Good day, ladies and gentlemen. Welcome to the Q3 2012 Kilroy Realty Corp Earnings Conference Call. My name is Beverly, and I will be your operator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Mr. Tyler Rose, Executive Vice President and Chief Financial Officer. You may proceed, sir.

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 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 7 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 give you a brief review of conditions in our key markets, and I’ll finish up with financial highlights and updated earnings guidance for 2012. Then we’ll be happy to take your questions. John?

Thanks, Tyler. Hello, everyone and thank you for joining us today. Before we get into the quarterly - KRC’s quarterly activities, I’d like to say on behalf of all of us here at Kilroy that we know many of you and your families and colleagues have been hit with a horrible storm and we want you to know that everyone affected is in our thoughts and prayers. Going back to Kilroy, our forward momentum continues at KRC as we are making significant progress on all fronts. We've signed 558,000 square feet of office leases since the end of the second quarter, at cash rent 7% higher than the prior rent and increased our pipeline of office LOIs to approximately 670,000 square feet. The cash rents on the LOIs are 25% higher than the prior rents. We made significant progress at our 410,000 square foot, 360 Third Street Building in San Francisco, which is now 80% committed, up from 37% last quarter. We executed a letter of intent at one of our Brannan Street Buildings for over $60 per square foot on a full service gross basis, which equates to more than $50 a foot on a triple net basis. Our pro forma rent for that building was in the $30 triple net range. For the first time since 2008, we estimate that rent levels in our overall portfolio are now at current market levels. We reached definitive agreements to sell our entire Orange County industrial portfolio at a very attractive price. We closed the acquisition of a West LA office building, the acquisition of a site in Hollywood for a mixed-use development, and the acquisition of a site in San Francisco for the development of a 27-story office tower. And finally, while we remain cautious about the general macro environment,…

Thanks, John. Hello, everyone. We continue to see improvement across all of our West Coast real estate markets, with San Francisco and Seattle clearly leading the pack. Over the past 12 months, California has added nearly 300,000 net new jobs, a 2.1% growth rate that is significantly better than the nation as a whole. Technology and entertainment capture the headlines, but the state’s economy, economic improvement and job growth also are being driven by additional industry sectors, including professional services, trade, tourism, education and healthcare, and more recently construction. All of our core markets in the state have now experienced positive job creation for 13 consecutive months. Let’s take a look at our activity in each region starting with San Diego. San Diego experienced another quarter of positive absorption in improving fundamentals. Job growth continues at a steady pace, as the unemployment rate at 8.4% decreased 140 basis points over the prior year. We also continue to see declines in availability of large continuous blocks of Class A space in select submarkets like Del Mar and Sorrento Mesa where our portfolio is almost 95% leased. We are making strong leasing progress on the former HP space in Del Mar where we have now signed leases for about 90% of the space. Additionally, 2 weeks ago, TD Ameritrade took occupancy of 5010 Wateridge Drive, a property that’s been in our redevelop portfolio. The stabilized cash NOI from this property is approximately $3 million per year. Finally, our 282,000 square foot Mission City campus is now 94% committed, up from 80% leased a year ago. We are now 88% occupied and 90% leased in San Diego. Orange County office market also experienced significant positive absorption during the third quarter. The region’s 7.1% unemployment rate is now one of the lowest in the…

Thanks, Jeff. FFO was $0.57 per share in the third quarter. This includes a one-time non-cash charge of $2.1 million or $0.03 a share for the redemption of our Series A preferred units and approximately 1 penny of acquisition-related expenses. As John mentioned, we have contracts in place to sell our entire Orange County industrial portfolio and the Camarillo buildings. These assets are now accounted for as held for sale properties and you will see that in our financials and supplemental. Our reported occupancy and same-store results exclude those properties. We ended the third quarter with stabilized occupancy at 91.1%; that’s up from 90% at the end of the second quarter. As of today, our operating portfolio is 92% leased. Same-store NOI for the third quarter was down 0.9% on a GAAP basis and up 2.2% on a cash basis. This is a bit lower than prior quarters due to tax refunds we received in the third quarter of 2011 and higher operating expenses in the third quarter of 2012 related to some property damage that I discussed on last quarter’s call. As a remainder, for next quarter, in the fourth quarter of 2011, we received one-time income of $3.8 million related to legal settlements and lease terminations. This will cause us to have negative fourth quarter 2012 same store results. But excluding that one-time income in 2011, we estimate that fourth quarter’s CAS same store growth will be approximately 4%. As John mentioned, we closed one acquisition since our last call. Earlier this month, we acquired Tribeca West for $73 million, including the assumption of approximately $41 million of existing mortgage debt at an interest rate of 5.57%. As of today, we have approximately $115 million drawn against a bank loan. We estimate that upon completion of our pending…

[Operator Instructions] Your first question comes from the line of Chris Caton with Morgan Stanley.

