Good day and welcome to the Fourth Quarter 2017 Kilroy Realty Corporation Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Tyler Rose, Executive Vice President and Chief Financial Officer. Please go ahead.

Good morning, everyone. Thank you for joining us. On the call with me today are John Kilroy, Jeff Hawken, David Simon, Heidi Roth, Tracy Murphy, Rob Paratte, Elliott Trencher and Michelle Ngo. At the outset, I need to say that some of the information we will be discussing is forward-looking in nature. Please refer to our supplemental package for a statement regarding the forward-looking information in this call and in the supplemental. This call is being telecast live on our website and will be available for replay for the next 8 days both by phone and over the Internet. Our earnings release and supplemental package have been filed on a Form 8-K with the SEC and both are also available on our website. John will start the call with a review of the fourth quarter and the year, Jeff will discuss conditions in our key markets, I will finish up with financial highlights and review of our initial 2018 earnings guidance that was published yesterday in our earnings release. Then we will be happy to take your questions. John?

Thank you, Tyler and hello everyone. Thank you for joining us today. I will address four topics in my comments this morning, first a review of 2017; second an update on our key development projects; third, our recently completed acquisition of Oyster Point Tech Park; and fourth, goals and objectives for 2018. 2017 was another year of strong performance at KRC. We delivered excellent results across all areas of our business and continued to create value in our operating and development platforms that will drive future earnings and dividend growth. We signed approximately 2.9 million square feet of leases driving occupancy in our stabilized portfolio to 95.2% and securing long-term high-quality tenants for more than 60% of our under construction office projects. We stabilized Columbia Square. The property’s office space is now 100% leased. We did not make any building acquisitions in 2017 and instead focused on creating value through our development pipeline in the disposition of non-core assets. We commenced construction on 333 Dexter and approximately $400 million office project located in the South Lake Union submarket of Seattle one of the country’s best performing submarkets, where Class A vacancy is just 4.1%. We acquired a land site in the Little Italy section of San Diego, a terrific urban neighborhood that offers the potential for significant value creation. We generated $187 million through our capital recycling program selling 11 non-core properties and a land site in San Diego. We increased our dividend another 13.3% bringing the 2-year increase to 21%. We continue to strengthen our balance sheet and lower our overall cost of capita. We raised close to $675 million in new equity and debt, redeemed approximately $700 million in more expensive debt and preferred stock and expanded our unsecured credit facilities to $900 million. And finally, throughout the…

Thanks, John. Hello, everyone. I will begin our market review in San Francisco, which continues to show strength. Large leasing deals totaling almost 4 million square feet set a new annual record with 18 deals greater than 100,000 square feet in 2017. Venture capital funding saw the second highest inflow for the region since 2011 and subleasing space was at a healthy 1.8 million square feet. According to JLL, there is 8.2 million square feet of demand from tenants in the market and there is currently only one contiguous block of Class A space above 100,000 square feet available south of market. Class A direct vacancy rates in San Francisco, SOMA and South Financial Districts were 5.3% and 7% respectively. Vacancy was 1.9% in Mission Bay and 2% in South San Francisco. And in Silicon Valley, Class A direct vacancy was 9.5%. We are currently 99% leased in the Bay Area and our in-place rents for the region are approximately 27% below market. In the Greater Seattle market, strong economic fundamentals continue to drive leasing. 2017 experienced a record year and net absorption with 4.1 million square feet across the market bringing direct vacancy to 8.9%. Investment activity also increased with 2.8 billion trading hands with a price per square foot high of $925. Class A direct vacancy in South Lake Union is 4.1%. In Bellevue, it is 3.8%. Our Seattle portfolio was currently 95.7% leased and our in-place rents were approximately 8% below market. In San Diego, the market continues to see steady growth with Amazon now housing 500 of its engineers in the region and several other large technology companies looking to enter the market. Class A product in Del Mar continues to command the highest rents in the county and some of the urban submarkets closer to…

