Good day and welcome to the Third Quarter 2019 Kilroy Realty Corporation Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Tyler Rose, Chief Financial Officer. Please go ahead.

Good morning everyone and thank you for joining us. On the call with me today are John Kilroy and several other members of our senior management team are all available for Q&A. 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 an update on our markets and review of the third quarter. I'll provide the financial highlights, and discuss our updated 2019 earnings guidance. Then we'll be happy to take your questions. John?

Thank you, Tyler. Hello everyone, and thank you for joining us today. I'll begin with a quick overview. In summary, our markets remain strong. We've made significant leasing progress in both our stabilized and development portfolios. We were successful in acquiring two strategic value add properties, and we improved our balance sheet. From San Diego to Seattle, the supply and demand fundamentals of every market we compete in remains sound with low vacancy rates and increasing rents. With these favorable conditions, we signed approximately 1.3 million square feet of leases in our stabilized and development portfolio since the end of last quarter. This includes 421,000 square feet with Stripe at Kilroy Oyster Point that we announced this morning. We are on track to have another great year on top of our regular leasing last year. Our stabilized portfolio is now 97% leased, we commenced construction on 2,100 Kettner, a $140 million office project in the Little Italy neighborhood, San Diego. We completed two acquisitions totaling $226 million, both provide attractive future redevelopment upside. We maintained a sharp focus on balance sheet raising $616 million through the pending sale of one building and the issuance of public bonds, and we continue to build a world-class sustainable enterprise. We are ranked number one in sustainability across all publicly traded real estate companies in the Americas by GRESB for the fifth consecutive year. The EPA has awarded us the highest honor of Sustained Excellence for the past six years, and NAREIT has recognized us as a leader in the Light for five years running. Further, we are on track to be carbon-neutral operations by year-end 2020. Now, if I can get into the details. First, we signed 550,000 square feet of leases in our stabilized portfolio since the end of last quarter, cash…

Thanks, John. FFO was $1.01 per share in the third quarter, driven by strong core results $0.03 of one-time items and the impact from our disposition and recent bond offering. Same store cash NOI grew 3.6% and GAAP NOI increased 8.3%. GAAP same-store NOI growth was primarily driven by the burn off of free rent at a few San Francisco and Seattle properties, the increase in GAAP same-store NOI was driven by commencement of new leases, also largely in San Francisco and Seattle. At the end of the third quarter our stabilized portfolio was 92.1% occupied and 97.3% leased. With our strong leasing activity through the first 10 months of the year, we've effectively addressed all 2019 lease expirations, with just 64,000 square feet remaining, and have a manageable 2020 expiration profile of 774,000 square feet or just 6% of the portfolio, we only have one expiration, greater than 100,000 square feet in 2020. We estimate that our portfolio-wide weighted average in-place rents remain above 21% below market. By region in-place rents for San Francisco are approximately 33% below market. Los Angeles and Seattle's are 10% below market and San Diego's are about 9% below market. Our 2020 lease expirations are estimated to be 17% below market. Now let's move to the balance sheet. In July we drew down all the proceeds from the sale of 5 million shares of equity we issued in 2018 on a forward basis. The roughly $90 million of forward equity issued in the first quarter under the ATM remains undrawn at this time. We intend to drive this down in the first quarter of 2020. We've raised $500 million of 10-year bonds at 3.05% in September. We are in escrow to sell our only Orange County building for proceeds of $116 million and with…

[Operator Instructions] The first question comes from Nick Yulico of Scotiabank. Please go ahead.

First off, on Oyster Point , congrats on getting a lease [indiscernible]. Can you give us a feel for the rents on that deal? I know you talked about the overall first phase project has now exceeded underwriting. So, I imagine you're getting higher rents for the office than for the lab there?

Yes, I don't want to give you specific rents on specific deals, Nick. Let's just say that of our office to the life science across the board that I mentioned in our earlier remarks, we are continuing to be in the very high 7% or better ROCs. Most of these leases are 10 to 15 years throughout the -- ones we've mentioned. And they typically have 3%, 3.5%, 4% annual bumps. That’s as good as I can give to you.

Okay. And as we're thinking about though, future phases of Oyster Point, your desire to do office versus lab there. I mean, does this mean that the overall yield on this whole project could be higher for the future phases if you were to do more office, or are you looking to do more office there?