Tyler, just wanted to follow-up on that - on the balance sheet strategy as you ramp development expenditures. Will you look to fund things kind of on a just-in-time basis or might we see you take actions ahead of expected development expenditures? And so will we see you keep the line as low as possible, or how can we expect the timing of some of these sources of capital?

Yes, I mean it’s a combination. I think some of it will be funded over time. Obviously the ATM can be used effectively for that, but if we’re going to do a bond deal, usually you need to do a minimum of $250 million and make it index eligible. So we might do a bigger transaction earlier on, basically pre-fund a bit of it. Some of it depends on the market; some depends on when we start these projects. $300 million I mentioned again assumes that everything gets started. So that’s - the timing of that is unclear. And then as I mentioned, the dispositions will fund hopefully a significant portion of that as well. And that always takes time to get closed, but that could be later on in the process, later on next year. But - so I know I am not definitively answering your question, but it’s a combination of all those things.

Thanks. And then maybe just for John on development, driving down the 101 and then 280, you see a good amount of development in not just office, but you see football stadiums, you see some owners building their own facilities. What’s happening to construction cost as some of the trades and other resources in the Bay area are getting used out. Do you see cost moving higher? And then the second question is, based on some of the rents that you talked about in San Francisco, you might already be looking at a mid-7’s kind of return on cost with 350 Mission. Would you be willing to kind of take some spec risk there or you really - would you really like to get to land a big tenant before you start there.

Now those are the exact kind of questions we ask ourselves. With - first, with regard to construction costs, construction costs have escalated in some areas, they’ve come down in some other areas, metals has gone up. But we - when we do our development, we get GMP prices, guaranteed max prices from very responsible contractors. We also put in quite a bit of contingency. So we feel very comfortable with our development numbers. But costs have escalated, and particularly in the Bay area where we see more cranes than probably we see most places in the country just because of the Apple’s building their big campus, Facebook’s building their big campus. Google keeps adding to their campus. And of course we’re building some campuses for others and we think we’re going to be building more based upon negotiations we have in way - underway. What’s clear is that there is a real flight to quality. And what has gone on, whether it’s in San Francisco, whether it’s in Seattle, whether it’s here down in Southern California in various markets, whether it’s in the Peninsula or the Valley, is that people are really looking at how they attract and retain the valuable labor they need and facilities in the campuses and the amenities in the transportation, all the rest that goes in - pardon me, I’m losing my voice - to a corporate campus or a corporate facility if it’s in a city, are very much focused on right now. And so much of the product - I would say, Eli, you probably know this better than I, but I would say a good 70% of the square footage you see in Silicon Valley is really antiquated to the point where it’s really obsolete and we wouldn’t buy it. So…

Your next question comes from the line of Josh Attie with Citigroup.

Can you talk about where you want your leverage to be kind of longer term? I know historically you’ve targeted kind of 35% to 40%. As development becomes a bigger part of the business, do you still feel comfortable with that range?

Yes, Josh, our leverage historically was in the high 30% to 40% and over the last couple of years we’ve brought that down into the mid-30s and even the low-30s. And I think we have made some comments would even drive - like to drive that lower. I think that’s more of a longer-term goal. I mean, given our development activities, we would like to keep leverage on the lower end. But we’re comfortable where we are now and we've run our numbers on a leverage-neutral basis, assuming - in the mid-30% leverage. So it’s somewhere in the mid-30s and may be lower over the longer run, but we don’t have any immediate desire to get down into the 20% range, for example.

Okay. And dividend coverage got better this quarter, but it had been pretty tight. As you look out the next couple of quarters, where do you see dividend coverage and this CapEx start to moderate to the point where it’s in the low-80s?

Yes, in the third quarter we have actually fairly low recurring capital expenditures, and so we covered fairly easily. In the fourth quarter, our - we expect our CapEx to pop up a little bit with some of the TIs that we are putting in place and with some of our leasing. So, we’re going to be right on the edge of covering in the fourth quarter. We think we’ll still cover. But then as - we’ve talked about this on calls over the last year or so. We’re getting to the point now where we should be covering consistently in the next year. So that’s our goal and that’s what we’re seeing in our numbers.