Thanks Jeff. FFO was $0.85 per share in the fourth quarter, which includes $0.06 related to the early redemption of the senior notes. The $0.06 includes the $0.05 charge on extinguishment of that and $0.01 of additional interest expense from double carry. In addition FFO per share improved $0.015 benefit from a one-time property tax rate assessment. For the year excluding one-time charges from the preferred and bond redemptions FFO was $3.53 per share. Same-store NOI was largely unchanged in the fourth quarter on both the cash and GAAP basis. For the year same-store NOI was up 3.2% on a cash basis and 1.1% on a GAAP basis. We ended the year with occupancy of 95.2%, higher than our guidance which was driven largely by the commencement of the 152,000 square foot Amazon lease at Westlake Terry in Seattle in mid-December. While commencement of the lease had a big impact on occupancy, the contribution to FFO was approximately $200,000. Moving to the balance sheet, we completed a number of transactions during fourth quarter that have positioned us well for the New Year. In November we repaid $124 million mortgage note at par. The debt encumbered a property that’s part of a venture and the partners repaid their respective shares. In December, we raised $425 million of 7-year unsecured senior notes at 3.45% and redeemed all of our $325 million 4.8% bonds that were due in July 2018. Also in December, we issued $17.5 million of common stock through our ATM program at a weighted average price of $75.40. As forecasted, we borrowed $75 million against $150 million unsecured term loan facility, the first of 2 6-month delay to our options. With these transactions including funding the $111 million acquisition of Oyster Point that John discussed earlier, the dispositions we completed…

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Craig Mailman of KeyBanc Capital Markets. Please go ahead.

Hi guys. Tyler maybe on the dispositions, could you give us a sense of kind of an anticipated timing in the guidance, is it more front end loaded, back end loaded to get to that $0.15. And then maybe just a makeup of it, is there going to be all non-core or could it include some JVs of kind of lower cap rate assets?

Well, I will take the first part of that and then maybe John can the second part of that. But from a timing perspective, we are modeling mid-year maybe a little bit later than mid-year into the third quarter.

Yes. Craig on the makeup, I don’t want to get too specific on that, but you have seen us sell off the assets that we thought didn’t have the legs for the future or didn’t have as higher pecking order in the kind of the strategic sense of location. We will continue to do that. We are going through an analysis right now as we regularly do every quarter about our portfolio. And I really can’t get too specific. But we could end up doing some ventures. We certainly are going to do some dispositions, whether some of that’s is core remains to be seen, more to come, it’s early in the year.

Okay, that’s helpful. And then just on Bridgepoint being taken out of service, could you give us a sense of how much capital you guys think you would need to spend on that ultimately and maybe where a stabilized return could come in?

Tyler…

Yes. On the capital side, there is a couple components to it. One is the modernization of the ground plan and the lobby areas and so forth and roughly it’s $7 million to $10 million for that component of it. And then there is going to be TIs and leasing commissions obviously to release it. And the space was – part of the space was formally a school until we will be upgrading that school space to modern office space. And so to be determined what the TI packages are going to be. But overall in the long run we get it fully released it could be as much as $35 million, $40 million.

And just from a same-store perspective when do you think this ultimately comes back in?

Probably mid – it depends on leasing obviously. But I mean with the lease up plan for our mid-year next – mid-year next year.

Okay. And then just lastly John, you guys bought some more life science this quarter have the option for the site next to it, how big should we expect this could become as the upside of the portfolio?

I – the portfolio is moving around a little bit, right. With dispositions and development and so forth, so it’s hard to give you a specific answer to a non-static environment. But right now, I think its performance with all of our development to be somewhere in the 20% range.

Great. Thank you, guys.

The next question comes from John Guinee of Stifel. Please go ahead.