I don't want to get into predicting what the yields in the future is going to be. I mentioned when we underwrote this thing, we were looking in the early mid 6's, we've done quite a bit better than that. I think we'll do better in the other phases obviously subject to market conditions as it relates to tech versus life science. I'm sort of agnostic. We do what we think is in the best interest of our shareholders, and we have the unique situation with the product in the environment that we've created Kilroy Oyster Point. Remember, we have 40 acres plus a 10-acre Marina. So, we have something that nobody else has. We have extraordinary views; the ferry service, et cetera. I think this is going to be a blockbuster project. I think it's going to appeal increasingly to tech as well as the life science, and we're working with many people in both camps.

Okay. And just last question on Culver City, the acquisition you did there. Our understanding is that there are a lot of people looking at that project, you ended up getting it. There's this densification potential there, which is attractive. Can you talk a little bit more about how much square footage you could ultimately build there and how we should think about when this could become a – as I say, is this a new development? Is this a redevelopment of existing space and you have to wait the full 39 months on the lease term to get the project started or would you think about being able to get tenants out earlier?

I don't want to talk about that. I think talking about strategy with tenants and with competitors is bad do on a telephone call. We do have a -- we're looking at early stages of looking at what we might be able to redevelop the project to over time, it would be many, many times the square footage that's there now. In the meantime, Tyler, do you want to talk about the yields on that project?

I think over the next, excuse me, I'll do it, over the next three or so years, we think we get to a north, maybe a high 6. We’re going in right now in the mid-threes on a ROC basis. That's not -- excuse me that's not allocating any value to the future development.

Okay. And then just one last question on the one-time items this quarter. I think, Tyler, you said it was $0.03. Is that all in NOI as we're thinking about just a clean run rate on NOI going forward? Is the $0.03 all should be stripped out of NOI this quarter?

Yes, it's related to parking and some common area maintenance true-ups, but yes, it's in NOI.

All right. Thanks everyone.

The next question comes from Craig Mailman of KeyBanc Capital Markets. Please go ahead.

Maybe Tyler just sticking on guidance, so if we think there's a lot of moving parts, you guys are up $0.12 over the last quarter kind of stripping out that $0.03 or at $0.09, how much of that was just the recurring kind of upside from 3Q versus some of these other moving parts on acquisitions and commencements and other things?

Yes, I mean if you break down the $0.12; roughly $0.07 of that is core and the non-core I just went through. So, the core is about $0.035 and then the acquisition is accretive initially and the bond transaction is later and lower rate than we had anticipated. So that's the other difference.

Okay, that's helpful. And I know John, you said, kind of $0.035 going in on Blackwelder, what's that when you assume kind of the FAS 141 impact for the below market leases on a GAAP basis?

Tyler, do you want to take that?

Yes, it's about mid 5%.

And then, John, you had mentioned the sequel lawsuits are kind of done for the Flower Mart, in the past you kind of said you wanted to hold off on leasing there till the lawsuits are done. Could you give an update on prospects there, may be potential timing on a pre-lease before you go forward?

No. I won't for competitive reasons.

Okay, that's fair.

The next question comes from Jason Green of Evercore. Please go ahead.

Good afternoon. How should we think about the remaining Dropbox space at the exchange coming on, you're at 52% now? How much just Phase 2 in Q1 of '20 in Phase III in 3Q of '20 add to that 52%.

Hi, Jason. It's Michelle. Dropbox at the exchange is scheduled to come online. The rest of it towards the end of the year and by December.

Okay. And just to be clear on the disposition side, $150 million that, I'm sorry the $150 million it's not in guidance right now is that expected in fiscal year '19 or is that of fiscal year '20 event?

The disposition we are in escrow to sell of project for $116 million that should be closing any day. We sold a property earlier this year for roughly '20. So that's roughly 135 that are the dispositions that will complete in 2019. We haven't given 2020 guidance yet on dispositions.

Okay, thank you.

Yes. And Jason, just clarify in terms of the Dropbox at the exchange, there'll be on Phase II roughly 50,000 square feet coming online by the end of the year and then the remaining phase will be coming online towards the middle of the year, next year.

Okay. Thank you.

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

Hi, everyone. You guys have had a busy acquisition market or been busy. What is the acquisition pipeline look like right now going forward, if you can?

Yes, we don't have anything with regard to existing buildings Paseo that we're, we evaluate everything we're not in negotiations on existing buildings we're looking always if we're missing something. As I've said in prior calls, I don't see us buying a lot of existing buildings. The exception would be something like a where it's an okay going in return, but it has significant redevelopment potential for the future. I like that just buying core not interested.