And just my last question, you talked about asset sales next year to help fund some of the development spend. I know the industrial portfolio you have been looking to sell for a while, but what type of assets in the portfolio are you looking to sell? Is it certain markets that you are looking to exit or are there certain types of assets that are non-core to you?

Well, we have a very - this is John, Josh. We have a very disciplined approach to looking at all of our assets literally quarterly, and we have a list. I don’t want to get into specifics, but I can tell you that there is some areas where - in Southern California, where we have some assets, particularly Orange County where we have round numbers, 600,000, 650,000 square feet of office, we have exited the industrial there. I don’t see us building any office there. We may or may not dispose of some or all of those buildings over time. It’s not a condemnation in any way, shape or form of Orange County. It’s just that we’re not a meaningful player there and you’ve got the big Bs, called the airline company that I’ve always respected and have great respect for, but also recognize they have the catbird seat. Down in San Diego, we will develop more product over time, and I’ve mentioned in the past couple of years that I don’t see our portfolio in San Diego growing hugely over time. I see it going up by successful development and I see it then moderating by the disposition of various assets there. I really like the Del Mar area. I really like the Sorrento Mesa area. We’ve got some big development projects that will come on-stream in due course in those areas. The I-15, Mission City, those areas, they may or may not be in the long-term history of the company, so - or future of the company. And then in LA we look at everything. So I think the likelihood is that dispositions will come from Southern California more than Northern California or Seattle at this point. There is still so much rental upside in those points north that we need to focus on rolling our rents up where the opportunity permits itself.

Your next question comes from the line of John Guinee with Stifel.

John Guinee here. In the old days, in San Francisco, they had some very restrictive development, 0.5 million, 1 million - 1 million square feet a year. Is that still in place and is all the product being built going to get done, given those restrictions, if they still exist?

Well, they do have caps with regard to annually and they do have caps with regard to the total amount. I’d have to get you, and I’m happy to send out to you, I’m happy even post on our website if we want to do that what those caps are and how they are - and update them. I don’t have that - just right on the top of my head, John, forgive me. But the - what has been announced and what’s going on right now in San Francisco is you have Foundry III which Tishman Speyer along with J.P. Morgan Asset Management are building, that’s about 280,000 square foot building. On the south side of what will be the TransBay - center there, you have our 350 Mission at - on the other side. That will go forward. We will build our 333 Brannan Street which will start at the end of the year, but that’s geared towards the brick and timber crowd, that’s a 6 story building. And then you have entitled the building that BXP and Hines have joint ventured on, which is the Big Beast. And then you have also entitled, 535 Mission Street which is just west and immediately adjacent to our 100 First Street, which is 100 First & Mission Building. That’s a 27-storied building that is a smaller floor plate, sort of 10,000 square feet, plus or minus floor plates. I don’t know when that gets built. And then you also have entitled - and I don’t know what state of entitlement it is, is 222 Second Street, which is also owned by Tishman Speyer. Other than that I don’t see anything of substance that is scheduled to be built. There are a lot of folks talking about things way downstream that would come on-stream 5,6,7,8, years from now, both mixed-use. Now, when I am talking about office, there will be some condo and apartment things you could build and some retail things that will get built in a city. I am not worried about overbuilding in San Francisco, but with regard specifically to your question on the cap, what I’d like to do is send you that information and if other people want, we’re happy to put it on our website.

Your next question comes from the line of Michael Knott with Green Street Advisors.

John or Jeff, just curious, the mark-to-market now overall is flat. Can you give us a rough ballpark sense of how that would be, Southern California versus everything else? I assume one is negative and one is very positive.

Yes, I can - the - Mike - Michael, I can take a shot at that. I think you are right. San Francisco is up maybe 26%, Washington over 10%; San Diego is down 14%. So that’s where the negative is. LA is roughly flat and Orange County really isn’t that meaningful anymore. So it’s - you are right. Southern California - although LA is flat now, it used to be negative, but San Diego is where we are having the rolldown.

Okay. Thanks. That’s helpful. And then John, can you - or maybe even Eli, I am not sure, can you just talk about maybe any space usage per employee trends that are worth noting in terms of how you are thinking about designing your $1.1 billion of developments compared to maybe what you would have done in the past or where that’s heading.

