Kilroy at Bank of America Conference

Rob Paratte

Everybody is guessing where Amazon will put its second HQ

“I personally think, and I don’t know – I don’t have any insider information, but I personally think the second headquarters would be either Denver, Austin, but I think there’s a strong possibility it could be here on the East Coast. ”

Tyler Rose

CRE pricing remains strong

“we’re seeing maintained high level of competition for the trophy assets, Class A properties like we own. San Francisco 222 Second traded at around the 4% cap. That’s $1,200 – low $1,200 a foot. L.A., there is a couple buildings on the West Side, they’re on the market now. I don’t know exactly whether price is going to come in on those. And then moving down to San Diego Diamond View Tower, which is in downtown San Diego, near the ballpark traded about a week ago, going in high 4s, like 4.7%, $675 a foot. And there’s a building in Del Mar, which is our largest submarket. It’s in Ashgrove 4.5% going in yield. So prices are strong. In San Diego, we’re seeing 50 to 100 basis points over San Francisco spreads.”

Kilroy 1Q17 Earnings Call Notes

John Kilroy – Chief Executive Officer

Demand remains healthy in West Coast markets

“Our experience in the first four months of 2017 is at the West Coast markets where we operate, demand remains healthy, the rental rates for top quality properties continue to rise and that a broad range of industries including Technology, Life Science and Entertainment continues to expand in our markets.”

New life science building costs $746 per square foot

“Yes, okay, so let me give you this as simply as I can. The cost went from 485 to 560. That’s a 15.5% increase in cost. The new cost is 746,000 — $746 of square feet because the square footage is 750, so we have a 7.2% increase in square footage, a 15.5% increase in cost. The new cost per square foot is roughly $746 a square foot, that’s a $54 a square foot increase per square foot, but the rents have gone up substantially since our original underwriting, so we believe we still end up at 8% or better. So we ended up with — another comment about that is that if you think about the $746 of square foot for the competed product for a brand-new, state-of-the-art life science. Life Science generally is about $100 a square foot more than the office spaces, but we already embedded into the 485,000 quite a bit of the Life Science ready cost, so the added increment, you can see from what I’ve mentioned.”

Sales of new buildings have been over $1000 a square foot

“In terms of the cost structure, at 746, you can compare that to recent sales here in San Francisco of Class A, newer product. It’s been well north of $1,000 a square foot, $1,100, $1,200 or more. We think we have a pretty great cost structure and well below what other things are trading at. And the last comment I’d make, just for everybody here is that The Exchange has about 700 parking spaces, which is unique.”

You haven’t seen us out there buying stuff at 2, 3, 4%

“you haven’t seen us out there buying stuff at 2% and 3% and 4%, unless there was a real opportunity to move it up through value add and I think that’s probably going to be the way. Value adds can come in different things.”

David Simon

Difficult to build anything in west la

“Yes, sure, I’ll go first. Hi, John. L.A. in general, Westside, as you know, extremely difficult to build and develop and put new projects up. There is a few going on, as you’re aware of, the pen factories, stuff down in Playa. With regard to the transit oriented stuff, related to the Expo line coming up, very important from Santa Monica’s perspective and the other cities that it’s attached to kind of find the community plan areas where that development can happen. So there is a push by that community and the city to build those kind of projects and those transit-oriented markets, John, with the right balance of products, whether its residential, retail or office. But overall, continues to be difficult in L.A. and the general and specifically difficult on the Westside.

Kilroy 4Q16 Earnings Call Notes

John Kilroy

Raw materials needed to succeed today are the minds on the west coast

“Let me finish by commenting on our West Coast market trends. We see a fundamental evolution, it will constitute to high tech company. Health care, transportation, auto, defense, entertainment, lodging, retail and even travel services are now being profoundly impacted by technology. This change is producing a meaningful result in all of our markets Fortune 500 companies informally stayed industries are acquiring technology startups in order to stay relevant. GM’s $1 billion acquisition of Cruise Automation is just one example, mature tech companies are using their massive cash flows to acquire new companies with potentially game changing ideas to move into faster growing spaces and to gain access to increasingly scarce talent. A whole range of new companies are being drawn to centers of high tech innovation including our west coast market. And the increase in M&A activity has enhanced the credit profile of our portfolio with transactions like Microsoft buying LinkedIn, AT&T buying DIRECTV, Adobe absorbing Livefyre and most recently Cisco acquiring AppDynamics. We believe this trend will continue and even accelerate in the years ahead. And this evolution will continue to drive demand for work space in dynamic urban centers to deliver the live/work/play convenience and amenities that attract young creative talent. This is the 21st century version of locating your production or the raw materials and transportation resources you need to succeed.”

