Welcome to the 10:35 A.M. Tuesday session at Citi's 2023 Global Property CEO Conference. I'm Michael Griffin, here with Nick Joseph from Citi Research, and we're pleased to have with us Kilroy Realty and CEO John Kilroy. This session is for Citi 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 in the room or the webcast, you can sign on to liveqa.com and enter code GPC 2023 to submit any questions if you do not want your hand raised. John, we'll turn it over to you to introduce Kilroy and any members of management that are with you here today, provide any opening remarks, and then we'll get into Q&A. Okay, great. Thanks for the song. That was a good intro. Eliott Trencher, our CFO, is to my immediate right. Justin Smart, our President, is to his right. Rob Paratte is to my left, Bill Hutchinson to his left. Some opening lines about Kilroy, if you want to. Yeah. Well, okay. For those who don't know Kilroy, we're the premier office landlord with a significant portion of life science and some apartments as well, in the West Coast and in Austin. We've been very active in developing over the years. In 2010, we had a big transition from Southern California to Northern California and Seattle and beyond, became very big in life science as well. We're looking for the next 2010 moment, which we think is gonna be within the next year or so. Great. We're starting off all these sessions with the same opening questions. What are the top 3 reasons an investor should buy your stock today? Well, I think best-in-class properties benefiting from a flight to quality. There is a major movement that I've been talking about for years, where people are going towards premier product, and the lion's share of product in this country is not premier, and we're seeing a tremendous movement to premier. The team track record of capital allocation, and as I say, waiting for our next for the next 2010 moment, we're very poised for that, and we have some pretty good things going on. Low leverage, investment-grade balance sheet with no new near-term debt maturities, a peer-leading liquidity and a well-covered dividend. Finally, low leverage, investment-grade balance sheet, as I just said. Well, I think I covered that one. Thanks for that, John. Just starting off, you know, with the headwinds facing the office sector currently, I think you touched on some there, you know, why is Kilroy differentiated from the competition in terms of portfolio composition, tenant makeups, you know, or other growth opportunities? I know in y'all's investor deck, you put this great slide showing offensive and defensive. I think that's one of your favorite slides. Just maybe expand on the opportunity set there a bit. Well, I know that everyone gets up here and says they've got a best-in-class portfolio, but if you take a look at the peer group of all the office companies, the average age of their portfolio is 34 years. Some are twice that. Ours is 11 years, and that's because we've been such active developers and capital recyclers. As I mentioned, I think that really positions us well for where people are going in terms of demand. Then, from a capital allocation standpoint, we think development ultimately will come back into favor because premier property is declining. We've had a 60% reduction in the last three years of good product under construction in this country. At the same time, we're, we have this movement towards quality product. I think those two things ultimately collide. We're gonna be very well positioned at that point. You know, maybe just with that quality product, I think about L.A. as an example. We've seen some defaults in the downtown market for some office assets, which may not be one of the better submarkets out there. I guess, as an example for this, how is Kilroy's portfolio able to benefit from that flight to quality trend, maybe, you know, more attractive submarkets, better buildings, that kind of stuff? Well, the assets you're talking to, I think, are probably Brookfield in downtown Los Angeles. We've never been in downtown Los Angeles. I'm never gonna say never other than the way I just said it, but it's not been a market we've ever looked at seriously. I would imagine that if you have a portfolio that has quite a bit of debt on it at the property level, why would you put CapEx into a building where you have a loan coming due in a short period of time? You know, we're expected to get not only a return on capital, but a return of capital. Just a little bit about Kilroy. Throughout the entire platform, we have, I think it's two assets that have project-level debt, so we don't have a lender telling us what to do. If we decide that we're gonna invest capital in a project, we're gonna do it with the expectation that not only we receive appropriate returns, but a return of that capital over a period of time. In terms of how we might benefit from this, I think about 70% of the product in the United States in office is obsolete or nearing obsolescence, and we have no interest in investing in that group of properties. I think it's a loser over the long period of time. If there's going to be an opportunity set for sure, there's dislocations in the market right now. We're seeing some of that, as you mentioned, with people turning the keys back. In most of those cases, with the big borrowers and owners, I think that