A.M. session here at Citi's 2022 Global Property CEO Conference. I'm Manny Korchman with Citi Research. We're pleased to have with us Kilroy Realty CEO, John Kilroy. This session is for Citi investing clients only. If media or other individuals are on the line, please disconnect now. Disclosures are available on the webcast and at the AV desk. For those joining us here today in person to ask management any questions, please step up to one of the mics we have located in the center aisle of the room. Give me a heads up if you wanna do that, please. If you're joining us remotely or in the room, you can type the questions into the live Q&A portal. For those online, you have a question on the screen. Everyone else, there's QR codes going around. Those will come to me anonymously, and we'll do our best to ask them during the session. With that housekeeping out of the way, and as you guys settle in there, John, I'll turn it over to you to introduce Kilroy, and any of the members of management that are there with you today, and then we'll take it to full-on Q&A. Okay, Manny. Good to see you. Nice to see everybody in person. It's you know, thankfully, we're all back together. To my right is Rob Paratte. He's our Executive Vice President in charge of leasing and deals with our major tenant relationships. To my left is a combo now, Eliott Trencher, Executive Vice President, recently appointed as interim CFO, and he's also our Chief Investment Officer. To my far left is our President, Tyler Rose. Are we supposed to do? Sorry. Hey, cool. Thanks for that, John. What are the top three reasons an investor should buy Kilroy stock today instead of any other listed property company? Well, I think allocation of capital. With regard to what we're doing now, we have a fabulous development pipeline. It's producing extraordinary returns, best-in-class product, invest in class markets. I think it's a real differentiator. We moved into Austin recently. That's another example of an area where we're allocating capital. As you may have seen in our deck that we published this morning, we have entered into escrow. Actually, we signed the PSA, gone hard, and we'll be closing later this week on a property, a major property, for a 500,000 sq ft ground-up development in the domain area of Austin. I think we're gonna end up between Indeed Tower, which we bought less than a year ago in the CBD. With this new asset, I think we're gonna end up with the two best assets in all of Greater Austin. Then the second thing is a best-in-class portfolio, where our portfolio is about 10-11 years old on average. It is the type of product that people wanna be in. We've talked about this a lot over the years, as well as here at the Citi conference, and we're seeing that tenants are definitely gearing themselves up to the quality space and moving into the quality space because it's what their people want. Lastly is improving fundamentals. In all of our markets, at varying rates, we're seeing increased demand, increased rental rates, increased valuations for high-quality space. The activity is on the rise. We're seeing that in all of our markets, and particularly in life science, but also now in office and in apartments. Those are the three reasons. Thanks. You know, John, as people do their screens here on office, they still think of you as largely a West Coast company, maybe California company, probably less so an Austin company. You know, just using that sentiment or that investor mindset for a second, you know, how bad are things in California, and should people really be worried? Well, if you look at San Diego, it was sleepy a few years back. Now it's become a tech mecca. Obviously, it's always been life science. That market's on fire. Rents are going up exponentially. Demand is extraordinary, and it's a very well-run city. Has good schools, has all that sort of stuff. In L.A., it's always been a tale of multiple cities within the greater L.A. area, and the West Side and Hollywood have tended to be the best places to be, along with Culver City. Obviously, on the West Side, you have a lot of amenities and whatnot. You do have some homeless issues and some lawlessness issues throughout California. This is a result of very bad policy. Happily, what we're now. I want to just cover San Francisco. San Francisco has had a couple of big whacks. One is homelessness and lawlessness. Obviously it's been the most rigid city, I think, probably in the country on COVID. That latter part is now changing. A number of major tech companies have come out and supported London Breed. They've said that they're going to start refilling their buildings here soon. That's a very positive sign. With regard to the lawlessness issue, there are two recalls going on, one for the district attorney of San Francisco and the other for the district attorney for the county of Los Angeles, and I think we're gonna be successful in those efforts. That is as a result, not of some right-wing group or some whatever group, it is a coalition of people that are just fed up. Businesses, homeowners, small business owners, school, you know, attendees, teachers, et cetera. You just can't have lawlessness. You have to have people to prosecute the laws and whatnot, and that is definitely changing, and I think you're gonna see some very positive things happen in upcoming elections. For those of you who may have noticed, they just threw out three