Kilroy Realty Corp (KRC) 2013 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth quarter 2013 Kilroy Realty Corporation earnings conference call. My name is Jackie and I will be your coordinator for today. At this time, all participants are in a listen-only mode and following the prepared remarks, there will be a question and answer session.

(Operator Instructions) As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to Mr. Tyler Rose, Executive Vice President and Chief Financial Officer. Please proceed.

Good morning, everyone. Thank you for joining us. On the call with me today are John Kilroy, Jeff Hawkins, Eli Khouri, David Feynman, Heidi Roth, 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 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 packages have been filed on Form 8-K with the SEC, and both are also available on our website.

John will start the call with a review of the quarter and 2013, and then provide an overview of 2014. Jeff will review conditions in our key markets, and I will finish up with financial highlights and initial earnings guidance for 2014. Then we will be happy to take your questions. John?

Thank you, Tyler. And hello, everyone. Thank you for joining us today. 2013 was another very productive and successful year for KRC. We continue to create value in all aspects of our business. We delivered strong results in leasing, acquisitions, development, and capital recycling, and achieved solid year-over-year FFO growth.

We leveraged leading West Coast operating platform to expand our opportunity pipeline and are in a terrific position to take advantage of improving real estate markets. In all of our markets, we continue to reshape our portfolio, both existing assets and new development, to address the very dramatic and, in my view, permanent changes occurring in the moderate work environment.

I believe our intense focus on the geographic location, physical characteristics, and operating sustainability of our real estate assets is an investment in our future that will set us apart from our competitors and build ongoing credibility among our existing and potential tenants.

Let me recap 2013 highlights for you. For sixth consecutive year, we executed 2 million square feet of office leases, signing 2.3 million square feet during the year and 732,000 square feet in the fourth quarter. The fourth quarter leases had rents that were 8% higher on a cash basis and 21% higher on a GAAP basis compared to prior rents. Rents across our portfolio are now close to 5% below market for the first time in five years.

In addition, we have in place letters of intent covering another 340,000 square feet of space. Over the course of 2013, we decreased the exposure of our 2015 lease expirations by 440 basis points, ending the year with 2015 expirations at 13.3% of our portfolio compared to 17.7% at the beginning of the year.

Our consistent leasing performance has driven up our occupancy by more than 1000 basis points over the last four years. At the end of 2013, our stabilized portfolio was 93.4% occupied and 95.1% leased.

On the acquisition front, we acquired two new office campuses in the strongest submarkets of San Diego and Seattle, for a total cost of $296 million. We were able to negotiate the purchase of these two fully leased, recently built, LEED certified, Class A properties at cap rates in the mid-6% range.

The timing of our 320,000 square foot Westlake Cherry asset acquisition in South Lake Union for $530 per square foot, was particularly opportune as a similar property up the street recently sold for almost $200 more per square foot. There continues to be a wall of money chasing core deals and cap rates are as low as 3% for some properties.

In our development program, it is running on all cylinders. We delivered a $45 million, 88,000 square foot building in Mountain View during the fourth quarter for Audience's corporate headquarters.

We remain on budget and on schedule with our three fully leased Bay Area developments for LinkedIn, salesforce, and Synopsys. Just last week, we obtained full entitlements for the development of an additional three stories at 350 Mission Street, which will increase the square footage to 450,000 square feet from 400,000 square feet. Salesforce will occupy all of the added space, which is projected to cost approximately $25 million.

And we initiated construction of three additional development projects during the fourth quarter -- 333 Brand Street in Soma; Crossing 900 in Redwood City; and Columbia Square in Hollywood. Our total current under-construction development projects now encompass more than 2.5 million square feet and represent a total estimated investment of $1.5 billion.

With an average forecasted cash return of approximately 7.5%, and assuming we could sell these assets at a 5% cap rate, which is probably conservative, that is over $8 a share or $700 million of value creation.

We also have made three recent announcements related to our development program. First, we announced last night, just six weeks after our groundbreaking, we signed a 182,000 square foot lease, 12-year term with Dropbox for the entirety of 333 Brandon Street. Dropbox is expected to take occupancy of the LEED Platinum property at the completion of construction in the third quarter of 2015.

Given our projected economics for the transaction, we now anticipate that we will far exceed our initial underwriting and deliver a double-digit return on cost. Also my location, the collaborative design, the big floor plates, the high floor to ceiling heights, the superior energy efficiency, and sustainability elements are all exactly what the market is looking for and were key factors in the tenant's decision to lease the property.

With the Dropbox transaction, [four of our 600] construction development projects are now fully leased.

Second, we announced that we would be collaborating with the Core Group, a Los Angeles-based development and management firm that specializes in high-end residential and hospitality projects on the project programming, design and branding of the residential component of Columbia Square. This portion of the project will be a mix of high-end, long-term rentals and extended-stay apartment homes that will cater to traveling businesses, entertainment and creative professionals. It will be the first luxury extended-stay property to be located in the heart of Hollywood.

While we will retain a 100% equity interest for now, we will partner with The Core Group to manage the apartment project after construction is completed, which is forecasted for the spring of 2016.

Third, in an off-market transaction, we completed the purchase of a unique, mixed use development site in the center of the historic Hollywood, just a block away from our Sunset Media Center building at the corner of Sunset and Vine for approximately $46 million. The Vine Street area has benefited from billions of dollars of recently completed and planned development, and has surpassed Hollywood and Highland in terms of institutional capital interest.

We purchased the four-acre, full-city block located just south of the ArcLight Cinema complex from the Academy of Motion Pictures Arts and Sciences, which had originally selected the site for a museum project. The Academy continues to own one of its key facilities on the adjacent block.

Following an anticipated 18- to 24-month entitlement process, we plan to develop a mixed-use, media-oriented campus that will include approximately 475,000 square feet of low and mid-rise office space, apartments, and retail space. Both from a timing and user perspective, the project will be complementary to our Columbia Square development.

While the Columbia Square office component is targeting larger corporate users and will be delivered in 2015, the Academy campus will target smaller, growing companies that can be built in phases, and subject to entitlements, can be delivered as early as 2017.

Similarly, the residential components will vary in timing and design. The Academy apartments will be at lower price points, and will be delivered roughly two years after the Columbia Square residential tower. In its present configuration, the site consists of a number of small buildings and large open space for movie screenings. We anticipate that we will be able to receive rental income from these sources during the entitlement period.

The successful performance we have seen at our Sunset Media Center in Hollywood, where Class A direct vacancy is 5%, and where rents have grown almost 50% on a triple net basis over our underwriting numbers, bodes well for both Columbia Square and the Academy project.

Moving to capital recycling, we negotiated the sale of 15 nonstrategic suburban properties, encompassing 1.2 million square feet for total proceeds of approximately $352 million during the year. Our 13-property San Diego portfolio closed in two tranches, one in December and one in January. The cash cap rate was in the mid-5% range.

Over the past two years, we have sold more than $850 million of nonstrategic and lower quality properties at low to mid 5% cap rates, while developing state-of-the-art projects in some of the best markets in the world at the 7% to 10% range. This is one important underpinning of our current investment and capital recycling strategy that has allowed us to remain a strong balance sheet, while transforming the Company.