Great. John Guinee here. A couple of comments. It looks to me Tyler like Bridgepoint is about $47 a foot gross rent, when you put in $35 million to $40 million all-in, is that $47 still achievable or it will be higher or will it be lower for the next tenant. And then for John, it looks like Oyster Point is about $780 a foot, could you sort of elaborate on $780 a foot and how much of that may be attributable to the future development and how much is the existing bricks and mortar?

Yes. John it’s about $760 a-foot. As we commented we think we are in the mid-sixes with leasing of the balance of the space. I can’t get into some of the strategic values that we think we accrued was in regards to the adjacent development property for the reasons we mentioned before until we can announce that officially, all we can say is we have options and whatnot that we think the whole is greater than the sum of the parts if you will. So we think there is some real value there. There is also the ability to significantly expand in that side, it’s only 146,000 feet today. We think it to could be multiples of that in the future, so hopefully that addresses your questions.

And John on the Bridgepoint question, I mean we don’t really want to get into – we are obviously negotiating leases, so we are not going to comment on where we think rents are. But we think they had incremental return on investment makes sense.

So is it a roll up or roll down on rents just big picture. And then…?

Given the length of the Bridgepoint lease and the escalations that went in as we mentioned on previous quarters there is a roll-down in rent. But given the modernization plan, it’s higher than it would be if we didn’t do it obviously.

Got it. Alright. Thank you.

The next question comes from Blaine Heck of Wells Fargo. Please go ahead.

Thanks. Good morning out there, if I am following your calculation correctly, it looks like the 70.5% margin that’s included in guidance might be a little bit lower than recent results, is that right and if so can you just comment on what might be driving the change?

Yes. I mean we model that with we have other property income in prior year that probably moved that margin up. We don’t really model that in the budget, so it maybe a little bit lower than we would achieve only because we always see to find some other property income. But there is nothing material changing in the portfolio that’s driving that.

Okay. And then maybe more broadly, I guess what are you seeing on the expense side, are you expecting kind of outsized or abnormal increases in expenses this year that might be hampering same-store NOI like you have seen in the past couple quarters or should we expect that to level out?

Yes. I don’t think we are expecting any large increase in expenses the typical 3% or 5% type range.

Okay. And then last one for me maybe for John and Jeff, there has been some concern that the Valley has softened given some new supply and increasing sublease space, just wanted to get a little bit more color on what you are seeing out there in the Peninsula and how you guys feel about your exposure in those markets?

Blaine this is Rob Paratte speaking. As we have said on the previous calls, I like to call up the transit effect and the projects and availability of space that are located along the transit lines primarily Caltrain are going to consistently do while they are going to lease quicker. There is quite a bit of activity right now. There is 27 deals over 100,000 feet in the market right now looking for space. There is 25 deals in the 70,000 to 99,000 square foot range. So again I think if you are in Cupertino or Mountain View and Downtown San Jose is having its own resurgence. Those projects will do well. And Irvine is delivering their new project and leasing and getting quite a bit of activity. So I am actually thinking that the value will have a real uptick in the next year, given everything that’s going on in the Bay Area and demand for space.

Yes. I will add to that a little bit. We have said many times before that older products it hasn’t been modernized is a tougher road to how I think given what’s going on. The trend has been towards modern facilities that help attract and retain people. And as Rob mentioned transportation is a huge component of the decision making. So everything we are hearing from the brokers is that the Valley’s future near-term looks pretty bright. We don’t have anything underway in the Valley currently.

Very helpful. Thank guys.

The next question comes from Nick Yulico of UBS. Please go ahead.

Thanks. So for the expirations and move outs this year, putting aside what you are doing with Bridgepoint, how should we think about when in 2019 you could get commencement of some leases on a cash basis for the expirations?

I am not sure we can give you exact date on that. But Rob if you could comment on where we are we have mentioned on Okta, that’s where is Okta taking the Delta Dental space and maybe you could kind of go through the other three expirations, what they are, when they come up and kind of the activity level.