is a negotiation to get more term or more favorable terms with the lender. A lot of the assets that are being turned back or threatened to be turned back are not of interest to us. We're very focused on the locations that are going to be great locations for the long term and on the physicality of assets. The fact that you can buy something cheaply does not necessarily mean it's an asset that we want to invest in. For that 70% that you highlighted that could be obsolete, are there any buildings in Kilroy's portfolio that fall within that 70%, in your opinion? Well, I don't think so, but I do feel that there's Well, I guess there's a couple of assets that are the lower tier assets that I would say over time could end up there, and those will be disposed of. As you've seen, we've been very active capital recyclers over the years. We have a chart. By the way, we posted a deck that's available on our website that sort of updates everything in terms of what we're thinking and how we're playing the cycle and so forth. We have a couple assets that we are wanting to dispose of, and I think we will. We're not gonna dispose of them without getting the kind of prices we want. Just a note about that. If cap rates were, I'll make it up, 4.5 to high 5s on quality stuff a couple of years ago, they might be higher than that today, for sure, particularly if you have over market rents. If you have over market rents, look, think of this math, okay? If you had something that at a five cap rate was worth $1,200, 3 or 4 years ago, 2 or 3 years ago, it might be worth $900 today. The rents, if they're over market, that might be the equivalent of a much lower cap rate. Our look, our view is we're trading at a big discount to, we think, the value of our underlying real estate. If we take something and sell it for $900, I'm not signaling any particular piece of property, for $900. We thought it was worth $1,100 a couple of years ago. The average of our portfolio is valued by our share price as $500. We can redeploy that into assets that we think are better, that's probably a good trade. Maybe we just switch over to the return from office trends. You've got a good slide in your deck here that talks about commentary of business leaders wanting people back in the office. Salesforce, I know, talked on their earnings call about the benefits of in-person work. When you hear that and marry it up with the fact that, as an example, they're subleasing more space in San Francisco, you've got 181 Fremont at, you know, Facebook Takes, you know, full building, I think, you know, delivered in 2018 that is now in a sublease space. I guess, how do you marry the idea that, you know, companies want people back to work, but at the same time, you know, they continue to give up office space? I'm gonna turn it over to Rob in a second, I'll make a comment about one of those buildings. It was a lousy floor plate. The tenant took it because it was available. 14,000 sq ft with a 15 elevators going through it to serve the apartments above and so forth, or the condos above. In my view, we looked at that asset in terms of potentially buying it. We could never get comfortable with the office space there. It doesn't surprise me they're getting out of it. There are tenants that are gonna get out of things. You have edicts by their CFO or their CEO, reduce, reduce, get your spend under control and so forth. That's gonna influence even good buildings in the interim. In terms of, the whole utilization thing, Rob, if you could cover that. Sure. We did some research going back. If you look at going back as far as 2016, utilization, physical occupancy in properties across the nation were at a maximum of about 76%. In 2019, that dropped down to 74%. The point there I think that's really important is you never really get to 100% physical occupancy in a building unless, you know, if you're a call center or something like that, maybe you do, but that's not the type of tenant that we end up dealing with. There's that aspect. Then Michael, to your question about, you know, sublease space and specifically Salesforce in San Francisco. For the most part, with the exception of the building John mentioned, for the most part, the space is pretty high quality. To go to John's point, there is a flight to quality. That space will be sublet eventually. A case in point is Google taking 275,000 sq ft in South of Market area in a building that's, you know, pretty premier quality. Although big tech is on the sidelines, they'll be opportunistic when you see it. One of the last thing I'd say, last block of that bigger sublease space they put on the market is gonna be largely attractive to banks, finance, insurance, because that's a lot of the tenant roster if you take Salesforce out. Appreciate that. Just, you know, Rob and John, in your conversations with real estate leaders, I guess, you know, we've heard the moniker that maybe a recession could be good for office this time, just given that it could bring leverage for employers to bring employees back. You know, we heard about Amazon mandating 3-day return to work starting in May. You know, in a similar vein, I think you had about 14 or 15 thousand employees in their Slack channel, you know, kind of vehemently defending the remote work policy. I mean, how confident are you that these business leaders can bring their