The economics of the San Diego sale not only speaks to the successful execution by our team, but to the improving conditions in San Diego. With very limited construction activity, combined with job growth rate of roughly 2% in 2013, and a projected office employment growth rate of 3.4% for 2014, we feel that we are particularly well-positioned to capture the growing demand in San Diego.

During 2013, we further enhanced the sustainability profile of our portfolio, ending the year with 40% of our properties LEED certified and 53% Energy Star certified. All of our development projects are now designed to achieve LEED certification, generally LEED Platinum or Gold, our 333 Brannan Street and 350 Mission Street buildings are the first two of ground-up, LEED Platinum office development projects in San Francisco.

Accordingly, or -- excuse me -- according to the most widely used global benchmark for sustainability performance, KRC now ranks among the top three American office REITs in sustainable practices and properties.

During the year, we continued to build a strong management team with deep regional knowledge and experience capable of recognizing opportunities that will unfold in our commercial real estate markets. Last month, we were delighted to welcome Rob Paratte to our team as Executive Vice President for Leasing and Business Development.

Rob, formerly with Tishman Speyer, brings hundreds of corporate relationships and more than two decades of West Coast experience to KRC. He will primarily focus his attention on major lease opportunities, including outgrowing development portfolio. That is a recap of our year.

For 2014 our priorities remain much the same. Continue to create value across the franchise and to grow our opportunity pipeline, continue to deliver strong leasing results while pushing rents and decreasing concessions, pursue value at property acquisitions that either add immediate NOI to our portfolio or play a strategic role in our future growth. Remain laser focused on delivering our development projects on time and on budget.

We now have four of our six projects under construction preleased to high-quality credit tenants. Take advantage of improving market to sell non-core properties to enhance and diversify the quality of our portfolio. Unlock the several dollars a share of value embedded in our land held for development through enhancing current entitlements, moving forward with development and, in some cases, completing land sales.

And, finally, maintain a strong balance sheet position us to take advantage of opportunities both for this and future cycles. I am confident in the organizational strength and capacity we have built at KRC from San Diego to Seattle. We have the strongest and most talented management team operating on the West Coast, in my opinion, and I believe we will continue to execute well against all of our priorities, building upon our position as the region's premier landlord and expanding our opportunities to create meaningful long-term value for our shareholders.

With that, I will turn the call over to Jeff for a review of our markets. Jeff?

Thanks, John. Hello, everyone. 2013 has been a year of broad-based improvement, both economically and in terms of commercial real estate fundamentals. Across our West Coast markets, job growth has been solid and unemployment has continued to trend down.

California added more than 236,000 net new jobs last year. Since February 2010, when the state's economic recovery began, it has added 920,000 net new jobs, an average of about 225,000 a year, and now has an employment rate of 8.3%.

In Washington, the Seattle-Tacoma-Bellevue metro area's strong demographics continue to create jobs, with the second-largest year-over-year drop in unemployment among the country's top markets. The state now has unemployment rate of 6.6%. Economists are reporting that these job growth trends in California and Washington will continue throughout 2014.

Across our core West Coast markets, San Francisco remains in a class by itself, delivering continued increases in rental rates and leasing volumes. Seattle continues to be very strong. San Diego improved sharply this year. And Los Angeles continues to show slower but steady improvement, with strength in select creative and media submarkets, including the Westside and Hollywood, with momentum gaining in the much smaller submarkets of Playa Vista and Culver City.

Let's take a market by market look. The San Francisco Bay area continues to surprise on the upside. Both absorption and demand surpassed the peak level set in 2012 with more than 1.4 million square feet of positive net absorption, marking three consecutive years of more than 1 million square feet of net new leasing, unprecedented for the city.

Rents for high-quality space have grown more than 130% since the downturn on a triple net basis. According to JLL, more than 50% of the leases executed in the city last year were driven by expansion or immigration into the city, which helped to drive San Francisco's unemployment rate to 4.6%. Brokers are seeing an uptick in activity and report there are numerous companies in the market for significant blocks of space.

In the fourth quarter, we've signed 50,000 square plus feet of leases in our 410,000 square foot Kilroy 360 Third Street building, which is now fully leased to some of the biggest names in media and technology. We also made significant leasing progress at Menlo Corporate Center, where we are now 95% committed. In the Bay Area, we are currently 94.8% leased.

Seattle remains a close second in overall performance. Seattle was recently ranked as the sixth strongest overall economy in the country by the US Chamber of Commerce, with an unemployment rate of 4.8%. In our primary Seattle submarkets of Bellevue and Lake Union, Class A direct vacancy rates declined to 6.2% and 4.0%, respectively, and rents have continued to increase.

In Bellevue, there are currently only two available blocks of space created in the 50,000 square feet. And they are both an older, less attractive product. This has driven Class A CBD rents to their highest level since 2008.

Bellevue is benefiting from the continued in-migration of companies from the suburbs into the CBD. We are currently 97.1% leased in our Seattle properties.

San Diego's coastal markets continue to improve steadily as they benefit from a unique set of characteristics, a highly attractive place to live and work, a well-educated workforce, and no new office supply. The region experienced 180-basis-point reduction in the unemployment rate to 6.4%.

In addition, brokers predict that total office-using employment in San Diego will grow more than 3% per year over the next five years. Supply remains extremely tight in the markets where we operate, especially Delmar and Sorrento Mesa, where Class A vacancy rates are 9.7% and 5.7%, respectively. Rents for top tier space and in Class A buildings in Delmar are up 20% on a triple net basis year-over-year.

Our stabilized San Diego portfolio is 95.3% leased, which is up 280 basis points from the third quarter. Los Angeles remains mixed with overall vacancy for the region still in the high teens, which is reflective of the 8.8% unemployment rate for the region.

However, markets with a higher concentration of media, entertainment, technology, education, and healthcare companies, including West L.A. and Hollywood, are experiencing rent increases given the lack of supply in the market. In Hollywood, we are seeing significant demand for the amenity-rich, collaborative space we are providing, which is very limited in this market.

And, as John mentioned, our rents at our Sunset Media Center Building are up 50% since we purchased the property.

In the fourth quarter, at our Kilroy Airport Long Beach complex, we signed a 200,000 square foot, 12-year lease with Scan Health, which includes a renewal for approximately 150,000 square feet, and an expansion of 50,000 square feet on the redeveloped building at 3880 Kilroy Airport Way. Across our Los Angeles portfolio, we are now 94.1% leased.

Looking at our 2014 stabilized portfolio, lease expirations total approximately 1.2 million square feet with only four leases greater than 50,000 square feet. As I mentioned during our last earnings call, we had approximately 290,000 square feet of known San Diego move-outs in the first two quarters of the year, which will impact our occupancy rate in those periods.

However, approximately half of this space has been released for occupancy in the third quarter at rents more than 20% higher than the prior rates. And we project for the other half, rents will be up about 10%.

That is an update on our markets. Now I will pass the call to Tyler, who will cover our financial results in more detail. Tyler?