So we are working right now in Bellevue on the Valve space. And I don’t want to get too specific, but we have got substantial discussion going on with two different tenants that could take roughly 70% of the space we have available this year and we get a chunk back in April and then a chunk back later in the year in the third quarter I believe. So we are very pleased with that. And then in San Diego we have the Fish & Richardson space as well as Bridgepoint which we have mentioned in both cases. Again without getting too micro on this, there is really pretty strong activity in and especially so in I-15 corridor. The talk about the renovation plan we are doing and what that space will become has attracted pretty significant interest.

So it’s a little hard to pen it down right now with deals in progress and paper being traded and so forth and hopefully we can be more specific next quarter. But we have great activity in markets that are strong and improving and it’s very encouraging.

Helpful. And then in San Francisco, you mentioned rents for your portfolio being 27% below market, that’s I think, for the whole SF Bay Area, what – do you have any expectation on what type of rent growth you might see in San Francisco this year, I mean it seems like there is a lot of optimism in the market supplies been to – has been leased up, I mean just the market that could grow rents 5% to 10% this year?

Hi Nick, it’s Rob again. It’s really hard to pinpoint what rent growth will be and that the people have pulled the data together, the various brokerage firms have different ranges in every firm. What I would say is based on the conversation with brokers, boots on the ground people. There is quite a bit of optimism that rents will grow in 2018 given what’s going on in the supply side. There is no let up on demand. And I wish we had more space to lease right now, because it’s a very dynamic market. And there are some significant tenants in the market right now actually did have just popped up in the last 10 days to 15 days, I mean we are only in February right now, it’s pretty amazing.

And then just lastly in terms of Flower Mart you talked about working on the entitlements do you have any latest timeline there? Thanks.

Well, Michelle, do you have the most recent data, I am sorry Nick I have just come off a case of flu on my head is a little bit heavy, Michelle do we have that in your?

Yes. I think Nick when we talked about last at NAREIT we said the Central SOMA zoning plan would be approved sometime this year or so. And we could get the first phase of approvals for our project sometime in early ‘19.

Thanks.

The next question comes from Manny Korchman of Citi. Please go ahead.

Hi, in terms of disposition plan, I was wondering how much of that is being driven by portfolio pruning or assets you want to get out off, first is capital needs and funding both developments and any additional acquisitions you might think about doing?

Yes. I think it’s a natural work. It’s the same thing you have seen us do for the last 20 years is that we are going to sell things that we think of where we have a better use of the capital. I like the idea of selling non-strategic stuff at 4 and 5s and reinvesting in strategic things which command higher or rather lower cap rates, higher values in better markets where you are getting returns in the mid-7s mid-8s, I mean, that to me is pretty easy math to do and that’s what’s driving the bus.

And Tyler, could you just share with us what same-store NOI growth would be on a GAAP basis as well as could you give GAAP guidance as well?

Yes, I didn’t hear the last part of that, but in terms of same-store GAAP for 2018 about 1 point higher than cash, but maybe 1 to 2 points, 1% to 2% growth. What was the second part of that?

No, that was it. Thanks, Tyler.

Okay.

The next question comes from Jamie Feldman of Bank of America/Merrill Lynch. Please go ahead.

Thanks. I guess sticking with Tyler do you have an outlook for AFFO or FAD?

Well, we don’t provide guidance, but I mean, our payout ratio is expected to be in the sort of the mid-70s ratio. So, you can back into that a little bit. We have – our CapEx estimates are on a second generation perspective are relatively equal to 2017 where we are in the low $90 million range. We do have some bigger projects that we, Bridgepoint for one, that aren’t in second generation, but it will increase CapEx on a first generation basis, but from an FAD perspective, there will be some growth, but the CapEx numbers are in that low $90 million range.

Okay. And then can you talk more about the current leasing prospects at Dexter and The Academy, how these conversations are going?