Well, I think we’ve been way ahead on this trend. And what you’re talking about obviously is densification of space and we’re seeing that across the board. We are seeing density - the greatest density we’ve seen so far is 13 people per 1,000 square feet. That’s roughly 70 feet per person. When I started this business, the rule of thumb was 250 square feet per person or 4 per 1,000. Then it kind of got to 5 per 1,000, and then we began to see 6 or whatever. We as a company, because we work so much with the technology companies, starting with the aerospace companies, and then as they morphed into a lot of the companies you see today have been very focused on providing facilities that accommodate these high densities. And that takes the form of floor loading. It takes the form of the type of height between floors that permit the dense uses, it relates to the amount of window and the penetration of light. It certainly relates to mechanical systems and the capacity to provide air and so forth, obviously power, wattage per square foot. It relates to exiting with your stairways and it relates to your elevators and so forth. It relates to your parking or your public transportation. It’s one of the reasons why we are so focused on building facilities or buying facilities around public transportation because you’ve got - with these densities, it’s very difficult to park them. You need to be able to have access to public transportation. So everything we build is that way. I might add that - I think Kilroy now is, of the public companies, has the highest level of lead in ENERGY STAR certified buildings of any of our peers. In everything we build, in…

Thanks a lot. That’s really helpful. I guess I’ve been surprised the stock has been somewhat weaker relative over the last month or 2 and it seems like it’s maybe due to a sense among a lot of folks that tech is slowing down or maybe too much risk on development. Can you - it sounds like tech is not slowing down. In fact, it sounds like it picked up on the leasing side. So can you just sort of address that? And then maybe with - in particular on the Hollywood deal, that’s pretty large, can you just try to convince us that that’s going to be a home run for you guys?

Okay. Well, let’s deal with first the tech. In talking with folks, whether they are analysts, whether they’re investors, whether they are - it’s the communication you see regularly that’s published by a lot of different folks, there is this question, is tech slowing? And I am not going to say that - first of all, technology is an extremely broad category. It’s like talking about manufacturing. Just as you have manufacturing of complicated technology products, you also manufacturing of beer cans, I mean it’s - technology is a massively giant category, and within that you have everything from the social media people to the people who make very sophisticated hardware and software and everything in between. We are focused on the companies that have balance sheets, that have - that are making - that make money and that have discipline. And I might point out that we did a little analysis, and it’s a month old or so, but if you take a look at IPO and DC activity back at 2000 versus today, BC activity is about 1/5 and IPO activity is about 1/5. So basically you have lot less money fueling this, although there is still money out there. And secondly, the trend is that you’re not seeing people back in - back in 2000, people had this idea that if some is good, more is better, and too much is just about right. In other words, if our business plan is to do this and it’s going to produce $10 million of profit, let’s do 10 times that much; let’s lease space for 10 times that many employees. And what we’re not seeing now is people lease tremendous amounts of space for future growth. What we are seeing is much greater discipline with people having options…

Yes.

And we are already dealing with a multitude of tenants that want that space. With regard to the balance of the project, David, it’s what, 300,000 square feet in 3 additional phases, low rise office. We already have multiple tenants that we are dealing with for some or all of that space that we haven’t even - we don’t even - we haven’t selected our brokerage team yet. And then with regard to the retail component, we think that gets done just because there is demand in the market. And with regard to the 200-plus or minus units of multifamily, we have got quite a few people that have talked to us that want to buy that. We’ll probably do some kind of a venture with somebody. But the point is, with regard to Hollywood it is as many as 5 phases or it could be accelerated depending upon pre-leasing activity and so forth. But we intend to take a very disciplined approach to that and we think that will be an absolute home run.

Your next question comes from the line of George Auerbach with ISI Group.

John, you mentioned in your comments that you thought the portfolio mark-to-market was about flat now. Any comments or thoughts on 2013 rollovers?

Yes, George, it’s Tyler. We have 1.3 million in rolling in 2013. Jeff, I don’t know if you want to comment on-?

Yes, the 1.3 million square feet, we have about 40% of that that is either in advanced negotiations to be signed or in LOI. So we felt really good about our activity so far in 2013. Like I mentioned in last quarter, we have one large lease, 130,000 square feet that we’ve already - have an LOI for that space and then we have one other property that have a fair amount of activity. And then I think I also mentioned that we did a large transaction in Seattle with Concur for 122,000 square feet. So, feel very good about our position and activity so far in our 2013 expirations.

Any comments on prospective lease spreads on those 1.3 million?

For 2013 guidance, we’ll give all the details on that in the next quarter’s call as we normally do.

At this time we have no additional questions. I would now like to turn the conference back over to Mr. Tyler Rose for closing remarks.

Thank you for joining us today. We appreciate your interest in KRC. Have a good day.

Ladies and gentlemen that concludes today’s conference. Thank you for your participation. You may now disconnect. Have a great day.