Thanks, Jeff. FFO was $0.67 per share in the fourth quarter and $2.66 for the year. That is a bit higher than the top end of last quarter's guidance range. We ended 2013 with a stabilized occupancy at 93.4%, up from 92.2% at the end of the third quarter and 92.8% at year-end 2012. Our stabilized portfolio is currently 95.1% leased.

2013 same-store NOI was up 3.6% on a cash basis and 1.7% on a GAAP basis. Same-store cash NOI was down 2.9% in the fourth quarter, but essentially flat when adjusted for one-time items. Same-store results were impacted by lower average same-store occupancy of 160 basis points and an increase in a variety of operating expenses, including utilities and insurance.

As I will mention later in guidance, we expect same-store -- we expect cash same-store NOI growth for 2014 to be in the 3.5% range.

CapEx trended higher in the fourth quarter, primarily due to the 200,000 square plus foot Scan lease that Jeff mentioned and DirecTV's tenant improvements related to the lease executed in 2011. As John noted, we completed the San Diego portfolio sale transaction earlier this month. Total gross proceeds were approximately $327 million.

The proceeds will be reinvested into our development properties and potential other acquisition opportunities over the next several months.

We currently have $395 million of availability on our bank line; approximately $350 million of cash; and debt maturities in the second half of 2014 totaling approximately $250 million.

Now let's discuss our initial guidance for 2014. To begin, let me remind you that we approach our near-term performance forecasting with a high degree of caution, given all the uncertainties in today's economy.

Our internal forecasting and guidance reflect information and market intelligence as we know it today. Any significant shifts in the economy, our markets, tenant demand, construction costs, and new office supply going forward, could have a meaningful impact on our results and we have not currently reflected in our analysis.

With those caveats, our assumptions for 2014 are as follows. We do not include any potential acquisitions or acquisition-related expenses in our forecasting numbers. We anticipate 2014 development spending on our current construction projects to be approximately $400 million.

We expect to complete the LinkedIn campus in various phases through the fourth quarter and 360 Third Street to be fully occupied late in the third quarter. Capital recycling will remain an important component of our funding strategy going forward. Our current guidance for 2014 estimates $150 million of dispositions, although this could change significantly depending on market conditions and the emergence of potential new growth opportunities.

We project same-store cash NOI growth to be approximately 3.5%. We expect operating margins to be in the 70% range for the year. Our recurring CapEx budget is approximately $75 million with the results in an [FAD] payout ratio of approximately 92%, assuming everything else stays the same.

Spending on the $75 million is forecasted to be weighted in the middle the year. We project issuing unsecured bonds, refinance our two debt maturities in the second half of the year.

In terms of occupancy, we expect to end 2014 at about 93%, with occupancy dipping in the first quarter to roughly 92%, given expirations Jeff discussed earlier, and then ramping back up by year-end. Again, these projections are subject to potential future acquisitions and dispositions.

Taking all that into consideration, we are providing initial 2014 FFO guidance of $2.55 to $2.75 per share, with a midpoint of $2.65 per share. The 2014 midpoint is basically equal to our 2013 actual results.

However, if you take out the one-time payments in 2013, our FFO would have been approximately $2.55 per share. And if you add back the near-term dilution from the sale of the San Diego portfolio to our 2014 guidance, our FFO would be approximately $2.75 per share.

So on an apples-to-apples basis, year-over-year FFO growth, from 2013 to 2014, would be approximately 8%.

That is the latest news from KRC. Now I will be happy to take your questions. Operator?

(Operator Instructions) Josh Attie, Citi.

Tyler, on guidance, can you just talk about what the assumptions are in guidance? You have $400 million of development spend and $150 million of asset sales. What is -- how does guidance assume the remainder of that development spend is funded?

Well, as I mentioned, we have about $350 million in cash from the sale of the San Diego portfolio. So with the cash and the bond offering that we have in there, and the other dispositions, effectively that funds that $400 million, assuming nothing else changes.

Okay. Got it. And on Columbia Square, can you talk about what the level of tenant activity for the office side and what our expectations should be in terms of when you might sign a lease for that?

David Simon here. Activity continues to increase, given that we started the renovations in the historic and digging a hole for the garage. We have seen a lot more activity.

We have LOIs that cover the majority of the historic space. We have five big tenants that have leased 100,000 feet or larger, which we are in discussions with, LOI and/or space planning for the new office buildings at [250,000 and 100,000]. So the activity is definitely increased and we are confident that, over the course of this year, we are going to see the right kind of user come in and take a large portion of the new space.

And can you just remind us what your pre-leasing requirement is to actually start construction of the office component?

We are under construction with the office component.

Jamie Feldman, Bank of America Merrill Lynch.

Focusing on San Diego, can you talk a little bit more about your prospects for rent growth there? And then, also, as you look at the future development pipeline, you seem to have several projects teed up there. How should we be thinking about getting those started and timing?

Okay. This is John, Jamie. In terms of rent growth, we have seen decent rent growth this year in Delmar, around 20% this past year. And similarly, we have seen rent growth in Sorrento Mesa. Jeff, do you have that number?

I don't have the exact number, but Sorrento Mesa has equally been strong in our market there with product. So we see good rent growth over this past year and anticipate we will see continuing increases coming year, 2014.

And the quality product, the Class A product that people want, it's anywhere from 8% to 10% vacant in the quality stuff. Rents in Delmar certainly, as well as Sorrento Mesa for the top Class A stuff, certainly will justify an appropriate return on development.

In terms of demand, I mean, job growth is everything. We sell 1.1 million square feet of net absorption in San Diego this past year. That is the highest number since 2005.

We have seen over the past four or five years, most of the quality space be consumed. There's very little quality space of any size available.

And we are seeing job growth, which is projected to be pretty good in San Diego. Last year, there were 23,500 jobs created in San Diego. The forecast calls for 26,250 in 2014. And that is anticipated that, at least forecasted there, that we will see job growth in the neighborhood of 3%-plus for the next five years.

So looking at that, I think we are teed up pretty well. And, of course, we control some of the key sites. We are permit-ready. We are ready to drop permits on most of the parcels we have.

On 1 Paseo, which is the big mixed-use project, we are moving through the city right now very well and anticipate obtaining approval later this year. We had an interruption last year, as you know. We had a mayor down there that had to be removed from office, who was kind of a bad guy and slowed down everything. But we are encouraged by that. We think we will probably get underway sometime midyear with the building on the pad that we call the Heights of Delmar, which is roughly 75,000 square feet.

We think we know a couple of good candidates that will take that space. We might very well get underway later in the year with Lot 8 in Sorrento Mesa. I can't speak too much as to who the tenant might be there. But let's just say we are having some good discussions.

And then, with regard to other land parcels in San Diego, our thinking is that we will sell the Rancho Bernardo property sometime this year, in all likelihood. And we may end up either selling or developing out the Carlsbad property with a lower end product, if we develop it. So we think we are pretty well teed up.

And then, finally, at Santa Fe Summit, Phase 2 and 3, we are having discussions with a major tenant that recently had a favorable change in their CEO structure. When I say favorable, it wasn't the other guy was bad. It is just that they went through a normal transition, which delayed things a little bit.

But we have a prospect there for both of those parcels that it is too early to tell whether we will be able to transact, but we are hopeful. So that is kind of the big picture on San Diego.