Sure. Jamie, it’s Rob Paratte and I will let David Simon handle Academy. At Dexter, we are just almost getting to the street level in terms of construction. We have been working on the parking structure since June, concrete and everything pouring that sort of thing. So, there is nothing on the skyline yet, but given that, our activity has been strong. Seattle as you know as Jeff and John both said in their comments is probably the most dynamic market in the country and particularly South Lake Union and the buildings the way they are designed can accommodate a single user, they can accommodate multi-tenant and we are seeing activity on both fronts. And we are very pleased, I was an optimist about Seattle when we started construction and I am even more optimistic now about it just given what’s going on in the market and the energy that’s there both with respect to what you hear from brokers, but also just speaking to tenants directly.

Yes. Go ahead, I am sorry.

No, go ahead.

I was just going to say how far ahead of time the tenants usually take down new construction in Seattle?

Well, it’s changed over time. We have said before on other calls that Seattle is not a typically a pre-leasing market, but over the last 2 to 3 years that’s changed where tenants have had to make choices based on growth that they have. So, I would say it’s improved from being a no pre-leasing market to something where you have a better shot at it maybe I don’t know what percent improvement, you could say that is, but we are seeing significant activity for uses that are coming up in that 2019/2020 delivery timeframe.

Yes, hey, Jamie, it’s David. On Hollywood and The Academy, when you think about the Hollywood market, where we were 5 years ago before Columbia Square came in and the Viacoms and the Netflixes and all the ancillary businesses associated with them have now moved in. The activity on Academy now that we have broken ground is continuing to increase. You are starting to see users that 5 years ago wouldn’t have looked in Hollywood that are now looking at Hollywood. The bigger users, entertainment, media dominate the landscape of whom we are talking to. So, in short, I think it’s – the project is going to be received really well. They know the environments that we create Columbia Square has been huge success and really well received and replicating that kind of environment in that dynamic is very interesting to a lot of big tenants as well as a lot of small tenants. So, the pitches and the activity and the meetings in the office are on the calendar and continue to increase now that we have broken ground.

Okay. And then finally from me how do you think about the competitive landscape at Oyster Point, it seems like there are several different developers with entitlements there, how do you think that plays out over the next 5 years or so?

Yes, hey, it’s Jamie it’s Tracy. So, I think as it relates to Oyster Point Tech it’s extremely tight from a existing supply standpoint. I mean, we have a little bit of vacancy at that project. Otherwise, there is largely nothing until Phase 3 delivers their Centennial Towers, which the first tower has been totally leased. The second one will come online later this year and they have a lot of activity in that sort of smaller segmentation of the demand. BioMeds project has broken ground this year and will deliver early ‘19 is my guess and then HCP’s Cove, as you know, Phases 1 and 2 have been entirely pre-leased and the third phase has a bunch of activities. So, from my standpoint, the supply will be gobbled up before the next project comes online.

Okay, great. Thank you.

The next question comes from Jed Reagan of Green Street Advisors. Please go ahead.

Hey, good morning guys. Just sticking with the Oyster Point acquisition, you guys mentioned the redevelopment opportunity there, is that as of right that you get that higher density or would you have to go back for entitlements on the re-entitlement?

Yes, hey, Jed, it’s Tracy. So the easy way to think about Oyster Point is it’s 150,000 feet today, it’s underutilized in the existing 3-building footprint. As it is today, we had more than doubled it with the existing zoning and density allotted. The existing density though is a lot less than you see in neighboring master development plans that South San Francisco has approved. So, with relative ease, I would say in the business friendly South San Francisco City, you could see more on that side.

Safe to say it’s a lot easier to get new entitlements and new density in that part of the Bay Area than the City of San Francisco?

Yes.

It’s like a different world.

Yes.

Interesting, okay. But that doesn’t concern you for the dynamics of that market longer term in terms of just ease of supply?

