Kilroy Realty Corporation (KRC)

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Kilroy Realty Corp. (KRC)

Q4 2012 Earnings Conference Call

January 31, 2013; 01:00 p.m. ET


John Kilroy - President & Chief Executive Officer

Tyler Rose - Executive Vice President & Chief Financial Officer

Jeff Hawken - Chief Operating Officer

Eli Khouri - Chief Investment Officer

David Simon - Executive Vice President in Los Angeles

Heidi Roth - Chief Accounting Officer

Michelle Ngo - Treasurer


Craig Mailman - KeyBanc Capital Markets

Josh Attie - Citigroup

John Guinee - Stifel Nicolaus

Brendan Maiorana - Wells Fargo

Michael Knott - Green Street Advisors

George Auerbach - ISI Group



Good day ladies and gentlemen and welcome to the fourth quarter 2012, Kilroy Realty Corporation earnings conference call. My name is Essania and I’ll be your operator for today. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session. (Operator Instructions).

I would now like to turn the conference over to your host for today, Tyler Rose, Executive Vice President and Chief Financial Officer. Please proceed.

Tyler Rose

Good morning everyone. Thank you for joining us. On the call with me today are John Kilroy, our CEO; Jeff Hawken, our COO; Eli Khouri, our CIO; David Simon, our EVP in Los Angeles; Heidi Roth, our CAO; and Michelle Ngo, our Treasurer.

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 our 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 seven days, both by phone and over the Internet. Our press 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 overview of the quarter. Jeff will review the conditions in our key markets, and I’ll finish up with financial highlights and initial earnings guidance for 2013. Then we’ll be happy to take your questions. John?

John Kilroy

Thanks Tyler. Hello everyone and thank you for joining us today. The fourth quarter capped an immensely productive and successful year for KRC. We entered 2012 a significantly larger and more diverse enterprise with a bigger geographic footprint, a deeper talent bench, a broader operating platform, a stronger financial position and a sharper strategic focus on the West Coast’s most promising growth markets for commercial real estate.

Throughout the year we leveraged our strengths to improve the quality and diversity of our office portfolio, continued our leading role in the development of a new generation of office space, built our visibility and credibility among potential tenants, maintained our momentum in leasing and capitalized on market conditions to monetize the value of non-strategic assets in our portfolio. Overall, we are very pleased with our ability to execute against all of these goals.

During 2012, we acquired $674 million of office buildings and seven transactions totaling 1.8 million square feet. We continued to establish KRC as a premier landlord in the best performing sub-markets of greater Seattle, added to our extensive Bay Area portfolio and significantly enlarged our platform of Los Angeles media and entertainment-oriented properties. Our projected stabilized cap rate for these acquisitions is in the mid-6% range.

We also added six development projects to our pipeline last year that upon completion will have a projected total investment of $1.2 billion and will significantly contribute to FFO growth.

Our decision to establish a development program in Northern California proved especially well timed. Five of our six new projects are located in the Bay Area, and four of them are fully pre-leased and under construction. In addition, we secured the rights to develop an additional $125 million Bay Area office project located in Redwood City. Overall, we project average cash yields in the low to mid 7% range for our pipeline.

We delivered another record year in leasing, topping 2011 results and producing the best performance in our company’s history. Across 2012 we signed new or renewing leases on more than 2.3 million square feet of office space, including 1.3 million square feet in the fourth quarter alone.

Our consistent leasing performance over the past three years has driven up our occupancy by 1,000 basis points. At the end of 2012 our stabilized portfolio was 92.8% occupied and 94.3% leased.

On the disposition front, we completed the sale of our entire industrial portfolio in the fourth quarter at a cap rate in the mid-5% range. For the year we sold 46 buildings in four transactions, generating gross proceeds of $500 million. Our success in disposing of non-strategic assets at full value prices has played a meaningful role in our ability to fund acquisitions and more recently development while maintaining the strength of our balance sheet.

Throughout 2012 we deepened commercial and community relationships in our key markets, strengthened our reputation as an innovator in commercial office space and added significant new names to our roster of top-quality tenants., LinkedIn, Synopsys, Adobe, TD Ameritrade, Concur Technologies, Lucile Packard Stanford Hospital, all joined our roster of significant tenants last year. In San Francisco alone, a banner year of tech leasing for the city with more than 4.5 million square feet of tech leasing activity, KRC executed nearly one-fifth of those transactions.

We ended the year with a more valuable portfolio that is increasingly diversified across the best real estate markets on the West Coast and is meeting tenant needs in terms of densification and collaboration.

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