And then you talked about the 2020 lease rollovers, for large space on over 100,000 square feet. What are the prospects looks like there or the prospect of retention?

Manny its Rob Paratte. So we have a, a year a little bit over a year left before that vacancy occurs and we're already in discussions with people on it. We've had some good leasing activity on current vacancy, we have at the project. And then lastly, I would say we're undertaking a mild refresh of the project itself lobbies, landscaping that sort of thing, same thing that we did at Sabre Springs and Del Mar corporate center, which we think will help us push rents and fill the space.

Where is that one Rob?

Long Beach.

Is there a follow-up. Mr. Korchman?

No. Thank you.

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

Great, thank you. Nice job, guys. Hey, Tyler, about a year and a half ago in New York City in June. I think a NAREIT you had an Investor Day and you just gave kind of a soft guidance of late 2020 FFO at about maybe $4.50 a share, how do you feel about that?

You asked me that every quarter. It's getting to be a tradition I think but -- yes and I think the answer is that if you were to go back in time and everything had played out the way we had thought it might that at that point, we'd be very close to that number obviously with less dispositions and more acquisitions and bond deal is a different timing and larger size that number would change. But I think to answer your question is yes, we would still be on track of everything else stayed the same.

Did everything stay the same and are you still on track?

No, nothing stayed the same.

Higher or lower?

We're not going to comment on that will provide guidance on our 2020 numbers next call.

Great, thank you.

The next question comes from Derek Johnston of Deutsche Bank. Please go ahead.

Hi, everyone. How you doing. What are your thoughts on how antitrust and potential regulatory actions on Fang companies could impact of their demand for office space?

Hi, Derek, it's Rob, again you know that we can't, we can't predict with the outcome of these various actions that are in the news, are going to have on these companies, but given the day to day conversations we have with all of them, there is no cessation and their demand for space, particularly on the West Coast but you're seeing their demand also in New York and other areas like Austin, so thus far and will it affect one company, more than another hard to predict and what the ultimate outcome will be hard to predict, but we're seeing a lot of demand and continued growth in all of our markets.

Okay, great. And no, there has been a fair. It's interesting you say that amount of debate about accelerating leasing demand in New York City from the tech or the expanding companies does this concern you guys at all and would you ever consider maybe a build-to-suit project in Manhattan or even other markets with your partners?

We've been asked, but we haven't done it and I don't think that New York City really needs Kilroy. The second part of your question, does it doesn't concern us. Not at all, because they're growing as much as they're growing in New York they're growing in Seattle, they're growing San Francisco Bay area, they're coming to San Diego its unique time right now.

The other side of that is everybody likes to focus on the things because they sort of been in the press lately. But the number what was the number 149 or something unicorns in the Bay Area with, I don't hold me these numbers because I'm just trying to remember what the article was, but it's the number of new companies that are growing sort of exponentially in the Bay Area is something like I've never seen before, it's and it's because these folks are all coming here because of the ecosystem. And any time you pick up a newspaper, there is always another one. So there's a lot of folks out there demanding space way beyond the things.

That's good color. And then just lastly for me, I think there has been some pretty well documented chatter about Prop 13 making its way to the ballot again next year. You guys have a fairly young or new portfolio, how do you view that. I mean, seriously you're closer to it on the ground. What do you think about that?

You want to cover that John or Tyler.

Obviously, we're watching that watching and how that might play out about next November if it passes, which is not necessarily going to pass. But if it passes. It will take several years to sort of get implemented. What we've said previously is initially anyway for us, it's a $0.02 to $0.04 [ph] as you point out, we have a fairly young new portfolio. So it doesn't impact us initially as much over time.

Thank you, guys.

The next question comes from Jamie Feldman of Bank of America Merrill Lynch, please go ahead.

Thanks. I guess, John kind of sticking with your comments on the San Francisco unicorns and growing companies there. I mean, we've seen a little bit of a hiccup here in the tech IPO market or the IPO market in general have you seen any change in mood or sentiment or cash or investment flows in the West Coast markets.

Hey, Jamie, it's Rob for us again we're not seeing any change in fact Q3 there was $26 billion of VC funding nationally 60% of that came to the West Coast and 20% of that came to life science, so we see a very, and that's on par with very close to Q2 of 2019. So we're not seeing any let up in that and as John said earlier, the amount of young growing companies in the Bay Area and elsewhere, frankly is truly astounding right now.