We are encouraged with what we have done down there. We have moved our occupancy now into the 94% or so range. We have sold off the nonstrategic stuff. We think we have gotten rid of most of the property that has ongoing reoccurring CapEx, which we didn't like. So all in all, we are pretty pleased with where San Diego is today.

Okay. Thank you. Then, just a follow-up on guidance for Tyler. Can you talk about maybe the sensitivity to your guidance range? What would get you the low end or the high end?

And then also the occupancy lost you mentioned in the first top of the year, how we should think about timing for backfilling and the progress releasing?

Yes. Well, I think, from an occupancy perspective first, I think we will be back -- we are going to lose the two spaces that Jeff mentioned, one in the first quarter and one in the second quarter. And then, we have already released one of those phases, which comes in early in the third quarter. And we are obviously working on the other space.

So by the third quarter, we should be most of the way back up, assuming, again, nothing changes else. The impact of the guidance, it can be lots of things. Same-store results will obviously be impactful.

The level of dispositions, if we start a traditional development, the capitalized interest component of that could change. From a new delivery perspective, we are delivering -- as I mentioned earlier, we are delivering LinkedIn in the fourth quarter. That is really the only delivery, so there really isn't a lot of movement on that.

And then 360 Third is coming online and we have leased it now to -- basically fully leased, but the occupancy will come in over the first three quarters and be fully leased. So if that were to slip a little bit, I guess, there is some downside there. We are subject to tenant delays in our FFO.

So that -- and then, in terms of interest rates, we are going to refinance our two maturities. We have built in some cushion on interest rate movements. We probably could issue 10 years out right now at [4.50]. We have built in sort of 100 basis point cushion on that.

But the timing of when we do that bond offering obviously can play a role in results for these.

David Toti, Cantor Fitzgerald.

I just have sort of a big picture question, relative to -- I think one of the things we struggle with when we step back and look at the quarterly results, there seems to be a divergence in terms of overall performance from the same-store portfolio and the non-same-store. And I don't know if that is a function of the fact that it is newer product or that your overall tenant base in the market is clearly interested in newer product.

Can you maybe walk us through some of the dynamics in terms of leasing that would highlight the differences between the same-store and the non-same-store performance?

This is Tyler. I can take a first crack at that. The same-store properties, for example, one of the buildings that we lost some occupancy on here, is next door to our headquarters here in West L.A. It is a relatively new building.

I mean, I don't think the newness of the buildings it really makes a difference in this issue. You look at 201 Third or 303 Second or -- a lot of these buildings are older, then we have come in and renovated, but it's the type of product that the market likes. So I'm not really sure that tenants are focused on the age of a building. It is more of the functionality.

And, as you probably know, about 70% of our properties are in the same-store portfolio, so there is a big component that is not. And those are the 2013 acquisitions and the 2012 acquisitions. So those will be coming into the portfolio this year.

So, a lot of those properties that are doing well will improve the same-store results for 2014. But I'm not really sure it's related to the newness of a building. John, I don't know if you have any comments on this.

I think you have covered it. It's one of the things we've been very focused on and, frankly, prideful about is that we have upgraded all of our properties that we continue to hold with very few exceptions, to kind of state of the market, if you will. Either that, or we sold them off.

So we think we will see significant rent increases throughout most of our portfolio as leases roll. Tyler mentioned that Westside media center that we -- in one building we -- Building 1, which is roughly, Tyler, 85,000 square feet or so, about 80,000-some feet -- we have a lot of intent on that. And to give you an idea, the rents are up -- Jeff, what is it? 20%, 30% on a cash basis and 40% or 50% on a GAAP basis.

Yes. In fact actually, I think even higher than that, but, yes, definitely strong increases.

Yes.

Okay. That's helpful. And I guess just sort of a subtext of that, given that the performance delta of whether it is age or product type or whatnot, does that encourage you to take more of an active view towards churning, selling more assets, continuing to grow the development pipeline? Is there sort of a philosophy around that based on the performance divergence?

Well, I think what you have seen us do in selling $850 million in round numbers over the past few years, of course some of that was $300 million or so was the industrial, right? As we look at it, we will sell some stuff. The top will sell the stuff to the bottom. And we will sell into this kind of a market.

How much we sell this year, we have forecasted roughly [150]. It might be considerably more, but we have had a long track record of capital recycling since 1997 when we went public. And I think, when you look at that graph that I sometimes show, which is how much we recycled and how it funded development and so forth over the first 10 years, and then the next five years, if we look at five years hence, I think you will see maybe the amplitude of the numbers will be higher, but it will be a very similar type graph than what we have done in the past.

We believe that you should sell off property and we always try to assess which properties are the most likely or the best to sell. And we are very focused on that reoccurring CapEx that we would like to make sure that we are selling.

One of the things we don't like about the two-story product, and we have been very successful in that, but when you do two-story product, typically what happens is you have a single tenant. The tenant moves out. The next tenant wants a new lobby. Then it ends up being a bit of a fool's game at times.

We have focused our attention elsewhere and sold off most of that kind of product. So that is kind of the big picture, the way we look at it.

Okay. That's helpful. And if I could just ask one more small follow-up, can you just remind me how many triple nets you have in the portfolio at the end of the year in terms of percentage?

Tyler?

I would have to double check that number. My guess is it is roughly half the portfolio, but I really -- given the increase in San Francisco where we have more industrial growth, it is probably less than that now.

Let me point out that we are far different from most triple net people because in our triple nets we generally actively manage the property, have control of the system, have control of the common areas, have control of the maintenance and so forth because we don't like assets that degrade by use. We like to make sure that they are up and fresh and ready to go for the next tenant.

Craig Mailman, KeyBanc Capital Markets.

Could we maybe just get a breakout of the mark to market, the 5%, maybe by market?

Sure. So in San Francisco, it is the strongest market. It is about 25% below market; Washington, 5%, roughly; Los Angeles, flat; and San Diego around 9%, 10% above market.

Okay. That's helpful. Then just going on to 333 Brannan, so obviously you guys are doing better on that project and pro forma. Is that just a function of market rents moving that much in the last couple months, or did you guys have a bidding war for the space?

It was a bit of the latter. We had several tenants that were interested in that space. And we were worked collaboratively with the owner that is next-door who is going to be building a roughly 112,000 square plus foot building and make sure the two buildings work well together so they could accommodate a larger user than just our 185,000 feet.

Our buildings are roughly 185,000 feet; 182,000 feet went to Dropbox. There's 3000, or 4000 square feet where we put a restaurant in it.

In terms of the math, you remember, when we first came out a year ago or so, when we bought the property, or maybe a little bit before that, we came out and said we thought we would get around $50 in rent and that we would have roughly an 8% return. And -- or maybe it was a little under $50. But, then we did the deal with Splunk at 250 Brannan, which is a 100-year-old building. It was a Gallo sausage factory originally and we redid all that.

And we did that lease in a much higher rate that we forecasted for 333 Brannan. Similarly, we forecasted 333 Brannan at originally 175,000 feet. It is 182,000 feet. So the cost went up a little bit.