Well, this is something we looked at very, very strongly and what you have seen HCP do and now BioMed’s done and of course ARE before them, but there has been very strong demand. There is a lot of demand for projects 3, 4 years from now. We have had a lot of discussions with folks continue to have discussions for really big requirements. And again, we can’t get into the specifics of the property that we have rights on, but we think we are going to have something that is going to come on stream right at the right time to be the right kind of product, with the right kind of amenities and of a scale that is going to be pretty eye-popping.

Yes, Jed, I would just add to that. Keep in mind then the sort of preferred northern end of South San Francisco or the Oyster Point corridor is zoned for commercial lab and office, the southern half is more industrial in nature. So, it’s not like all of South San Francisco could be converted overnight to supply if that’s what you are after.

Okay, that’s helpful. It looks like the expected cost at Academy moved up about $25 million, I guess, what drove that change and does that dilute expected yields at all and maybe just if you could remind us what yield expectations are for that project?

Yes, hey, Jed, it’s David. So, there is – as all these projects evolve design scope changes and square footage grows and it’s primarily due to that. So, with respect to yield, it’s no different than all our development yields in our pipeline mid 7% to 8%, a little bit higher depending on where things ultimately shake out, but given where the costs are and we haven’t baked in our budget and our costs are lot, we feel good about it.

Jed, let me just add one thing to what David said, those yields are office, they are not resi, and what we are talking about when we started now is the office at the retail. So, we feel pretty good about where we are going to be on yields and the resi component, which is about $150 million, it would be the next phase. Obviously, we are not – we would love to get 7.5% on resi. I think it’s going to be a little bit lower.

So, 7%?

Yes, I think that if you can get mid 6s plus or minus at resi, that’s pretty strong.

Okay. And then maybe just last quick one for me, so just to clarify, maybe Tyler is Bridgepoint part of this year’s same-store pool then or is it already been taken out?

It will be out – it hasn’t been taken out yet, but we haven’t reported on for the first quarter, but it will come out as the expirations occur. And I think the first ones – the third quarter and then the second ones in the fourth quarter or the both in the third quarter, sorry, so yes, it will come out in the third quarter and will be out at the end of the year.

Okay, so that’s their current same-store NOI growth guidance includes Bridgepoint expirations?

Yes.

Okay, that’s helpful. Thank you.

The next question comes from Richard Schiller of Baird. Please go ahead.

Hi, good morning guys. Similar question probably for Tyler, thoughts on funding in 2018 given the ramp in development and the spend on the 333 Dexter and The Academy, what does the trajectory look like in the funding sources for 2018?

Yes. So, with the dispositions we are modeling in at a midpoint of $500 million and development spending of roughly $500 million, it’s heavy on dispositions right now. Obviously, if we do other things, there is debt capacity there is joint ventures depending on where the market is, there is equity, but right now, the main focus is the disposition, which ties into the amount of development spending.

Okay, great. Thanks. And one smaller cleanup item, the 135,000 square foot lease executed in 4Q that the impact of the lease statistics, can you guys share anymore details on this, when did it expire and where is that?

Yes, this is Jeff. It was going to expire fourth quarter of ‘19 it’s been extended to the fourth quarter of 2020, but given that we are still in negotiations we really don’t want to comment further at this point.

Okay, great. That’s it for me. Thanks.

The next question comes from Rob Simone of Evercore ISI. Please go ahead.

Hi, guys. Thanks for taking the question. Just a cleanup item for me, Tyler, in the past you have given capitalized interest and G&A guidance, just wondering if you could do that again for us this year?

Yes, on cap interest, it’s about – Michelle is telling me $50 million to $55 million for the year. It increases over the year given our spending goes up over the year and G&A is in that $64 million, $65 million range.

Okay, great. Thanks. Yes, that’s all for me. Thanks, Tyler.

This concludes our question-and-answer session. I would like to turn the conference back over to Tyler Rose for any closing remarks.

Thank you for joining us today. We appreciate your interest in KRC. Bye.

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.