Okay, that's helpful. And then, have you seen any change in either the tenant demand or different co-working operators looking for space since we were its IPO?

Well, there's always there is the -- there are number of other competitors that we work that always looking for space and so forth. I want to make it clear to everybody on the call that Kilroy has, I think it's something Michelle, correct me if I'm wrong, but it's well under 1%. I think it's under a 0.5% exposure to co-working, we've not been a big fan of having that kind of tenant in our buildings in scale. But just to comment about WeWork there has been a lot of speculation in the press and whatnot. What does this mean it's going to be different things in different cities, I want to guess, but if they give any of that space back their space is terrific space. It's total, plug and play for most of the tech companies. So we'll see what happens --.

Okay. And Tyler, I know you are running quickly through some of the financials here, but I guess, as we just kind of think through the next year or so, can you just walk through kind of sources and uses of funding?

Yes, so in terms of spending, as I said about $125 million remaining this year and roughly 500 million or so next year, assuming nothing else happened. And in terms of funding that as I said, we'll have 150 million of cash, we have the 90 million of ATM and we're looking obviously are doing dispositions next year and we have debt capacity and other capacity to do ventures equity, we will leave all the doors open and we'll evaluate it, but more than half of it is funded today and will -- as we always do, we'll be selling properties and doing other funding next year.

Okay. Right, thank you.

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

Thanks. Can you guys talk about the type of tenant, you guys are targeting at 2,100; any early indications of interest to you guys are seeing there. And just in general what factors may do you comfortable going ahead, we expect development in that market.

It's just incredible market is very supply constrained. It's where a lot of the housing is where the Millennials want to be in the tech companies and so forth to support that. I don't think you could find a better location other than maybe One Paseo office now because of the One Paseo retail and residential. So you just couldn't ask for better site and better market conditions, then what we have there. Also, the product that we're developing its lower rise. What does it Rob 5 stories roughly 1,000 feet with ground floor retail brick and timber high ceiling height lots of. I mean, it's the, it's the needs. If I can use that expression in office space in terms of the user crowd, we have any -- we have all kinds of people that are interested in a building, or a portion of the building, and we won't quota rent at this point. Rents are going up. Once the sale rents has set new highs. We have some other things going on. We think we're going to set new highs and we just started construction that thing delivers what at the end of next year Rob or maybe stabilizes 2021. There I think, yes 2021, so I don't want to quote a run at this point, but I think it will be a record breaker.

More to follow-up on that. And not to get into specific rents but maybe for Rob I guess where do you think market rent growth could shake out in San Diego and I guess more importantly in the submarket that you guys operate in over the next 12 months. I mean are you seeing growth there that's getting closer to your other major markets at this point?

Yes, we are, I mean, San Diego rent growth is 9.2%. I mean I've undershot my rent growth projections for the last few quarters. So, I think particularly with folding in what John said about the unique character of 2,100 Kettner rent growth above 10% it's not going to surprise me. Again it really -- it's one thing to be in the markets where the tenants want to be, but it's also building this type of product and collaborating with the tenant/clients that we deal with. And to answer your other question, there is a lot of interest from different categories of tenants whether it'd be tech or some professional service firms that sort of thing.

Very helpful. Thanks guys.

The next question comes from Dave Rodgers of Baird. Please go ahead.

Yes. Tyler maybe start on the accounting side with you if I could quickly on the exchange. Can you talk about the capitalization of interest there and kind of how you see that burning off through the final phases of occupancy?

In terms of the actual numbers. I don't have the numbers, but I mean as Michelle said that we'll be fully completing capitalization by mid-next year and Phase III comes online and will be reducing cap interest at the end of this year when Phase II comes online. And we expect cap interest for the year to be in that roughly $80 million. So it's in the similar run rate to second quarter and third quarter.

And is that just lower capitalization from exchange offset by the added development projects?

Correct.

Okay. The fees in the quarter, I think you had mentioned some time ago some restoration fees from Dropbox. Have you recorded all those, or will you get those later? Will those bleed into 2020?

Yes, those are all have been amortized into our numbers.

Okay. So still collecting them on a GAAP basis. And then the down –

Just to be clear, they've been amortized. So we've collected all those and done. They're all done.

Thank you for that. You mentioned the downtime, I think at the Brannan Street assets, Tyler with the move-ins and move-outs. But it sounds like that downtime is literally limited just to the fourth quarter this year.