“I hate politicians”

“Obviously the President has said that his top priority is to stimulate growth and get people working and expand the economic pie. No industry provides growth that tech does and no industry helps the US maintain its competitive edge greater than technology does. I can’t say what the President’s view is going to be in the future. I bet on the – it’s not just the tech industry, this affects everything, automobile, every industry relies upon technology. So I can’t – I can only – I could only speculate but I don’t have obviously the crystal ball that permits me to give an accurate answer to that question. Reinforces my view that I’ve long held that I hate politicians.”

Probably wont see Kilroy being a big buyer

“I’ve been surprised to see how the cap rates have compressed in some of what I would call tertiary markets or for product that you really wouldn’t own, not long term, but there’s so much money looking for stuff. That I just don’t think you’re going to see Kilroy being a big buyer. Having said that, if we find something that we think we really can turn into — we improve it through some value add component like we see in the deals that we just did, then we’ll act on it. With the balance sheet we have, we’re prepared to go with development when it makes sense. We’re prepared to acquire when it makes sense as we’ve said we’re going to dispose of things as it makes sense. We’re going to stay in a very conservative range.”

Kilroy Realty 3Q16 Earnings Call Notes

Kilroy Realty’s (KRC) CEO John Kilroy on Q3 2016 Results

Found it very difficult to make the math work, but now pursuing a few transactions

“Before wrapping up, let me comment on the acquisitions market. While over the last few years, we have found it very difficult to make the math work on high quality acquisition opportunities in our markets. We are now pursuing a few transactions that not may need our investment criteria. They have value creation elements and superior locations near transit and amenities, more to come on this.”

Will see some significant transactions in the coming quarters of tech and life science space

“I think you’ll see a lot of good news over the next could of quarters from Kilroy on some pretty significant transactions involve both life science and involve technology up and down the platform but there – just to put in connection with demand, you are also you of all have heard me at various conference calls or at the NAREITs or other conferences that are held talk about the kind of product that the users of the market want.”

We’re not buying coupons because cap rates aren’t attractive but we’ll buy things that we can fix up

“Well we’re not thinking of buying core product that’s leased and buttoned up because the cap rates are not compelling to us, the things that we’re looking at our products where they’re drastically under market in their rents and so we think there’s some big up side and or they’re screwed up. Think up 60 to 55 which we call Sunset media center in Hollywood. It was totally messed up, and now it’s become a terrific asset, because we had the imagination and then they capital and whatnot the straight it out. So it’s kind of a combination of those things. Manny you’re not going to see us by coupons.”

Have only seen cap rates compress further

“we haven’t seen cap rates back up in any of our markets, if anything we’ve seen added cap rate compression, because of what’s going on now there are good number of assets that are being bought by companies that are poor and there aren’t real estate companies, because they in their host countries they can borrow at 1% and then get a 3.5% coupon on the lease transaction or the sale transactions that they buy and that’s a massive spread. So if anything for great stuff, I think cap rates could compress further, but I don’t know about the tertiary stuff I just don’t follow it.”

Robert Paratte

Tech continues to lead SF market

Hi, Nick, sorry. We’re looking at demand in San Francisco currently – third quarter, it’s approximately 8.7 million and we see that continuing to track going forward. And I think it’s interesting, tech continues to lead the market but it’s significant also that there is about close to 650,000 feet of fire category tenants that are in various stages of documentation. So we are comfortable on what we are tracking that fourth quarter will show some significant executed transactions.