people back, and ultimately the leverage that they could get from, you know, potential macroeconomic downturn? Well, they created a bit of a problem. I mean, if you think about the social media companies, there's a lot of opinions that go on amongst the workforce and whatnot, and there's been a little bit of resistance, but we're seeing it in our buildings. We're seeing the utilization rate. We've seen it double in San Francisco, double in Seattle since Labor Day. We're seeing it back to normal, as Rob mentioned, in San Diego, back to normal in Austin. L.A. is about 2/3 of the way back to normal in our buildings and whatnot. With these mandates, and they're increasingly prolific, people are serious. People are getting fired. If you take a look. Eliott, what was the number in terms of the amount of folks that have they've laid off and what% are remote? Yeah. When you look at the percentage of layoffs at Big Tech, we have a slide on this in our deck. Call it about 3%-5% of the workforce has been laid off, but about 13% of people laid off were remote. They're disproportionately targeting remote employees. We also would say it's not a coincidence that folks will announce a layoff and then subsequently announce a return to office policy. They know what's going on. The pushback is not a surprise. They're very strategic, and we think very deliberate. From everything we can see, these are real mandates. I think it's helpful to put in perspective, too, the amount of hiring that went on, since the pandemic. In most of these companies, it's anywhere from 30% to 100% increase in employment. So when you talk about a 3%-5% reduction in workforce, that's really not very much. The mandates to get back to work, we're seeing in our buildings increase occupancy, a tremendous increase. I think that's going to continue. It's gonna be spotty, it's gonna be choppy, but it is already materially increased in the last 6 months, and there are a lot more CEOs now saying, "Get back or you're fired. You can only stay and hide in your PJs and play video games during the middle of the day for so long. Correct. Companies are gonna rise up to it. The operative word is mandate, as opposed to it'd be nice if you came in two or three days a week. To John's point, if you look at and go to afterwards, go to our deck that's posted and look at page 14. It's a really compelling slide about layoffs and putting proportion to the amount of hiring that was done from 2020. Just a few examples, Amazon, 91% increase in hiring. Google, 47%. Meta, you know, 70%. John and I meet frequently with the heads of all these companies, and pretty much to a company, they've said, "The hiring, the new hires that we brought on from 2020, over 50% of them have never been in one of our facilities globally." If you look at what John's talking about earlier, with new starts declining, supply being absorbed in the premium space, and mandates, real mandates now to bring people back to work, we look at that as sort of, you know, that is the trend that's directionally right. How long it takes for all of that to converge is, you know, remains to be seen. Robert, maybe we can talk about the leasing market for a bit. I know you've got some notable expirations this year. I think about DIRECTV in L.A., I think about Amazon up in Seattle. You know, can you update us on any conversations you're having with some of these larger notable expirations? You know, what, if anything, it'll take to get tenants over the finish line, whether it's an increase in TIs, concessions, free rents, you know, any commentary there would be helpful. Sure. Let's just talk about what tenants are looking for today. The two drivers of demand right now are lease expirations and flight to quality. When you're in a conversation with a tenant, probably number one thing is surprisingly not rent, it's flexibility, because these real estate executives are, you know, being told, "You've gotta cut your real estate footprint by 30%," or whatever it is. They've also been in the position where when things turn and someone says, "I need 300 seats in XYZ city," it takes six months to a year to actually outfit that space and be back in it. They're very mindful of flexibility. What we're seeing in our negotiations are, fortunately shorter terms right now with little to no CapEx, which we actually really like because we think the market will improve, eventually markets will improve. Michael, specifically with West States, we, you know, underwrote the project two ways. One was, the tenant stayed, and one was that they didn't stay. We had plans in the background, which Justin, John, myself, and our entire teams had been working on in the eventuality, they didn't renew. January second, we had a really large team meeting on site. We've developed multiple plans for refreshing the amenities space, lobbies, that kind of thing. We already have as a result of that, we've got activity, and it's some is tech, some is not tech, you know, 60,000 feet and greater. It's sort of meaningful size tenants in terms of the Seattle market. We're, you know, we didn't want it back, but we're gonna we're positioned to really, I think, do well over time in getting that re-leased. Maybe just on that demand from various sectors. You know, obviously, we've seen tech take the outsized lion share of demand, call it, over the past