That's correct. We expect Bruce to move in December, so there's effectively two months of downtime.

Two months. Okay, thanks. Maybe last just to John and his follow up on Tyler's comments earlier about funding. You had talked for a number of quarters about larger joint venture sales. It doesn't sound like that's off the table, but you just kind of didn't mention it overtly today. Can I just ask about kind of any progress that you might be making there and if that's still kind of a main avenue for you in the future?

It's certainly an avenue and it's certainly something that we keep abreast. Talk with folks all the time in specifics, but right now we don't have anything that we are negotiating in detail. And with the leasing, we're doing and so forth, I kind of feel that if we're going to do a venture on a development project, it's probably a lot better to do it when you have a lease in hand rather than when it's spec because the differential in thresholds for IRR and so forth are a little bit different. But it's certainly a source that we look to for the future.

All right, thank you.

And we have a follow-up from Manny Korchman of Citi. Please go ahead.

Hey, it's Michael Bilerman here with Manny. John, congratulations on the Oyster Point strike deal. I know they felt like you just left on counts and are you involved at all on their potential sublease of that space or providing them any compensation for lease termination payment or is it solely they're going to deal with that and they'll move in, in 2022 to your space?

It's the latter. We have no exposure.

And then are you going to help them at all on sublease or you're definitely like of service that you'll provide for them?

They have assets and it's not generally what we do so I don't know. I don't contemplate us being involved in that at all, Michael.

Okay. And then just stepping back from it. Clearly, at least from what they're trying to put out there into the press is one of the big desires for them to move down to South San Francisco is there's the need for space and the ability to grow, which is quite limited right now in San Francisco, which is great from a rent perspective for you and great for you to lease up your developments in San Francisco proper. But does it concern you at all if tenants feel that they can expand in the city and -- or have to pay absorbent rents to get space? Is this a trend potentially that others may go down and seek alternatives to the San Francisco market?

Well, Michael, it's a big question and certainly I don't see it as a trend. There are companies that move out all the time, but there is many more companies that move in. I don't like the idea. I'm not going to agree with you that they are exorbitant rents. If you look at what these types of companies pay in other markets around the world, San Francisco is in the upper quarter from a percentile standpoint, but it's certainly not anywhere near the highest. So I think there is room to go on rent. As to the availability now with the sequel lawsuits solved, we're going to see projects come on stream. I mean we have the Flower Mart, of course, and [indiscernible] has there 900,000 feet, 700,000 feet, whatever it is and so forth. So the problem is, this has just come about the sequel resolution. And people move for various reasons. I'm not going to get into any comments with regards to the recent announcement on our Oyster Point tenant that is better addressed by them.

I wouldn't expect you to comment on that. That was more so thinking about that situation and some reasons that they've put out there in the preference to their move and whether as you think about what's happening in the city, whether that could portend to others. But I appreciate your -- the color that you've provided.

One of the things we're excited about with the Flower Mart with the scale of that and remember, that's -- the first phase is pretty good sized and then there's a second phase that we have the ability to accommodate a large user or a number of large users with the ability to scale up. And frankly, we are seeing that more and more frequently with -- particularly with the big -- the faster-growing companies. If you think about the Chelsea area there in New York. You saw a big user come in and take some space and take some more space and take more space, take more space and more space. Well these folks are growing and when they put their foot down in a place generally, they put a second foot down and then pretty soon, you have a lot more to follow. What we have and what we offer in scale in South San Francisco is almost unprecedented. We have in Phase 2, 3 and 4 roughly 2 million square feet we can deliver. And I think 8 or 9 building 7 or 8 buildings, so you could think of those as all being a phase under themselves. And then we have the Oyster Point tech center, I think we call it right next door which is literally a budding Phase II of Oyster Point where we only have 145,000 square feet and we think we can get it entitled for another 0.5 million-plus square feet as well. So people like -- these companies like to know they can grow and if you think about that was a very big point with our relationship in expanding Dropbox into their new headquarters. We did their first headquarters and -- what was it, 3, 4, 5 years later, we did a bigger headquarters and we didn't have to go to a lender or partner and get permission and so forth. So we think we have a pretty good program to deal with frankly the best working environments and buildings you can develop in areas with great amenities and transportation, you add to that scalability you end up with something that's extremely unique.

All right, great. Will see you in a few weeks.

Okay, great. Thank you.

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. Goodbye.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.