But, by and large, what we did is we significantly enhanced the quality of that building with the systems and the floor loading and all of the things -- the rooftop deck, et cetera -- all of the things that the high density collaborative user wants. And that is the area, if you think of demand as being a pie chart, the lion's share of demand of high rent-paying people are in the technology and media areas up here -- or industries up here. And most of them don't want to be in the traditional high-rise.

They want to be in a big floor plate building that accommodates their high density requirements. And they recognize they have to pay more for it.

Now, at the same time, we decided to make the decision to go to a LEED Platinum. Actually we tried to do a zero carbon, which can't be done, but I will describe that problem later. So we have probably -- I'm sure it is the most energy-efficient building over two stories in the United States.

That contributed to increased demand for the property, while, at the same time, we have seen rents increase. So basically, we have a building there that is achieving about -- approximately 250 basis points better ROC than we forecasted originally, around 300 basis points better on the straight line, and we think somewhere in the neighborhood of 350 to 400 basis points stronger on an IRR.

It was highly sought after by a number of different tenants. And I just emphasize again that, if you think of that pie chart, where you want to be, it is where there is the most demand. And there is tremendous, tremendous demand in San Francisco for this kind of building.

I was up in somebody's office yesterday that is one of the premier buildings in the city -- a big high-rise; traditional fire category, overlooking all of the bay, San Francisco Bay, you know, just amazing views. And he was telling me that [they'd had dedication] to be in one of their clients spaces over in Soma recently that had no view of the Bay, but had all of these features and so forth that people are seeking. And they decided they are going to move out of that building, pay more rent even, to be in the kind of space that we are doing.

So that is a long answer, but it was all those factors. And I want you guys to think a little bit about areas like Sand Hill Road, Palo Alto, Stanford Research Park, where buildings have regularly traded into several -- in $800 to $1200 range. And that is what I see happening in the quality buildings like we are building now, is that the demand for those is so intense and there is such a limited supply that you can develop in the city, that it's a really new paradigm in where I think values are going and the types of assets that are going to command the highest values in the city.

No. That's helpful. Then, maybe just head south and a little bit of update on Crossing 900 and the demand you're seeing there.

Well, Crossing 900, we have multiple folks, both from the fire category, mostly law firms, as well as the tech industry. We have a number of letters of intent going back and forth for one building or the other. We have a couple of tenants that are interested in the entirety.

We think we are going to see very significant improvement in the forecasted yields there, much like we saw at 333 Brannan, not necessarily the same yields that we talked about in our report this morning, but a similar direction. There is just -- it is a very high quality building, right next to the transportation with all the amenities and so forth, with the bigger floor plates, geared to the high density user. It is exactly what people want and we are very encouraged.

One of the things we like is that, in all of our development projects now -- the 333 Brannan which is now leased, Crossing 900, Columbia Square, the dynamics we are seeing in those markets, while they may be a little bit different. But the dynamics are very similar in the sense that we are seeing increased demand, very low vacancy rates, and at significantly improving rental rates.

So we like our position and we think we're going to do very well on that. And we will probably have some announcements -- I am not going to say whether it is this quarter or not.

I kind of get the feeling a little bit that we sort of -- and I say this tongue-in-cheek, but we sort of spoiled everybody because we have delivered so many buildings over the last year, or so many lease deals that were preleased. And I think it is just unrealistic for us to say or for others to assume that everything we do is going to be leased the day we start it or within a month of starting it.

Remember, all three of these projects were started in the fourth quarter. In the case of 333 Brannan, we literally just demoed the building the day before yesterday. We had a ceremonial groundbreaking six weeks ago. So I feel very, very enthused about where we are at on these development projects.

Vance Edelson, Morgan Stanley.

So, back on the four acres in Hollywood, and you mentioned the functionality of buildings, how would you say the proposed office campus is going to compare to your West Sunset building, which has one of the lower occupancy rates and a similar location? Are there any inherent advantages that the new structures will have, and maybe it's just a more favorable mix that you are contemplating?

I am unclear of what the building you referenced has a low vacancy -- I mean a low occupancy here. I didn't understand the question.

If you could just compare what you are looking to build at the new site in Hollywood on the four acres compared to what you have at the West Sunset building, and any inherent advantages in the new building or the new campus that you are looking to construct. And is the mix going to be flexible depending on how the markets develop over the next couple of years?

What I was troubled with when you said the West Sunset, are you talking about Sunset Media Center in Hollywood?

Yes.

Okay. Sorry. That is a building we bought a year and a half or two ago. We are totally repositioning. We have moved the rents up about 50% on the bottom line with the deals that we are doing now, so well above what we forecasted. And that is a traditional older building that is totally going through a renovation.

We have saved the best floors to be leased last. And I think we finish up that stuff here in another month or so.

And the floor plates, Dave, in that building our roughly 20,000-some square feet per floor, right? And then if you look at Columbia Square, we are building larger floor plate buildings that are geared very much to the media and technology folks.

They work very well for our fire category folks, but they have all of the amenities and height and ceiling height and floor loading and density and so forth that the traditional buildings don't have, so much more flexible than Sunset Media Center.

With regard to the Academy side, which I think is the four acres you were talking about, David, do you want to talk about what we are building there? We are not building it yet. We have to get it entitled.

Yes. Sure. Yes. So we have about 18- to 24-month entitlement process. And we are going to create another creative campus. It is going to be as unique as Columbia Square, but different.

It is going to have a retail component, residential component, and office component, low-rise campus feel, creating another sense of place in the kind of environment that the modern workforce wants, especially the entertainment, media and tech guys.

Hollywood is filled with midsize tenants -- [tens, fifteens, fives]. This project is really going to focus on those users that are growing out of that market, although we are going to have the flexibility to handle larger users as well. Meaning four, maybe five stories, all creative design, and we think it is going to be very complementary to what we are doing in Hollywood, especially when it comes online, probably in 2017 -- mid-2017 after we get entitlements, after Columbia Square is all buttoned up. So we feel good about the direction we are heading.

Okay. And the 18 to 24 months on the entitlement process, is that pretty straightforward? Is that a standard timeframe and any chance you could accelerate it or it takes even longer?

Yes. No. Well, we already have the 3-to-1 [FARs] in place under the Hollywood Community Plan. And it is really about a site plan approval and getting through some traffic studies and things like that. So given our relationships with the city and the mayor and the Councilman, what we are doing in that city and the good stewards of the land in that community, I think it is going to be smooth sailing for us the way we take our expertise and go through the process. So I think 18 to 24 months is a pretty good guideline.

Okay. That sounds good. And then, just back on the Bay Area, kind of big picture. With average occupancy now pushing 95%, how do you think about the balance between pushing rents and pushing occupancy even further? Are the rents even more in focus now as you effectively start to run out of having a lot of space to show? Or do you think occupancy can still go higher?

Jeff, do you have before you, or in your mind, the percentage of the San Francisco portfolio or just maybe a square foot number that rolls over the next two, three years? I don't know if we have that before us right now, but just a big picture -- excuse me.

No. I was going to say, I don't have the exact number over the next couple of years, but.

The lion's share of space that we have, we are rolling up very substantially. And, of course, any projections we might have had a year or so ago, we probably have blown through because the rents have gone up considerably more than we would have projected.