crazy people from the school board up in San Francisco, 78% of residents that voted in San Francisco. You can't do that with other than a broad coalition. I think that's what's really positive. We are seeing, and Rob can talk later, about the fact that people are really beginning to reoccupy and whatnot. I think that's gonna change things dramatically. A couple hours ago, I guess at this point, Marc Holliday from SL Green spoke about the less of a correlation between sort of that occupancy and tenant leasing trends and desires. Are you seeing the same? Do we need people to reoccupy to get leasing up again? I'm sorry. The last part of the question, I didn't. Does occupancy in the office buildings need to come back before sort of more leasing decisions are made? You wanna take that one, Rob? The answer is yes and no. We have it in our portfolio at Kilroy in the Silicon Valley and in San Francisco. I'm talking about, we have activity now that's expansionary, and tenants are sort of, I'd say, in the 25% reoccupancy mode in the Bay Area right now. But that said, there are companies, some of whom we're talking to, that have already made plans or are thinking about 2025, 2026, 2027, because one thing, Manny, as you've heard us say on earnings calls and meetings like this over time, tech, even in 2020, in the depths of 2020, tech had record-breaking hiring, and they've continued on that trend. We believe that once people are back in the office, and it's the first time during the pandemic that executives at tech companies actually have conviction about bringing their employees back. It's not till you're coming back sort of in May, you're getting a notice saying, "You come back three days a week," or in Microsoft's case, one day a week, and then you ramp up. I think it's sort of a confluence of you continue hiring, but you start bringing people back in. You have a much better idea of what your footprint is, and therefore, I believe in cities, even San Francisco, you'll start to see demand pick up. What's Kilroy's work from home or work from office policy right now? Work from the office. We've always had, as a company, way before COVID, we've had the, at the discretion of supervisors, so they can adjust people's schedules. I mean, after all, people have kids in sports. They have, parents perhaps that live at home. They have special needs children, whatever it might be. We've always had a degree of flexibility, but inherently, we're an office company. Now, we have, changed one or two of our offices around a little bit, and we're going to change our Westside Media Center office, which is our headquarters. We're gonna move our corporate headquarters out of there into Santa Monica to one of our buildings that's coming back, because we can then move it into brand-new space rather than try to, redo the space as we occupy it. It was funny to think that we moved in there 15 years ago or so. It was the most modern, sort of techy, kinda cool space. Now you look at it and you say, like, "Where," You know, we ourselves have been in a little bit in the dark ages at our corporate offices, but our policy is work from home. I can tell you that our people are so excited to be back in the office. San Diego, you know, we had to shut down for a while because of the rules, but it's been open for quite some time, and the energy level in that office is amazing. The energy level is pretty good in all our offices. Where you have these policies by politicians that have been really harsh, understandably, the energy level is less. It's interesting. In San Francisco, our parking garage at our office and some of our other garages is now back to almost full revenue. People are in the city. It's interesting. They're in the restaurants, not all of them. They're in the bars. They're in their places of worship. They're in the sporting places. They're even in the concert halls, and they're in, many cases, in the movie theaters. They haven't been required to come back to work. I think there are a lot of folks, frankly. I don't wanna say this for anybody here, of course, but I think there's a lot of people that do more than work during working hours when they work from home. Eliott's got an interesting story about that, but you can tell it later. Well- Not about Eliott, about somebody who's related to him. They just got the notice. He works for a big tech company in New York, and he's been living in his spare bedroom for the last year, and he just got the notice, "You will be in the office three days a week, and you will be back by," what is it, April? April 3rd. April 3rd, or you will not have a job. All of a sudden, "Oh my golly, I've gotta go to work." Yeah. Rob, maybe this is one for you. It's coming from the live Q&A side here. Given your focus on tech or at least your interactions with tech, what is the change post-COVID? You know, how much less occupancy are companies assuming? How are they altering or fine-tuning their space to match that? It's a good question. We've spent a lot of time talking with our clients as well as prospects about that. CBRE, just to start with the statistics, CBRE surveyed 800, over 800 companies in the U.S. about their growth needs, their need for space, are they giving back? Less than 7% of those 800 companies said, "We're gonna need less space." It's either stable or growing. As I said earlier, there's massive hiring that's continuing to go on in life