Kilroy Realty Corporation

Good afternoon, and thank you for attending today's KRC 2Q24 earnings conference call. My name is Sam, and I will be your 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'd like to ask a question, you may do so by pressing star 1 on your telephone keypad. I'll now turn you over to Taylor Friend, Senior Vice President, Capital Markets and Treasurer. Taylor, the floor is yours.

Good morning, everyone. Thank you for joining us. On the call with me today are Angela Ahman, CEO, and Elliot Trencher, EVP, CIO, and CFO. In addition, Justin Smart, President, and Rob Perotte, EVP, Chief Leasing Officer, will be available for Q&A. At the outset, I need to say that some of the information we'll 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 webcast live on our website and will be available for replay for the next eight days. Our earnings release and supplemental package have been filed on a Form 8K with the SEC, and both are also available on our website. Angela will start the call with a strategic overview and quarterly highlights. And Elliot will discuss our financial results and provide you with updated 2024 guidance. Then we will be happy to take your questions. Angela?

Thanks, Taylor. It's great to have you on the call this quarter. I'm pleased to report another strong quarter of results that reflects the hard work and dedication of the entire Tilroy team and underscores the recovery that continues to take hold across our portfolio. While this recovery will at times be uneven, we are seeing encouraging signs in all of our markets that reinforce our conviction that the trend line is moving in the right direction. From a market perspective, we are seeing particular strength right now in San Diego and Bellevue, Washington, both of which continue to benefit from broad-based demand across a wide range of industry categories supported by higher physical occupancy rates. In San Francisco, total tenant demand in the market has doubled over the course of the last 18 months, and leasing volumes are slowly but consistently improving. supported by growing demand from many new-to-market tenants, including those in the AI sector. And while the South Lake Union submarket in Seattle and our submarkets in Los Angeles have been slower to recover, we are making headway. In particular, in Seattle, the previously noted strength of demand in Bellevue, combined with a limited amount of Class A vacancy in that submarket, is starting to have important spillover benefits for South Lake Union, an encouraging dynamic as we near the completion of our major repositioning project at West AIDS. A major benefit to Kilroy during this recovery has been and will continue to be the indisputable slight to quality that we are seeing play out in our sector and specifically in our markets, which has been a driving factor behind virtually every conversation we are having with existing and prospective tenants alike. These tenants are singularly focused on the quality and amenitization of their space and the capabilities and financial wherewithal of their landlord. And we have no doubt that the focus on quality and sponsorship will only become more attenuated in an environment of virtually no new supply. Over the last 60 days, we've been particularly encouraged by a number of discussions with potential new tenants with space requirements over 100,000 square feet. In addition, recent high-profile return to work announcements by major employers and a newfound focus on the enforcement of new and existing mandates underscores the recognition that in-person connection is critical to the long-term success of both employees and organizations. During the second quarter, we signed approximately 235,000 square feet of leases with a weighted average lease term of about five and a half years and cash leasing spreads of approximately minus 4.5%. Excluding one retail lease in San Francisco, our leasing spreads were roughly flat. Leasing activity accelerated as we moved through the quarter, a trend which continued into July where we signed an additional 184,000 square feet of leases, including a 118,000 square foot multi-year early renewal with SAP at Key Center in Bellevue. Shifting to Kilroy Oyster Point, tenant discussions on phase two remain active. During the last earnings call, we referenced a pickup and touring activity, which has continued. And as we approach project completion, prospects are now able to fully appreciate the tangible merits of our campus, which include expansive water views, conferencing facilities with indoor and outdoor meeting spaces, multiple upscale food service offerings, a well-appointed fitness center with outdoor fitness patio, on-site Bayfrontage trails reserved for walking and biking, and importantly, the optionality inherent in Kilroy's ability to accommodate future growth on the site. Our spec suites, which we'll deliver in the fourth quarter of this year, are generating interest from multiple early-stage life science companies, while later-stage life science companies in addition to more traditional office tenants, are expressing interest in the balance of the project. While the continued acceleration in tenant interest is an affirmation of the quality and relevancy of what we have built, the job is not done until the project is leased. This is a top priority across the organization, and we are laser focused on execution. From a capital allocation standpoint, we have seen an improvement in both the quantity and quality of office and life science offerings that have recently come to market. We're spending more time evaluating transactions and we'll be ready to execute when we see values that are appropriate relative to the risk environment and our cost of capital. As always, we intend to be disciplined and ensure that any acquisitions we pursue will be value enhancing for shareholders. As it relates to dispositions, last quarter we mentioned that we were in the process of evaluating the highest and best use of various sites in our future development pipeline. we have concluded that several of the sites have an optimal use that is no longer office or life science. And feedback we have received from multiple market participants has further validated this view. We're actively working on transactions for a few of these parcels and contemplating a variety of potential structures to maximize value. While the ultimate realization of proceeds may take time, as parcels are re-entitled for alternative uses, we believe that these transactions will represent a significant well-priced source of dry powder for the company to participate in an increasingly active acquisitions market, while also continuing to prioritize the balance sheet and maintain the company's substantial liquidity profile. Before turning the call over to Elliot, I'd also like to discuss some of the organizational changes we announced last night. One of my key objectives since joining the company has been to ensure that we have appropriate resource levels across each functional area. reflecting both the opportunities and challenges of the environment in which we are operating. As mentioned on previous calls, I have been blown away by the talent and professionalism of this organization, and in particular by the engagement and willingness of the executive and senior leadership teams to embrace change in order to optimally position the platform for success going forward. First and foremost, I'd like to thank Elliot for his partnership over the last six months and his combined CIO and CFO role. Elliot has been truly invaluable to me as I've gotten up to speed at the company, and I'm very much looking forward to continuing to partner with him on all of our capital allocation objectives going forward as he focuses on his chief investment officer responsibilities. In addition to leading our efforts in the transactions market, the investments team under Elliot's leadership will also oversee long-term asset level strategic planning, working even more closely with our leasing and property management teams going forward. As a result of the refinement of Elliot's role, we will be bringing a new CFO on board. I've had the pleasure of working with Jeffrey Keeling in a number of different settings already, and I know that his deep skill set in finance, accounting, asset management, and technology change and innovation will serve the company extraordinarily well going forward. I'm also thrilled to announce the promotion of Lauren Statler to EVP General Counsel. Lauren has been with Kilroy for over 10 years, most recently serving as SVP Corporate Counsel. She brings significant legal and institutional knowledge to her new role, as well as impeccable insight and judgment. I'm excited to welcome both Jeffrey and Lauren to the executive team. On the leasing team, we also announced that Michael Schmidt will be joining Kilroy as SVP leasing for the Northern California region. And we're looking forward to welcoming Michael, who will be joining an outstanding team of leasing professionals that are ready to capitalize on the continued recovery in our space.