decade. Have you seen more interest from maybe some of those traditional, you know, financial professional services? Just given that tech does make a greater composition in your portfolio, could we see, you know, more diversification of the strategy going forward? Well, if you think about Kilroy, in the office area, 40% of our occupancy is non-tech. We're now seeing some new different kinds of tech come on to the market. You see AI increasing significantly. I think everybody knows. I'm not supposed to mention the name of the company, even though they have their logo on it, on a 750,000 sq ft building up in Seattle at 333 Dexter. It's an early letter in the alphabet, and it's not Amazon. You know, that was our first experience with artificial intelligence. That's their global headquarters. We recently consulted, just sort of pro bono with somebody who's gotten a lot of publicity recently, which is OpenAI. That particular field, I think, is gonna become, from everything I hear, one of the greatest tech advancements. Now, I'm not sure it's totally an advancement for mankind. I'm a little creeped out by artificial intelligence myself. But there are all kinds of new technologies coming, so by no means are we abandoning the idea that tech is good. I think tech and life science are gonna be the two major drivers in this country and probably other countries for some years to come, and it's gonna go up and down. In terms of taking steps to reduce tech, we don't have a particular motive there or plan there, but we are seeing a big increase in the finance area, in the, in the, in some of the more traditional folks. Indeed Tower is an example in Austin. It has Indeed, which is arguably tech, but employment, but they use technology just like LinkedIn does. Then it's all basically finance and related activities. Professional services. Yeah. It's a good mix, and that's consistent throughout our markets. If you look at our One Paseo project, the office component is entirely leased by, you know, banking, finance, professional services. We think we have a really good diversification across the West. Maybe switching over to. Actually, we did have a good question come in from live QA. Thank you for the who submitted it. Have you seen any stats, I guess, to get back to your point earlier, Eliott, any stats on how many of these laid off people laid off by tech companies have been able to get another tech job, like, pretty soon afterwards? Well, ZipRecruiter as one to quote, but others have said it's about 3-4 months, depending on the. Let me characterize the layoffs too. Some of these layoffs are related to recruiting, HR, the types of things you're doing. If you're one of the big FAANG companies and you're bringing 3,000-5,000 people in a week to indoctrinate them into your program, those because you have a hiring freeze going on or layoffs, those jobs go away. For specific software capabilities, we've heard 3-4 months, and in some cases less. We had just another one come in on AI, John, on just your comments earlier. With respect to the opportunity in artificial intelligence, do you believe it will follow traditional tech patterns focused on those knowledge centers in San Fran and the West Coast? Absolutely. Absolutely. Great. Let's move on to life science now. Definitely, you know, probably some more positive tailwinds, maybe relative to the traditional office sector you have in your deck, the pro forma, you know, that should be about 30% of the business. You recently announced a redevelopment of 4400 Bohannon down the peninsula. Just, you know, what are you seeing in a sense of demand, be it there, be it at KOP? We've kind of heard maybe mixed commentary about what's going on in South SF. Any update there would be helpful. Let me start with San Diego, and then I'm gonna pass it to Rob with regard to Northern California. We're very involved in UTC, Del Mar area, so it's Torrey Pines, UTC, Del Mar, where you have under 2% vacancy, huge year-over-year rent growth for the last number of years, and significant demand. That's sort of main and main. I've made comment, I think, at this conference before, and certainly in our conference calls, our quarterly calls and whatnot, that the fact that you can entitle something for life science and you can convert it to life science doesn't mean that people are gonna go into it. It's gotta be in the right area. I mean, just take a far extreme. You build the best life science building in the world, you put it out in the middle of a desert, how many people are you gonna get to go there? None. What we've seen in San Diego is, with the buzz around life science, we've seen quite a few people go out to Sorrento Mesa and buy older buildings and convert them, and I think it's gonna be a bloodbath there. I think that's just gonna be an area. It's not main and main. It's never attracted main and main kinda tenants. There might be a couple that started over there. It's typically attracted those that couldn't afford to be in UTC and in Torrey or Del Mar, and now you've got added supply there. I think that's gonna be a problem. There is also a project downtown in San Diego that some folks started. This one downtown, meaning the CBD, which has never been a life science location. It's over 1 million sq ft spec. I don't even think they're getting any RFPs for that project. There