Kilroy 2Q16 Earnings Call Notes

Kilroy Realty’s (KRC) CEO John Kilroy on Q2 2016 Results

What’s good or bad for apartment isn’t necessarily good or bad for office

“Well, I again I don’t what we have statistics or Mike with regards to what the protection is for job growth for the market. I can you tell that don’t confuse office and apartments. We want everybody to do well, but a back off in rent increases in apartment is actually a very good thing for the office community because it makes it is more affordable for the people that they are unable. And again, what they’re talking about current rents that are more cautious about et cetera. We are talking about deals that we are working on for occupancy that are year and half are sold out”

Jeff Hawken

Fundamentals remain strong across our markets

“Thanks John, hello everyone. As John noted market fundamentals remain strong across all of our real estate markets. According to JOL, West Coast job growth outpaced the rest of the nation by almost 65% and our markets command a 17% premium in rents compared to the national average. In the San Francisco Bay Area, market fundamentals continue to trend higher. ”

Tech companies continue to spend a lot on space

“Definitely. Steven, Seattle and most of this is public, you look at whose looking in the market, now there is Apple, there is Amazon, there is Facebook, Uber, Google Sales Force, all of them are looking for space they have taken initial premises, they are looking for more and I mean I would say every two weeks there is a new name on the list. And I think another part of your question is what we are also seeing in terms of sentiment from the tenant side is they are making the capital commitment in their premises to deliver space that helps them retain, hire and keep the best and brightest employees. So there we see them spending money on tenant improvements and all sorts of employee benefits that hasn’t scaled back. In fact I would say it’s probably ramped up.”

Kilroy 1Q16 Earnings Call Notes

John Kilroy

fundamentals in our markets remain healthy

” Four months into the New Year fundamentals in our markets remain healthy. Rental rates and net absorption continue to increase, while vacancy rates continue to decrease in the innovation driven sub markets of San Francisco, Seattle, Los Angeles, and San Diego.”

You may see a few fewer bidders, but pricing has remained very strong

” You don’t see as many bidders at some of the really core, real Class A sales. Although you still see a dozen or so and then it generally narrows down to two or three in the final round. But pricing has remained very strong. If you look at land, lands being acquired — there is not much acquired in San Francisco, down in the Valley, Mike, it’s very robust, the pricing is strong.”

Construction costs in Silicon Valley have spiked primarily because of labor

“The thing that we’re look at right now is construction costs which have spiked, it’s basically a labor driven. Down in Silicon Valley right now labor costs were up considerably. How long you’ll stay that way we don’t know. We’ve been able to manage cost to where we forecast generally about 5% per year, and we’ve been able to as we mentioned, we had savings on the two buildings we just delivered. But all those factors you have to really keep control of and if you have a project that is you’ve got to start soon, you better make sure you have forecasted your cost correctly”

Kilroy 4Q15 Earnings Call Notes

Kilroy Realty’s (KRC) CEO John Kilroy on Q4 2015 Results

West Coast market fundamentals continue to outperform

“While we recognize that there are macro factors creating uncertainties about the capital markets and future business conditions, West Coast market fundamentals for office space continue to outperform. We see strong demand and limited supply for the type of work environments that our tenant base requires. Rental rates and net absorption continue to increase, while vacancy rates continue to decrease year-over-year in the innovation driven markets of San Francisco, Seattle, Los Angeles, and the submarkets of Del Mar in San Diego.”

VC funding still well above healthy levels of 2011-2013

“While Bay Area VC funding in the fourth quarter was down from the highs of 2014 and early 2015, it is still well above the healthy levels of 2011, 2012, and 2013, which was a period of considerably higher vacancy rates. And already in the first quarter, brokers are advising that there are currently 750,000 square feet of new leases in process in the San Francisco market.”

Demand continues to look strong

“”based on our discussions with global heads of real estate, executives of companies in our markets and the brokerage community, demand continues to look strong against the backdrop of low vacancy rates, low availability of contiguous blocks of desirable space, constrained supply and increasing rental rates.”

There are big name companies in San Francisco, Seattle, San Diego and Hollywood that are looking to bring their people together in new space

“There are some additions, which I can’t obviously talk about which companies they are. But we are seeing some pretty strong demand for two to four years out, that’s been going on for the last year or two. These are companies that are pretty much household names, big balance sheet that are looking at how they modernize. Just like Viacom did down in Hollywood, where they brought all their divisions together and they — in some cases, they expanded various divisions, and in some cases divisions were reduced in size. But overall, they want to get their people together. The same thing is happening at San Francisco, Seattle, San Diego and Hollywood.”