I mentioned at NAREIT, when we had the conference -- or not the conference but the reception up on the roof deck at 360 Third Street, to those that were there, that I thought we would see another significant spike sometime probably midyear this year. And I believe that will happen.

The number of spaces that are available of any size in the Soma area -- South Market area so de minimis and the demand is so great, there is a lot of discussion, you recall, over the last year or so about did the big users kind of go away and so forth. I can tell you, the big users are back. There are a lot of them that are looking for space for sometime in the next 3 to 5 years and many of them are looking for space now.

I think that bodes very well. And it bodes particularly well for anybody that has the kind of space they really want, and ultimately it probably lifts all boats. I think we are actually are going to continue to escalate.

Okay. That's great. And then last question for me. The average lease term on renewals was, I think, about seven years during the quarter, which was a little bit higher than it had been. So do you see tenants looking to lock in for longer now? Is that driving it?

And, given your optimism that you just mentioned on the asking rents going forward, are you pushing back at all on the longest proposed leases?

Well, it you know, this is a -- I've been doing this a long time. So it is -- we aren't a hotel or an apartment that can adjust all the time. You want to balance your overall -- ideally you balance your overall portfolio, at least the thought we have always had is, if -- in a perfect world you would have 10% rolling every year and that it would be fairly much the same regionally.

Now, obviously, when it is extremely robust, you would like to say, okay, well, we would like it to be marked to market every year. It just doesn't work that way in office. And, from a credit standpoint, we have got to look at the long-term. We are not just going to write short leases.

We don't do a whole lot of five-year leases. We do a few. Most of our leases end up being anywhere from 8.25 to significantly longer in the case of a build to suit.

To your other point, yes, there are a lot of people right now that are trying to engage to lock in rates earlier because I think they read the same kind of charts that we do, that the brokers publish and that the tenant brokers send out, which is that rental increases are likely to be in your future.

Brendan Maiorana, Wells Fargo Securities.

Just on the Academy land, that acquisition, as it goes through the entitlement process, this is probably for Tyler, is there any impact to earnings? Are the carrying costs offset by some of the income that you get or would you expect to have a little bit of negative carry on OPEX carry?

Yes, I mean, we will be capitalizing the interest on that investment and then that will be affected by the revenue that we will receive all the sites that John mentioned in his remarks. So, effectively, it's the carry costs that at the capitalized interest rates.

Okay. There is not income that is being generated from whatever existing structures are on the site today?

There will be income, but that will offset the capitalized interest.

Okay. Got it. And then, I don't know if this is David, Simon, or John, but how do you think -- you guys did a nice job kind of laying out how that project compares to Columbia Square. But how would you think about the Academy project relative to maybe some of the other developments that are proposed in Hollywood?

And, I think Hudson has their office project. I think Lincoln is maybe doing a redevelopment office project and there are several other multifamily developers that I think have projects that may or may not go.

David, do you want to take that?

Yes. I'll take it. So, in Hollywood, as you know, there is an enormous amount of institutional capital being put into the city in investment. Predominantly, there is a multifamily. I think it's about 1700 units under construction now, if you go all the way down La Brea Avenue, with another 1500 to 1600 potentially planned that are going to go through entitlements.

The bigger projects, from the Crescent Heights, the CIMs, some of the bigger developers, are predominantly residential. There is not a lot of office. Hudson does have a project on their Bronson studio, closer to the 101, which is a high-rise. I think it is 13 or 14 stories, different location than what we are doing.

I believe the Vine and Sunset core is kind of the nucleus of the business section in Hollywood. And, you know, our projects are right there with all the amenity base and all the housing that could be used for the workforce.

So I think, from a competitive standpoint, and what is coming online, quality office space, creating these kind of environments that we are creating with Columbia Square, I like to call the Sunset Media a vertical campus that we are putting in place.

And the type of campus that I described with the Academy, there is nothing like that that is planned. So I think we are positioned pretty well as we look forward and we look downfield through the entitlements, given what is planned and what is coming. And most of it being entitled, as I said, is on the residential side.

Okay. That's helpful. I had two quick ones for Tyler. First, on same-store, the guidance that you gave, does that include -- in 2013, I think you got a $5 million property damage settlement. So is it -- would same-store be higher if you are excluding that from a 2013 results or maybe you strip that out of your guidance?

And then, I didn't recall if you gave the rent spread outlook, but if you could give guidance on rent spreads, that will be helpful as well.

Yes. We excluded that payment out of the 2013 numbers when we calculated our 3.5% forecast. And on rent spreads rent, our whole portfolio -- you were talking about going forward. Our whole portfolio approaching 5% on the market, I mentioned earlier how that breaks out by region. Is there something else you are looking for?

Oh, yes. I thought that was the overall. I thought on a couple of prior calls we had said that 2014 was likely probably to be kind of in the plus-10% range, which is I think where you thought 2013 would be.

Yes. Sorry. 2014 is roughly 5% below market.

Mitch Germain, JMP Securities.

Just, maybe John, just curious on the San Diego sale process and how it played out versus your original expectations.

Eli, do you want to take that?

Yes. It played out according to our expectations. I mean, we were basically trying to construct a portfolio that could take advantage -- a mix of properties that could take advantage of the particular state of the debt markets at that time. And, even though there was a little hiccup in the summer, we put together a composition of fully leased properties and value-add properties that supported a real high level of debt.

And then, as we got past the summer and the debt markets came back together, the ability of people to get really good debt to drive pricing on that, with a combination of assets that went in there, so we had huge combination of possibilities. We could break it down to three or four different parties and transact at one level. We could have several different options for single party transactions.

And we had great debt quotes all the way across the board for both medium leverage and high leverage buyers. And we took the best of that lot and we had the ability to adjust if the debt markets had kind of stayed wobbly. But it turned out very simply to get one party paying the highest price and do it in one transaction. There were other people -- I mean, there were other combinations at the same price as well. So we had a lot of backup.

Michael Knott, Green Street Advisors.

It is [Jed Reagan] here with Michael. You are obviously seeing very strong demand in south of Market and nearby areas still. With 360 Third and the Brannan property leased up, I am just curious what you can do for an encore in the City of San Francisco. And are there any additional opportunities that you are currently exploring?

This is John. I've got to be -- remember, I am kind of a smart aleck, so I have to have a little tongue-in-cheek comment about this. On the first one, we are not going to tell you.

Just assume that we have a lot of things up our sleeve, but we are not -- the problem with these conference calls, I have so many tenants and brokers and friends and so forth that are in the real estate business and they say they read our script. So I have gotten in trouble before by sort of -- and we have competitors that read our script as well. So you should assume that we have multiple discussions going on with regard to San Francisco as well as the other markets we like, both with tenants as well as securing other opportunities.

And you know the kind of product we like and the characteristics we like, so we are not going out on some far limb. With regard to the second point, I'm sorry, I got lost in my own comments.

It was related just to what opportunities you are seeing out there, looking at something similar with regard to Seattle, but I think it sounds like you sort of --

Seattle. You know, we like Seattle. You know my circles and squares. We are so focused on that. And when we find stuff that we like that makes sense, we are going to be enthusiastic and go after it.