science and office as it relates to tech. I think that's you know, kind of the bottom line in terms of how the space will get absorbed. It's interesting, you know, Manny and the group, some of the biggest tech companies and others that aren't as big have been consuming massive amounts of new space. If you look at, Facebook just or Meta just took 500,000 sq ft-700,000 sq ft. It was a remaining big block in Austin. They've taken other big spaces around. You've seen Amazon take big spaces in various markets and Microsoft and many others. While they've not been back to work, they've been consuming huge amounts of new space. You notice what I said, new space. It's space that works for their population. I've spoken for years about the decline of a lot of the older buildings, and I think COVID has just accelerated that obsolescence. You've mentioned Marc Holliday. Look at One Vanderbilt and how the leasing they've done all through COVID, and it's been at the expense of a lot of older buildings that just do not comport to people's new needs. The last thing I'd say on that, touching on what John said, is that there is a transition going on. It's been going on during the pandemic, but tenants with leases in place are reconfiguring their space, and they're reconfiguring it to spread people out, not so much because of social distancing concerns. That's part of it, but more about quality of life for the workforce. A big component of every office floor we're seeing in the companies we're talking to is what I would call the hospitality component of that floor, where there's areas to gather socially, have beverages, hang out after work. If you couple that with the massive hiring we've been talking about, we don't see a decrease in need for space. Right now, I hate foretelling the future, but this quarter, thus far, we have more activity. We're in more discussions this quarter than we had any quarter in 2021, and over 95% of those discussions are expansionary. You know, an interesting thing about modern office space, it's the meeting room is no longer always a conference room. It's more like a living room. Sometimes they're big, sometimes they're small. Sometimes they're set up differently or reconfigured even daily. Indeed, which is the latest, greatest, biggest building that we bought that's in Austin, they have nine floors. Their top three floors are all amenity space. Then they have amenity space, obviously, on the six floors where they actually office. It's all geared towards attracting and retaining and creating a really pleasant, fun, hip workplace environment. This business of the benches and so forth that we saw for so long where everybody's sort of crammed in like this and, you know, you're doing and talking on the phone or I can't hear myself think. It reminds me of the. We've lost Manny, I think. Yep. We've lost him. I'll actually be able to take over for Manny while we try to get him connected again. Okay. Sorry about that, guys. I guess switching the conversation towards the Austin deal that you announced today, right? Can you just talk about sort of the growth strategy there in Austin, some details about the, you know, project that you'll be doing there as well? I'm not sure I heard all that correctly, but let me start, then I'll have Eliott follow up. Our strategy on Austin was a similar strategy to what we had when we moved into San Francisco, when we moved into Hollywood, when we moved into Seattle. That is have critical mass, have super assets that you can add value to if you're buying them. Immediately get into good development where we really know what we're doing. I think we offer a better mousetrap. I think in this kind of environment, we create more value there because we get better returns and generally have a lower cost in terms of cost per square foot. Austin was exactly that case. We tried for five years. We looked at that market. We looked at buildings. We looked at companies. We looked at any number of opportunities. We looked at development sites. We found an off-market deal in Indeed Tower, which is the largest building. It was the largest office deal ever done. I might point out that was an off-market deal. If we look at it, Indeed Tower, that's about 11 or 12 years old over in The Domain with a much lower rent, sold at a cap rate that was considerably lower than what we paid. We think we made about $125 million on that purchase alone, and the rents have skyrocketed. We underwrote to $43. We're now doing deals in the low- to mid-$50s. We like that. We've been looking through, you know, every kind of opportunity, and we came upon this deal that is in the decks. It was formerly known as Arena Tower. We're not gonna call it Arena Tower because it's next to Major League Soccer, and those are called stadiums, they're not called arenas. But in any event, that was an off-market deal. We bought the land for $40 million. It's already entitled. It's already has building permits, and we're ready to go. We'll be under construction by midyear. Those folks spent probably $8 million on design and on permitting and carrying and all the rest. We'll have an asset that we'll be in for about $700 a ft. You want to take over from there? Yeah. We think all in will be in the low $700s a ft. As John referenced, we've seen trades literally down the block that were much closer to $800 a ft for older product. We think it just kinda is a testament to the