have been some folks that have made bets that I think are just really bad bets. That's why we're so focused, we're so constrained in our thinking about what's the circle that you really wanna be in, the main and main locations, and the kind of property that's premier. If you deviate from that, I think you put yourself at risk. Moving up to the Bay Area, you mentioned the Bohannon project and KOP. Sure. The Bohannon project is in Menlo Park, and it already has life science tenancy in the campus, in our campus. Are looking at that market. You have basically San Mateo, Redwood Shores, and Menlo Park as a subgroup of life science cluster. Gilead is the largest employer and life science company in that triad that I just mentioned, and they have pushed, because of their absorption, pushed life science into markets like Redwood City, Menlo Park, et cetera. We saw an opportunity. If you strictly try to re-lease as office, you have a finite pool, say it's 20 tenants. If you convert, not convert, but enhance to life science because it really is pretty a light refresh. You basically double the pool of tenants that you can go after. As, as we said, it's a, it's a proven life science submarket. We think we're gonna do well there and have done well leasing to life science. I might add about that particular group of assets. It's roughly, what, 400 and some thousand sq ft. We already have quite a few life science and medical related tenants, so it's kind of a natural for us. We're very confident that the return on investment there is gonna be terrific. Oyster Point, just quick recap. Our activity has been steady since the inception of the project. For all of you that have been there, you know what I'm talking about. It's unique in its position on the San Francisco Bay, 1 mile of bay trails, a lot of different amenities that other projects and locations in Oyster Point don't have. We also have one of the biggest companies in the life science space as a neighbor of ours. As we have undergone construction, and we're now up and out of the ground, and we've got steel topped out, our activity has increased. We're seeing a marked increase in single floor and double floor users. We also have users that could take up to an entire building. We're pleased with. It has been steady. Some have gone, some have come back. I guess one thing I would clarify is we're not, never have been after the early stage funded life science startups. We're mid-tier to name brand Big Pharma. John, how are you feeling about quality of life and vibrancy of CBDs and any green shoots we're seeing there versus, efforts still need to come? There's no question about it, I probably have been the most outspoken CEO, at least that I've heard, people reference I've been, with regard to CBDs and the way they're behaving and so forth. We've got some challenges throughout all of our big cities for varying reasons. In San Francisco, L.A., obviously New York and Chicago have other issues. We've allowed some things to happen that just aren't conducive to a great business environment. In San Francisco, as you know, we were active along with in a broad coalition to throw out the DA. Jenkins, who's the new DA, has done a good job, word needs to be proved there. They're cracking down on crime. The mayor, Mayor Breed, London Breed, has an initiative to supercharge the funding for the police department to deal with that issue. Again, the board of supervisors there is changing dramatically, which is really important because the lunatics have been running the place. I know I might offend some people that believe these policies could be good. If I do, I intend to. Because they're insane, okay? They're insane. People want safety. People wanna be able to go about their business. They wanna be able to walk down the street. They wanna be able to do all the things that we have generally expected and taken for granted, and I think we're starting to get back to those principles. In the city of Los Angeles, you know, we all attempted, not just real estate, but a broad cross-section of people to recall George Gascón, who oddly enough, had been the crackpot district attorney in San Francisco before he went to ruin L.A., or tried to. Amazingly, they wouldn't allow our side to be part of the recount. So that got hung up, and then they, you know, we couldn't recall him in time. He just suffered a rather horrible blow. Seven or eight deputy DAs in L.A. filed suit against him for retaliatory practices because they were disagreeing with not enforcing some of the laws they thought should be enforced. This just came out this morning that he's lost that suit, and it portends not a good path for him, we think, going forward, because if one prevailed, there will be more. There's a broad coalition of business interests across the political spectrum of citizens, across the economic spectrum of citizens. They just had enough with all this stuff. That's in San Francisco. That's in L.A. I think it's probably happening elsewhere around the country. I'm optimistic that we're gonna get things back on track. It's gonna take a while. Is that coming up? Oh, sorry, go ahead. Sorry. Go Sorry. Go ahead. I was gonna say, is that coming up in leasing discussions at all? Is this, you know, momentum you're seeing starting to bear fruit? Yeah. I mean, we talk about it in the sense that it's