Sometimes we can't achieve the pricing. But, I think what is happening to us right now is, we are very encouraged by the number of folks, some of whom we have done business with, some of whom that now love us, some of whom might be clients of the same DCs or whatever with whom we have had relationships on other deals we have done, where we are getting referred to a lot of folks in regards to their facility requirements, and what I would call their longer-term requirements.

So that is something that is you always hope for and sometimes you get it. I have only had it a couple of times in my life.

One of the reasons we hired Rob Paratte, who I mentioned in my remarks and who we made an announcement about, I don't know, a month or so ago when he joined, is Rob has tremendous relationships here in San Francisco and up and down the coast and throughout the country, generally at the highest levels with many of the big users, particularly the industries that we kind of catered to. And we are already seeing that he is getting our organization before a lot of new prospects and whatnot.

So until we announce them, they haven't happened. But let's just say we believe in planning seats for the future and so think of Kilroy -- we are going to buy when it makes sense, we are going to develop when it makes sense. We are not going to do either when it doesn't make sense.

The cycles will change. We think we are very well-positioned to continue to deliver great opportunities and that is about as much as I can say.

Okay. Thanks for that. And you guys talked a little bit about 2015 being a bigger year or lease roll. Can you just discuss any particularly large expirations or move-outs in that year that you are focused on? Or is it too early to tell at this point?

Well, I just think that in the more robust the particular market is, probably the more we want to let a little time go by, because it is forces of the market. But, I don't really want to get into which tenants, simply because it empowers tenants.

Great. Fair enough. Thank you.

But, directionally, we have gone from 17.7% to what was it, Tyler? 14.3% or thereabouts over the course of the last year. And we will continue chipping away. We don't like uncertainties when we can prevent to them.

Vincent Chao, Deutsche Bank.

Just a couple cleanup questions in our guidance. I think on the $400 million of development spending, I think you said that was on the existing pipeline. Just wanted to confirm that, so that no additional starts baked into guidance. Is that correct?

That's correct. We have a little bit of spending on predevelopment for some of the ongoing projects, but there is no other additional starts in the numbers at this point.

Okay. And is that a function of just having announced anything or just comfortable with the total size of the pipeline today and would wait for some stuff to deliver before announcing some new starts?

Tyler, if I could just comment on that. Obviously, if we do a preleased deal, we are going to announce it. We are prepared on most of our development properties to move forward, subject to how we feel about the market and the demand and all the things that are going on and/or pre-leasing.

In regards to -- we don't have a reluctance to start anything, if it makes sense. But we do -- we have historically delivered 60%, 70% of our development when we have started it being preleased, and somewhere in the neighborhood of 80%, 90% upon completion. While we are not going to guarantee that it is that way in every market, always think of Kilroy as being fairly -- we are fairly conservative with regard to development. But we are not going to start just a ton of spec up and down everywhere that is not -- I don't have the stomach for it.

Okay. That's helpful. And then, on the unsecured financing later in the year, I apologize if I missed it. Did you guys mention a size of deal? Looks like about $250 million rolling towards the middle or the end of the year.

Yes. $250 million to $300 million.

$250 million to $300 million. And any appetite at all to take out the 2015 unsecured early, just given what potentially could be a rising rate environment? It doesn't feel that way right now, but no interest at all?

Yes, well, certainly not right now, but you are right. It is something that we actually look at all the time. And with our upcoming maturities, is there a point where it makes sense to prepay them, typically the prepayment penalty would kill you, but it is something we look at.

Okay. And then last question just on the same-store NOI guidance, similar to this year's growth, when our OPEX was up quite a bit, just curious what you are thinking about same-store operating expenses for 2014.

In terms of how the 3.5% splits between revenue and expenses?

Right.

I don't have that number in front of me, but I can get that to you after the call.

George Auerbach, ISI Group.

Tyler, you mentioned CapEx is about $75 million in 2014. I know it was a little elevated in 2013 and you guys are doing a lot of leasing. How should we think about that going forward? Is sort of $75 million a good number plus or minus, just given the size of the portfolio?

Yes, you know, it depends. We are still spending money on the DirecTV lease that was signed in 2011. So we have another -- in that number, I think there is another $7 million, roughly, of DirecTV cost.

So it is hard to say that is going to be a consistent number. Hopefully, over time, we can drive that number down a little bit. About half of that is pre-committed and the rest of it is more speculative. But for modeling purposes, it is probably not a bad number going forward.

Great. Thanks. Just on the asset sales, I know in the past you targeted non-core markets and assets. I guess, given the strong pricing for core assets that you guys talked about on the call and we have heard about, the $150 million of asset sales, should we expect that those will continue to be non-core sales? Or could they be more core CBD type sales?

Well, we look at both the top and the bottom, as I mentioned, like the comments of somebody else, George. And I don't want to get into identifying any particular asset, but we are constantly looking at the portfolio.

Eli is sitting across from me and he has always got a whole bunch of ideas up his sleeve. So we will let you know more as we proceed. But, obviously, there is -- it is a pretty robust market out there right now and we could sell things at pretty attractive prices, but more to come.

One of the things I mentioned in the past is, we have a lot of EBITDA that is coming in over the next couple of years through all this development as it comes in. And we have sold off EBITDA with regard to the assets that we transacted on, the $850 million over the last couple of years. And, while we don't want to put ourselves or we have to be slaves to any one set of criteria, we do look at all these ratios on debt as well as FFO and so forth.

Okay. Thanks. But, I guess, Tyler, you mentioned that you gave yourself some breathing room on the assumed debt rate at the end of 2014. Should we assume that, as you were modeling out the dispositions, you were sort of leaning more towards selling non-core assets as opposed to a lower cap rate type asset?

Yes. We usually model 6%, 6.5% cap rate on dispositions, (multiple speakers) greatly outperformed.

Right. And I guess the last one for me, the same-store taxes jumped this quarter versus a year ago. Is there anything happening with reassessments in California or Seattle?

Yes. Actually, it is more in Washington than it is in California, where we don't have Prop 13 in Washington. But the increase in taxes was almost fully passed through to our tenants. So from a same-store perspective, actually it didn't really impact on numbers for 2013.

Dave Rodgers, Robert W. Baird.

I just wanted to follow up on expected development returns. And I guess relative to the initial pipeline -- I think you had said, John, 7.5%. You have added some projects maybe with some more multi-family layered in.

Talk about maybe any downward pressure you could see an overall development returns, notwithstanding the Dropbox lease over the course of the next year or two as you add more projects in.

Downward pressure; I am not seeing downward pressure right now. I mean, obviously, if costs escalate substantially, but we have actually seen commodities back off a bit. I think that is probably related to China, I guess. At least that is what I am reading about.

So while costs have gone up quite a bit over the last few years, they've moderated it a good deal. That always could be a factor on yields.

From the standpoint of what we are seeing is rents are going up and demand is going up and the supply is tight, so we like those dynamics. Obviously, when we have talked about yields before, we sort of talked about -- you know, in the old days, we would sort of say 8% to 12% back in the early 1990s -- or, not early 1990s; late 1990s, early 2000s.