There are big tech companies looking at space under construction right now that’s going to be eye popping

“There is a couple of major tech companies that are looking at some of the space that’s under construction right now, for major requirements; whether they move on that this year or not, I can’t really tell you, Brendan. But I can tell you that, amongst the — within the comments that Rob Paratte made and I made to Jamie a moment ago about future requirements, there are some big plays that are going on right now, that I think are going to be eye popping. If they go forward, they are going to be eye popping for San Francisco, they are going to be eye popping for Seattle.”

People are moving to where labor wants to live and play

“I think you are going to see a continuation of the trend that we have seen over the last four years, which is folks migrating to where the labor wants to live and play, you have to get two better areas than the city of San Francisco and Seattle.”

There are some properties that are not necessarily the best that are trading at pretty high numbers

“Well, I haven’t seen anything that’s a deterioration. What we have seen is some products that frankly, I would surprise, that the values they traded for, whether it was in San Francisco or LA. Some of the stuff, in my view, was not what I’d call core — kind of core locations, but not necessarily core, that traded at really healthy values in my opinion, based upon assumptions of — I think the markets, assuming that they are going to continue to be rental rates, we underwrite everything, we bought very little last year, we bought nothing, other than a couple of land sites. So I’d say that, some of the products that are coming on-stream are great. Some of the products that are coming on-stream are kind of — Mike and Rob, help me, or I’d say kind of not first cabin, not necessarily best location, and yet they are trading at pretty high numbers. We have seen a few projects that have come onstream, and I got to be careful, because we probably got confidentiality agreements on a couple of these things. We have seen a couple of things where the pricing was so over the moon for the outset or the location that they had to backup and ask for a different bid or lower bid. But those are properties, that in my mind — its like — somebody says they are going to sell you a Volkswagen Bug for $80,000, you are probably not going to get a lot of bids. So there is some of that.”

Haven’t seen any pullback from foreign investors

“We haven’t seen anything. Obviously, we don’t — there’s probably some better sources on that with East Hill and HFF and CBRE and what not. But we haven’t seen any pullback. To the contrary, we are seeing a number of foreign governments that are wanting to be in the cities that we are in.”

We are probably going to get projects off, but the macro does concern us. We are becoming a little more conservatively biased

“What we are seeing on the ground, and the demand we are seeing for a couple of years out would suggest that we are probably going to get some of those projects off next year. But I think, this is the time. I mean, everybody knows — who has ever heard me speak, knows that I concern about the macro, things that are going on in the world. We are not — I mean, we are definitely subject to all that stuff. So yeah, we are going to be conservative and make sure that we get a lot of pre-leasing done across the portfolio and make sure that we like the — what we are seeing in the tea leaves. And then we will make a decision. But I’d say, the bias has become more conservative towards development — spec development, given the factors that we are conforming with around the world.”

Overview of cap rates in markets:

“cap rates in San Francisco today, for quality space in the high threes or low fours and IRRs are in their high fives. In Silicon Valley, its sort of the same thing, maybe IRR is five to six. In Seattle, its cap rates of 4% to 5%, and kind of a 6% range IRRs. In LA, its anywhere from the high threes to the low to mid fours and cap rates, and low to mid to high, depending on the product, 6% IRRs. In San Diego and into Del Mar, its sort of in the 5% range on cap rates, and IRR is sort of the 6% to 7% range.”

We know VCs who got involved in companies that went from $4B to $10B to $6B

“I don’t think we have enough input on that. We haven’t seen it. We spend a lot of time — I personally spend a lot of time. I know Rob does too spend a lot of time with the VCs, the angel investors and others that are involved, that aren’t always VCs, that are family offices or others that are involved in a lot of these companies and a lot of those folks — what we are getting is yes, you’re going to see what value reductions, there are some people that have been burnt, where the company went from $4 billion to $10 billion, $6 billion or whatever it might be. Feel bad for those investors. If they are a tenants of ours, if they were okay, if we were okay at $4 billion, we are certainly okay at $6 billion and we did underwrite $10 billion.”

