President, Rob Peratt, Chief Leasing Officer, 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. Our 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 our third quarter highlights. Justin will review our in-process development pipeline and Elliot will discuss our financial results and provide you with updated guidance. Then we'll be happy to take your questions.

Thanks, Bill. Hello, everybody, and thank you for joining us today. Over the last several months, we have seen long-term outlook for office business improve. More companies are committing to and enforcing in-person work. As a result of higher physical occupancy levels, increased foot traffic and commuter activity, cities are heading towards recovery. For example, New York City has been a leader in this regard, as large corporations insisted their employees return to the office. This has not only positively impacted physical occupancy levels, but has also restored a sense of urgency and vibrancy back to the city, and I should say energy and vibrancy. The West Coast markets and the tech companies that dominate them have followed suit, and we anticipate the West Coast will follow a similar trend. San Diego, which was the first mover amongst our markets, is a prime example of how high physical occupancy translates to leasing activity. Over the course of this year, physical occupancy in San Diego has gone from 20 percentage points, gone up 20 percentage points and now sits above 80%. The region is 89% leased with our primary cluster in Del Mar 97% leased. Leasing activity in San Diego is amongst the best of any of our regions because higher physical occupancy is translating into tenant demand for space. It's important to note that the green shoots of increased demand are coming in the form of better tour of velocity and leasing interest. In times like these, having the newest, most modern assets in the best locations is critical to attracting tenants at top of the market rent. Additionally, in many of the cities in which we operate, things are beginning to change for the better from a policy perspective. Specifically, recent data points in San Francisco demonstrate there is self-awareness around the challenges the city is facing and that policymakers and voters continue to take steps to correct the issues. A few notable examples. Within the last 12 months, District Attorney Jenkins won re-election, which is an endorsement from voters of her law and order philosophy. The city is hiring more police officers and increasing their pay. And the Board of Supervisors approved delays to payroll tax increases and provided discounts for new businesses relocating to the city. We have much more work to do, but the train is finally moving in the right direction. Shifting to the economy, the labor market remains tight and inflation while lower is not yet at target levels. The market is suggesting that we are likely to be in a higher rate environment for longer. Any certainty on the trajectory of rates will take time, but ultimately will be good for the capital markets even if things stabilize at current levels. However, from a commercial real estate perspective, the same concerns persist. Higher rates are putting near-term pressure on real estate valuations as loans originated in a low-rate environment come due and need to be refinanced. This dynamic, coupled with a pullback in bank lending following the regional banking crisis earlier this year, has created softer conditions in the transaction markets. We acknowledge there are going to be continued stress and refinancing risk in our sector. However, we believe we are well positioned against these headwinds. As we talked about last quarter, in July, we closed on a $375 million 11-year mortgage for a portion of our one Paseo campus in San Diego. The loan has a fixed interest rate of 5.9%, and the additional liquidity enhances our financial strength and flexibility in this volatile market. The Juan Paseo campus continues to perform incredibly well. Occupancy is approximately 95% across the entire project, and we have market-leading rents on the office, residential, and retail. Real estate always goes through cycles. I've been through six myself. We don't know when the headwinds will come or how long they will last, which is why we prioritize keeping Kilroy well-capitalized with robust platform liquidity and conservative leverage. As a result, we can stay patient and make prudent capital allocation decisions when we have conviction. With this in mind, and given where financing markets are today, we are not anticipating any asset sales for the balance of the year. While markets and sentiment change based on where we are in 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 the steps to ensure that we are ready when the time comes. As of now, our goal remains the same. Own and operate the highest quality portfolio of mixed-use office and life science properties clustered in innovative and supply-constrained markets. Turning to the third quarter highlights of what has been a period of continued volatility, I'm happy to report that Kilroy continues to execute. We signed a total of 188,000 square feet of leases during the quarter, as well as 117,000 square feet of leases post-quarter end. We remain busy and are encouraged by the leasing momentum that we are building across our markets and expect to secure more wins on the leasing front during the balance of this year. And in many of our markets, we're seeing significant increase in demand. At the platform level, just as we have done in prior down cycles, we will continue to be opportunistic in sourcing efficient capital as needed, and we are laser focused on making the right capital allocation decisions. Lastly, on a personal note, this earnings call marks my 107th quarterly earnings as CEO. We actually have had 108, which is including today, as a public company, but I did miss one. in 2007 due to the lack of wind competing in the Transpac sailing race from Los Angeles to Hawaii. Reflecting on my time spanning more than 50 years in the real estate industry and almost three decades at Kilroy as a public company, we have accomplished quite a bit, including a total transformation of our company coming out of the great financial crisis. As I look at the company today, I am proud of our tremendous team, We've never been better positioned from an asset quality, tenant base, and balance sheet perspective. I want to thank every one of you for your support over the years, and I'm confident that Kilroy will continue to thrive adeptly, handle whatever challenges come next, and outperform in the years to come. With respect to our search for the next CEO, we are entering the home stretch. We have been pleased but not surprised to see that the opportunity at Kilroy has attracted many qualified candidates both internal and external, and we expect to have an announcement before the end of this year. That completes my remarks. Now, Justin will go through our development pipeline. Justin?