happening and people I think I've mentioned before, maybe at this conference, that business people need to know that problems are being addressed. They don't expect them to get resolved immediately. They took a long time to get to the point where they deteriorated. In the absence of having something where they can see that they're being addressed, over time, it can't help but negatively impact leasing or demand or whatever. Think of the poor shopkeepers and whatnot that have been crushed by this. People with their family, you know, their entire net worth in a restaurant or whatever it might be. I'm optimistic that we're gonna get this thing resolved, but it's gonna take time, and it's gonna take vigilance. John, I feel like we could spend the entire session just talking about that, but sadly, we have other topics to discuss. Just on demand on the development leasing pipeline, I know there continues to be leases done at Indeed Tower in Austin. You know, any insight into demand there? Maybe we've heard Austin from a tech perspective is a little weaker. Any update on Kettner in San Diego? Okay. We'll start with Kettner. We originally anticipated it'd be a large tenant. We've broken it up now. We've done a couple of deals. We're having very strong demand. I think that asset's gonna be terrific, and I think it's gonna meet its close to its performance. It's been delayed 'cause it came on stream during COVID, but we're getting very high rents, and so I'm optimistic about that. In Austin, we're now... You wanna talk about Austin? I wish I could, I wish I could announce something we're working on, but we're pretty confident in relatively short order, we'll be at 80% leased at Indeed. Activity's been, you know, very promising. Tech, big tech, kind of across the board, across the country is on the sidelines. In Austin, there are some notable sizable 500,000 sq ft tech requirements in outlying areas. One note I'd make is Apple is now moving into their 3 million sq ft campus in North Austin. There's a lot going on in Austin. It's just, you know, again, big tech is a little bit on the sideline, but then when you look at a 3 million sq ft campus coupled with another couple of users that are half million each, it's, in a market that size, actually still pretty impressive. Maybe just on expansion market opportunities. I know we just had that lively discussion about the regulatory environment on the West Coast, but, you know, I know no decision will be made overnight, but could you see yourself, if it made sense expanding into a, I don't know, a Phoenix, a Dallas, you know, some other kind of, you know, expansion market? Maybe. Maybe. I mean, we look at a lot of different markets, including the ones you just mentioned, as well as others. There's nothing that's actionable at this time. We've been looking at them for some period of time. My view is basically this: If you're gonna be in this, the long game, you have to take a long view, and you have to be ready to strike when it makes sense. This is a very dislocated, inefficient market right now. I think there's gonna be some great opportunities for Kilroy. Right now, I don't see them as being actionable in terms of geographic expansion. We will continue to look, but there's nothing that we're working on right now to announce. What's the opportunity set like at Flower Mart? You know, could we see that potentially be monetized at some juncture similar to The Exchange a few years ago? You know, any commentary around that would be helpful. The Exchange, of course, was an existing asset that was well-leased, so it had an income stream, whereas the Flower Mart is entitled. We're completing the wholesale Flower Mart, which is the relocation of the vendors. We'll soon scrape the new Flower Mart development site. We have 4 phases there that it's the largest, I think, development opportunity, 7 adjacent acres in the city. I'm confident that it'll do well over time, but we have no plans to start any kind of spec development there. In terms of monetizing it's pretty hard to do that if you don't have a building on it. You can always sell land, but that's not something we're considering at this time. Maybe lastly, just touching on the residential platform. I think you highlight in your deck that proforma over some time could reach about 20% of the company, but just, you know, any updated thoughts around there? I mean, you know, One Paseo is an example of a good kind of mixed use asset. Is that how we should maybe see, you know, the growth opportunity for the residential platform? I think the slide you're referring to is we have roughly 8 million sq ft in the pipeline that's all entitled, and the break is 8 projects over all 5 markets. It represents 50% of that would be office, 30% would be life science, 20% is resi as part of multi-use projects. We don't have any expectation that apartments are gonna be 20% of the company. That's of the 8 million sq ft. Gotcha. We just equated apartments into square footage for that calculation. Wonderful. I've got my 3 rapid fires to end the session. Best real estate decision today: buy, sell, develop, redevelop, or pause? Pause, and be prepared. Same-store growth expectations for office in 2024. 2%. Will there be more, fewer, or the same number of office REITs a year from now? Same. Great. Thank you so much. Thank you. Thank you.