Some companies will fail and deserve to fail

“I feel like right now, people are being very — the VCs and so forth, they are spending a lot of their money on third and fourth stage, as opposed to first stage, and that’s not all bad. Some companies will fail and deserve to fail, let’s just be honest about this. The nature of technology is that, it rapidly evolves or even increase the revolution, and sometimes that obsoletes some other things.”

Kilroy Realty 2Q15 Earnings Call Notes

San Francisco’s CRE leasing market is hot

“San Francisco Bay area is once again on pace to outperform most U.S. real estate markets in 2015. In San Francisco, rental growth remains strong. The supply of large blocks of space is very limited and demand continues to grow. JLL reports that there are now more than 35 tenants in the market for office space greater than 50,000 square feet and only three available blocks of space of that size.”

“In the Silicon Valley venture capital funding continues fuel growth as the Bay area accounted for approximately 55% of total U.S. high tech venture funding. This ongoing tech expansion has driven Class A vacancy rates in the region down to 4.2%, the lowest in almost a decade. We are currently 98.9% leased in the Bay area.”

Seattle attracts tech companies too

“Greater Seattle continues to attract technology companies and workers, Oracle, Twitter and Facebook continue to aggressively grow the local headcount as technology accounted for more than 40% of Seattle’s tenant requirements in the second quarter.”

LA continues to grow thanks to entertainment industries and limited construction

“Los Angeles continues to strengthen the strong rent growth in the key submarkets of Santa Monica, West LA, Beverly Hills and Hollywood. Most of the demand is driven by the creative and entertainment industries and new construction remains limited. Google, Verizon and Snapchat have grown organically in the region and have been key drivers of office absorption.”

People are trying to get there office space needs right. It’s intense because there’s so little space coming through the pipelines

“people keep changing the amount of square footage. We have one tenant that want 300 and then they wanted 150, now they want 200, 250. There’re all trying to figure out what their long term needs are and that has become more intense because of the — due to some space available the tenants are really worried about getting it right because there is so little space coming through in the pipeline.”

Analysts always ask where we are in the cycle, I say we don’t see any signs of deterioration

“in the last couple of years you and other analysts, investors and so forth have asked the questions, that same question, where are we? And I’ve been probably wrong, I don’t know if it’s wrong or right but I said we don’t see any signs of deterioration, we’re not seeing signs of deterioration in fact we are seeing acceleration of tenants moving into the area.”

Who the heck knows where we are in the cycle?

“in terms of the bigger, in terms of where we are on the cycle who the heck knows? I mean it’s one of the reason why we operate with such a conservative balance sheet if you are going to do the development and so forth that we do, you want to make sure you are well insulated.”

San Francisco is small and tough to develop. Supply and demand says rents are probably going higher

“In terms of the question of how much in San Francisco, one thing about San Francisco remember it’s 45 square miles, a share less than 10% can be developed for non-residential and there is a [indiscernible] of development size that are good, and there’s increasing demand.

So you this incredible kind of economics 101 of supply demand imbalance, we like that. I am not a fan of the policy [indiscernible] because a bad policy but it is the law and it’s reality and we’re the recipients I think of that supply imbalance. So rents I think are going to continue to go up, where they’re seeing some non-essential users in San Francisco sort of smaller companies or older companies that have profit margins occasionally you see them move over to Oakland or somewhere else.”

Some of these companies will fail, but there is fantastic demand behind it

“We’ve always said, there is going to be some failures, the nature of — it’s just like baseball. Not everybody gets up and it’s a homerun and not every team with a winning season wins every game. I don’t mean to be queue here, except for there are going to be companies that fail, this is the nature of it. What is very important is that there are — it’s that there is just strong demand, just fantastic demand. So what happens is some of these companies reduce their footprint if they do they generally get snapped up by somebody else. So I think if anybody thought that all these companies are going to survive, they’d be smoked at some point.”

Companies that you would have called Unicorns have gotten stronger

“I think the quality is improved because you end up with some of the big name companies that have come in and with companies like Airbnb, or a couple of years ago you would have called those companies probably unicorns and today’s there’s real cash flow of big companies that have really strong financial wherewithal so that’s the other side of the evolution, the nature of evolution is some of them don’t make it and some of them become strong.”