value creation through our development strategy. In terms of the bigger picture as it relates to Austin, CBD is a market that we've been focused on because it has a lot of the characteristics of the West Coast markets. It's got a public transportation. There's an amenity base there. It's walkable. There are some supply constraints, believe it or not, even though it is Texas. We think that this site that we bought by The Domain has a lot of those similar characteristics. You have the amenity base of The Domain Mall, the restaurants. There's 4,000 apartments nearby. There's almost 1,000 hotel rooms. We're right next to all of that. You have the amenity piece. You have the validation from large cap technology. It's a 3 million sq ft class A market that's 99% leased today with anchors such as Amazon and Meta, Indeed as well, and Expedia. There's a lot of validation that gives us comfort in a project of this size, about 500,000 sq ft. We have our own identity because we're literally catty-corner from The Domain. We're not sort of bound by the constraints of The Domain, but we think we can drift off of the benefits of it. We think it kind of brings the best of all worlds. Got it. Thank you. Just touching on Austin as well, I think if I'm not mistaken, Rob, you were leading the leasing efforts just for now. Is there any plan to add on another person, a leasing head down there? Or what's just sort of the strategy on that side? Yeah, we have plans. We, in fact, hired somebody, who was an executive at Lionstone who has a background in leasing and acquisitions. His first day actually is today. Okay. He's rolling his sleeves up already, but we're really happy about hiring this individual. We also have moved one of our senior asset managers from Los Angeles who wanted to move to Austin. You know, part of our retention of our employees is letting people have mobility. One of our key people in L.A. has relocated to Austin to run the asset management function, and we're gonna continue with those two there to grow our team the way we've done in every market we've been in. Got it. If we can change the conversation towards just the life science development aspect of the piece, right? I know you guys delivered some stuff at Oyster Point One, and you're working on two and sort of progressing along that. Can you guys just update us on sort of what the status is on the overall project and sort of what that looks like? Yeah. Let me just put it in context for everybody. At Oyster Point, it's called Kilroy Oyster Point. It's in the city of South San Francisco. It has a mile of frontage. It's not all straight, but on the bay. It's next to Genentech and all the major companies. It's the largest project there. We can do over 3 million sq ft. We delivered roughly 700,000 sq ft fully leased just recently. We're under construction with approximately 900,000 sq ft in three buildings. We have a number of phases to go, of course. We also have quite a bit of life science down in San Diego. So you wanna take Oyster Point- Sure. You can take San Diego. Sure. As we've said numerous times, the market there is probably the hottest market on the West Coast next to, you know, San Diego and Oyster Point. Right now there are 61 active requirements that total about 3.6 million sq ft in the market. Average tenant size in that market is about 57,000 sq ft. Life science companies have continued to hire during the pandemic as well. Genentech recently has begun moving their people back into the labs and office, which they hadn't done prior. We're very, you know, excited about that activity coming back to the market. We have literally, it feels like Austin sometimes. We have tours or presentations every other week. We have one. I'm going back to California on Thursday to do a major presentation for life science users. We couldn't be more pleased. Rent growth is up over 15% from last year on deals that are being signed. Our steel is just coming out. We have our cores up, but once we start getting framing and steel really on the skyline, activity will pick up. The last thing I'd finish with, which is terrific for us, is that we have this sweet spot of delivery where we're delivering in the fourth quarter of 2023, and there's no meaningful competition on either side of us in that window. We feel very confident about our chances of success there. Actually, it's borne out by the activity we have going on today. By the way, talking about rent growth. When we underwrote and got really enthused about assembling Oyster Point, we looked at what the rents were in South San Francisco at that time, and they were in the high 50s. We sort of forecasted we'd get into the early 60s, but our thesis was pretty simple. A lot of the same companies and the same kinds of users that are in South San Francisco are in Cambridge. At the time, Cambridge was in the $85 triple net range. You know where it's gone. It's flown way past $100 now. City of South San Francisco, you're gonna see $80 triple net very soon. We're pretty enthused about our position there. San Diego. As far as San Diego goes, on the demand side, it's been very strong as well. San Diego, kinda ground zero has been Torrey Pines historically. Torrey Pines is full, spilled over into UTC. UTC is effectively full, and now it's going into other places. One thing that you've heard us talk about in the past is the conversions that are happening and how maybe we're