And of course it has been a different environment with where interest rates are and so forth, but we sort of hit anywhere from 7.5% to plus-10% with the average being, I guess, Tyler, in the sort of 8%-ish, plus or minus range. And I think that is kind of a good way to look at it.

Now, if we have the ability on a material piece of property that we already own, and we would end up with a yield that would be lower than that, but still a very attractive yield On incremental dollars and a decent yield, and above what cap rates would be in terms of overall yield on project, then we would seriously look at that. That would be probably a good investment.

So I don't want to get pegged ahead had tagged with absolute here, but we did the Synopsys deal, which was the first deal we did up here in the Bay Area and it was at the low-end of the yield on ROC, but very strong credit in a very -- and at rent that now is probably $0.75 or so per month below market for a great tenant.

And it allowed us to move into and be recognized by folks in this market as a major development player. And, of course, you have seen the success we have had since then. Everything since that has been considerably higher ROCs, and in most cases we are getting 3% bumps.

So you can figure the straight lines pretty easily. If it is a lousy yield, we won't do it. But I think right now we are feeling pretty good about the way we are teed up.

Can you remind me whether, to get to the initial yield that you are quoting, are you using trended or in-place rents?

The rates I am quoting are first year return on cost unleveraged.

Just to make sure I'm understanding, so trended rent when that property stabilizes or opens?

(multiple speakers) calculation.

Beg your pardon, Tyler?

We typically use in-place rents when we can do the calculation. It depends how far out the project is, but if it is delivering in the next year or so when you can do in-place rents.

Okay. That's helpful. And maybe one last question for Eli. Eli, maybe give us some color, if you can, on kind of going in yields today in San Francisco on something stabilized versus going in today, maybe buying land going through entitlements and starting to deliver a project with the yield differences would be absolutely relative.

Yes. Okay. Well, you have a couple of good comps here that you could just draw on. Number one is 101 Second that just traded at a 3% cap for $770 a foot to an institutional investor. Nice quality building, but it is not a building that has really attracted the tech tenants. It is really an entirely financial services occupancy now.

And I don't know that they will transition that or not, but it has not been the building that has attracted where the thickness of the demand is right now. And there is another building, 123 Mission, that also traded in the low 3%s. There is a building in Southern California that traded.

So this in-place cap rate for really poor stuff, the last few months have seen, believe it or not, another leg up or down, whichever you want to call it, in terms of the pricing of these things. I have seen on the IRRs drop down to 6% flat, maybe even high 5%s. And so it has got gotten more -- the price per foot has gone up.

And, on development, putting development together is so multifaceted. If you can do an assemblage and have a little bit of entitlement, and you get into the good land basis, I mean spread on that can be -- if you're asking about the spread between a completed development and these, well, I will just address the yield that we can get for right now.

I mean, the yields that we can get are what John just talked about. Certainly north of 7% based on the way that we have a team who could put together the different components that get us into the project for that cost structure with a great location, with a great product. I think there is huge spread over the things that we have already built a based on today's cap rates.

I think there are some like -- Synopsys has tremendous credit and a good long-term lease with good ups that is already under market in a really strong location. And I think what we are seeing here is we are seeing -- as the rents build, we are slowly busting through some of the price per foot that we have seen before.

There is a building in Palo Alto that just traded $4060 a foot because the rents justify it. It was an Amazon subtenant. And, as John mentioned, on several of these markets we have seen values over $1000. There are two buildings that traded several months ago, almost a year ago, that were over $800.

So I think we are getting to the point where it depends on how high the rents go, what the actual per square foot exit value is. And I think it is substantially higher than it has averaged. And I certainly think, like New York, we can get up into the $1000 a foot range as rents continue to go up and justify those values.

Now, I talked a lot. I am not sure I answered your question.

Josh Attie, Citi.

It's actually Michael Bilerman. There was a comment about $350,000 that is out for LOI right now. And I was just curious how much of that represents development leasing, versus how much of that is existing vacancy versus roll. So I don't know if you could maybe break that out a little bit.

Yes. This is Jeff. Of the 340,000 square plus feet, it's all in a stabilized portfolio and 48% is new and 52% is renewal.

And then you are saying the rest is development LOIs?

No development. All in the (multiple speakers)

340,000 is all stabilized. There is no development in that.

340,000, I thought you said 140,000. Okay.

340,000.

And then, in terms of just as we think about sources and uses, and I recognize you have well north of $300 million in cash and $150 million in sales, when you look at the development of -- that is under construction, I think you said $400 million would be spent in 2014 of the $825 million that is left to spend on the pipeline.

Is there any chance that any of the total -- the $825 million or the $425 million that is left -- falls into 2015, that that is brought forward in any way? Or you feel really confident that most of that spend will happen in 2015 and then into 2016?

Yes. It is unlikely it would come forward too much. It is always -- things always actually take longer to get spent than sooner on these projects. So if anything, it gets delayed a little bit, but -- so those numbers are pretty solid, I think.

So the only change potentially could be if one of the shadow pipeline projects comes about, either through a pre-lease or something where you get a new project in, in terms of a use of capital.

Exactly. And at that point, whether we would -- how we would fund that or do we want to pre-fund a little bit of 2015, as I mentioned, we will probably raise a little bit more in the bond offering than we need for 2014 or to start pre-funding 2015.

Well, that is where I was going to go next, which is how do you feel about balance sheet metrics and potential need for eventual equity either s through additional asset sales or through common equity? And when does that all factor in?

Yes. We don't have really any need for common equity at this point. We may work around the margin on our ATM program. But given the dispositions, which sort of form from -- you know, it was really equity related, we are in good shape right now on our metrics.

But as we have done over the long run, in the next couple of years we will access all of the markets. In 2014, we did $300 million of debt, we did $300 million of equity. We did $300 million of disposition. So you can see our profile.

Great. And then just one for John, just as we hold in a little bit. There has been a lot of discussion about asset sales on core versus your non-core product.

But I am just curious. How would you look at something like 333 Brannan? It has been an absolute home run, signing a 12-year lease with Dropbox and the returns and what you have been able to do. And you spent a lot of time talking about how you have been able to drive that return higher than what you thought it was going to be.

Clearly, there is a lot of NAV value sitting there now. But it's also leased now for 12 years. How do you think about holding that in terms of an asset versus potentially monetizing it for an unbelievable quick return?

Yes. This is Eli. And first of all, we don't deliver that until 2015 and there would be some sacrifice in trying to sell that lease right now without a completion, even with a completion guarantee. And so it is a premature question and there is just a lot of things in the pipeline of that delta that we have to work through.

And, as John said, we are balancing things on every dimension in terms of coverage ratios, EBITDA, funding needs, turning the profit, getting spread, every -- whether it is core or whether it is non-core, all of those things. And I can't take you inside of the machinery right now, but, yes, things are where we have created a lot of value, our general principle is where we created a lot of value it may not be able to create more value for some substantial time.

You have seen us already in our disposition program take advantage of that. And that style will continue to be a part of the disposition program. But, 333 is premature, just because we have to button up, get the tenant in there, get it all delivered and get it into final shape.

With that, ladies gentlemen, I would like to turn the presentation back to Mr. Tyler Rose for closing remarks.

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

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect and have a great day.