a little cautious about some of that. Now, with that said, we announced previously that we are converting three of our properties in UTC and Del Mar to life science. The important difference is we leased all three of our properties before we spent a dime converting them. We've de-risked our conversion. We've proven out that the quality that we have on the office side does lend itself to life science. We had studied where the demographics for life science talent are in the San Diego area, and they're concentrated. There is a pocket downtown, but there's a big concentration in Del Mar along the 56 corridor. That kinda gave us comfort that you will see demand for life science come to Del Mar. We started studying our buildings to figure out which of those lend themselves to conversion. When the time came, we were prepared. Now fast forward, you've seen some of that demand kinda continue to go across the 56 corridor, and a 500,000 sq ft tenant has just signed the lease on the 56. For those that are familiar with life science, the cluster model is very much built on that anchor, and the virtuous cycle can start once you have that validation. We've seen that. It gave us comfort as we think about the land that we have along the 56, that it could work for life science, and we've positioned ourselves accordingly. The last thing I'd add to what Eliott said, at both Oyster Point and in the San Diego life science markets of Torrey Pines and UTC specifically, and Oyster Point, all three markets, vacancy is less than 2%. That's what's partially driving the move in San Diego into the corridors Eliott's talking about. Again, in his point about clustering, the sweet spot for life science really is the Oyster Point sub-market, both in terms of access and for us, it's the scalability that we can provide a growing company. Got it. Thanks, guys. Just a question that we've been asking in each of these sessions so far today. We were just wondering, what is the biggest growth opportunity that you believe the market is not giving you credit for today? I'm sorry, you're not coming in very clear, so. I'm sorry. What is the biggest growth opportunity that you believe the market is not giving you today? Yeah, I think it's our development pipeline. Nobody has a robust development pipeline. There's not another office company that's public that I know of in the United States that has the pipeline we have in the markets you wanna be, that's geared towards the types of tenants that are really leasing space. There's huge value creation there. Just think of what we did with the Exchange, which was 750,000 sq ft that we had $560 million-$570 million invested in it. Dropbox, a non-credit tenant, was the tenant. Had 11 years left on the lease or whatever it was, and we sold it for just under $1,600 a sq ft, the highest price ever in San Francisco. You know, we doubled the value, and I think we ended up with something like 11% or so average return, unlevered for the two years during Safe Harbor. The other thing would be our mark-to-market is changing pretty drastically. We say that it's about 10%, I think, 15%, but rents are going up quite a bit, and I think that where rents go, you know, they don't go to the moon, but they're going there in certain markets. I think there's an embedded into Kilroy some pretty strong growth. Then it's just back to the quality of the portfolio, which nobody has the modern portfolio at scale that we do, and it's exactly the kind of portfolio, in most cases, that their tenants wanna be in. As Eliott mentioned, while Del Mar has been a life science community for some period of time, there was nothing that was available. As soon as UTC and Torrey Pines couldn't accommodate any more, we found that we could take those facilities, some of which were 10 or 15 years old, that we owned, that comported themselves very nicely to life science, and Eliott gave you the math. I think there's three areas there, not two, that are pretty significant. Got it. Thanks, guys. Manny, I think we have you back online or no? Hopefully. Okay. Welcome back. That was a- That's what happens when you work from home. Exactly. [crosstalk], John, that work from anywhere doesn't always work. It's I need to go get the delivery now. Dropped the internet. What can we do? I actually had a question similar to that. And going back to the point you made earlier, Eliott, your friend who was sleeping on your couch, he gets this letter from his boss saying, "Come in or you're terminated." Let's relate that back to this question of, you know, what was his first reaction? Is it move to New York or is it, I'm gonna find a job that lets me stay here? I'm gonna get Eliott in so much trouble for having brought his brother into this. Sorry, bud. No, no worries. I mean, I think everyone there is figuring it out, honestly. You have to go back. If you want a job, you gotta go back to where your job is. Now, different companies, I think, have different approaches to this. I think what we've seen from a lot of the large cap tech, and Rob could probably speak to this as well, is creating different hubs across the country of, you know, maybe you can live here, maybe you can live there. It has to be where there's a cluster because of the benefit of having different folks together and the importance of how that kinda drives business, that they're not gonna let people live anywhere. If there's a critical mass, and by the way, those critical masses overlap very much with a lot of the markets that we're in, maybe that's a slightly different story. I guess outside of Austin, are you guys playing into that at all? What other sort of clusters outside of San Francisco and L.A. and Seattle and San Diego and Austin are you looking at? Well, we didn't move to Austin just to buy a building, and now we're developing a building, and we didn't move to Austin just to be in Austin. I think you'll see us in other areas in due course. One of the reasons that piqued our interest about Austin was the vast number of tech companies that we regularly talk with, and Rob meets with them all the time. What were some of the things they were saying that led us to go to Austin? All right, there's the bell. For years, as we looked at Austin, our clients as well as others kept asking, "When are you coming to Austin?" It really. There's a time gap between a lot of the product that's in the Austin market, meaning there's a lot of it that was built in the late 1990s and 2000, and then there's a big gap to modern office buildings. Indeed Tower was so attractive to us because it was the type of thing Kilroy would build, and that gave us the foundation and foothold. Growth is gonna continue in Austin. It's. There's been massive absorption downtown between Meta and TikTok recently, almost 1 million sq ft in the last 90 days. It's a great market. We see a lot more potential for growth in terms of our clients and companies moving into the city. Um, and just- What about your rapid fire questions? We'll get there. We have four minutes and one second left. Oh, I thought we were done. What was that bell that we just heard? It was cutting me off. Oh, okay. A warning bell. That we just didn't wanna hear from Rob. On the new land site, and pardon me if I missed this while I was disconnected, but on the new land site in Austin, you guys are going full spec there. You typically haven't been a spec developer unless you had a tenant in your back pocket that you weren't really spec or you really thought the demand was gonna be there by the time you deliver. Which one of those is it here? It's spec. Sorry to correct you, but the vast majority, like 80%-90% of the development we have done, which is $5 billion or $6 billion in this cycle, has been spec. It's just leased during construction. I have no doubt that this building is gonna do very well. It's going to be the best building in The Domain with more bells and whistles, and it's in a great location with great amenities, and the demand characteristics are just fantastic. In terms of it, you keep saying it's in The Domain. I looked at the map. It looks like it's across the street from The Domain. Yeah. Um, there's another- That's what Eliott said. There's another developer we've been following for a long time that has space across the street from The Domain, and that across the street has been a big issue for them. Why do you think it'll be different here? Why do you think you're more sort of Domain proximate than maybe you really are? Do you wanna take that? Yeah. I think that what we really looked at here is a few things. One, we're right next to the soccer stadium. The soccer stadium has a lot of life to it. It brings a lot of energy to the area, and it makes it a little bit more of a, you know, walkable, amenitized location than a typical suburban location. It also is gonna be walkable to transit because of the soccer stadium. When we think about what and it's gonna be brand new with all the bells and whistles, as John said, that we've brought in other markets. It really is not about whether it's inside the walls of The Domain or outside. It's about what The Domain represents. The Domain is a very centralized location, and it has an amenity base there. We're able to leverage both of those. We're also gonna be able to leverage the soccer stadium and the transit, to build what we think will be a successful project. Right next door at the soccer stadium, they'll have a mixed-use development that's retail, apartments, a hotel, and some office space. It's literally just adjacent to us. We think we're pretty well positioned. Now to the rapid fire. What will same-store NOI growth be for the office sector overall in 2023? 3%. What will the 10-year Treasury yield be a year from today? 2.25%. Will your property sector have more or fewer public companies a year from now? Fewer. Great. Well, we have 45 seconds left, so I'll ask one more question. Just where are we on the CFO search? Well, Michelle, as you know, resigned. She took a position with a private company that's doing pretty exciting stuff. They do ski areas and golf courses and marinas and all sorts of things. We were sorry to see her go. She's been with us for 17 years. She's been a terrific asset. When we began to think about succession for Tyler, we thought of three candidates, one of whom was Michelle, another woman in our office, and Eliott. Eliott, when he joined from Cohen & Steers, my goal was to have him be the next CFO. Then we made him CIO, and he liked that so much he didn't want to be the CFO. Now he gets to be both. We'll start a process. We determine exactly what we need, and we'll have a CFO that is geared towards the Kilroy that you're seeing now, which is bigger and more markets and so forth. Thanks, everyone. Thank you, John. Andy, good to see you. Thank you, everybody. Thank you.