Kilroy Realty Corp (KRC) 2014 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q2 2014 Kilroy Realty Corporation earnings conference call. My name is Stephanie, and I will be your operator for today. (Operator Instructions).

As a reminder, this conference is being recorded for replay purposes, and now I'd like to turn the call over to Tyler Rose, Executive Vice President and CFO. Please proceed.

Good morning, everyone. Thank you for joining us. On the call with me today are John Kilroy, Jeff Hawken, Eli Khouri, David Simon, 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 the forward-looking information in this call and in the supplemental. This call is being telecast live on our website and will be available for replay for the next seven days both by phone and over the Internet. Our press release and supplemental package have been filed on a Form 8-K with the SEC, and both are also available on our website.

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

Thank you, Tyler. Hello, everyone, and thank you for joining us today.

We had another strong quarter with solid execution as West Coast real estate markets continue to strengthen. We made good progress with all of our strategic initiatives. The highlights include the following. We increased our occupancy by 120 basis points to 93.6%. Our stabilized portfolio is now nearly 96% leased. Our same-store portfolio generated strong year-over-year growth on both a cash and a GAAP basis as we continue to see the benefits of rising rents and demand across all of our markets.

In our development portfolio, we executed one lease and have an LOI for a second that increased our office projects under construction to 71% leased and 85% committed, up from 67% leased last quarter. We successfully reloaded our development pipeline with two new projects in San Francisco, arguably the best market in the country and now have signed an LOI to acquire a terrific site in the vibrant South Lake Union submarket of Seattle. We completed two San Diego dispositions totaling $63 million, which included a land parcel and two smaller vacant buildings. We increased our borrowing capacity, extended the term and lowered pricing on our credit line, and we received an upgrade in our credit rating outlook to positive from stable from both S&P and Moody's.

Let's take a look at some of the details. On the leasing front, we had another solid quarter, signing newer renewing leases on 470,000 square feet at rents that were 11% higher on a cash basis and 20% higher on a GAAP basis than rents in the expiring leases. Year to date we have now executed approximately 1.3 million square feet, and we currently have 450,000 square feet of in place letters of intent.

Our existing development program continues to outperform with the strength of our franchise growing more evident each quarter. Our six projects currently under construction totaled just over 2.5 million square feet and represent a total estimated investment of $1.5 billion. Five of the projects are now fully leased or committed, and we expect to deliver two of them in the fourth quarter. That represents an on-time delivery for the new LinkedIn office campus in Sunnyvale and an accelerated delivery for the new synopsis campus in Mountain View.

At Columbia Square, we signed a 93,000 square feet lease with NeueHouse for all of the office space in Phase I, which includes the two historical buildings. NeueHouse is the world's first unique private workspace provider, offering a series of spaces, experiences and amenities catering to innovators in the film, design, fashion, publishing and tech industries. The cost of the project has increased slightly to reflect a larger Phase I square footage of approximately 10,000 square feet and other improvements to the space. Our projected rents for both the office and residential components of the overall project have also increased based on improving market dynamics.

At our Crossing/900 development in Redwood City, we have a full project LOI that would result in a phased delivery of the two buildings starting in late 2015. More to come on this as we complete our negotiations. And in the Del Mar submarket, we are preparing to start the 75,000 square-foot Heights office project late this year. The estimated total investment would be approximately $45 million.

As we've said on prior calls, we have also been working on a number of new development opportunities. Here is the status report on three new projects. First in May, we completed the acquisition of a new development site in the Mission Bay area of San Francisco. We think this is a terrific opportunity as it is fully entitled and exactly the kind of product users prefer.

In addition, based upon our current plans, we will be delivering the project at a time when very little other supply is forecasted to come online. We paid $95 million or approximately $140 per FAR foot for the 3.1 acre site and expect to invest approximately $450 million, including land, to build four LEED-Gold midrise office openings totaling approximately 680,000 square feet.

We think this is an outstanding purchase, not only because of the three attributes we noted above, but also in just a few months, we have seen the land value of our site almost double based on what we understand as the current pricing for a nearby parcel that we don't think is as well located. Our site is located adjacent to the 280 freeway and along the 16th Street corridor, which is the primary artery connecting Mission Bay to adjoining residential neighborhoods including Potrero Hill, the Mission District, and Dogpatch, all of which are popular with the city's young technology workers. The site is highly accessible to public transit and bicycle paths. It will be within walking distance of the new Central Subway line and the recently announced new home of the Golden State Warriors. We have flexibility to build the campus in two phases with the first phase scheduled to begin by the second quarter of 2015. Depending on discussions with prospective tenants, we could start the entire project in one phase.

Second, as we announced last week, we have entered into an agreement to acquire a 1.9 acre land site in the Central SOMA region of San Francisco for $27 million subject to approval by the seller's shareholders. We've been in discussions to acquire the site for some time and expect to close the transaction by the end of the year. This is a compelling opportunity that will allow us to deliver this type of product most tenants seek in a location that provides tremendous access to transportation, including the future Central Subway. Delivery of this opportunity is projected to be 18 to 24 months, after that of the Kilroy Mission Bay project. We are excited to establish a foothold at this location in what should become a tremendous office development opportunity.

And third, we have executed a Letter of Intent to purchase a development site in South Lake Union submarket of Seattle that would be our first development project in that region. The development site is zoned to allow for more than 580,000 square feet of office, residential and retail. We have the flexibility to develop in multiple phases depending on market conditions. More to come on this opportunity.

We also continue to make great strides on the entitlement front. In Hollywood we anticipate receipt of entitlements on the Academy site by the time Columbia Square is completed and leased. And in San Diego, in Del Mar, we are on track in our (inaudible) project to be entitled by the end of this year.

We are also re making good progress on the entitlements for a medical office building in the UTC submarket of San Diego. While we are obviously active on the development front, we remain very disciplined and have a clear eye on current deliveries and preleasing progress to prudently manage our pipeline. We are diversified in terms of location, tenants, product type and timing and are conservative with phasing and funding. Subject to market conditions and preleasing, we believe we can maintain a reasonably consistent level of activity that balances development upside with market risk.

To provide a bit more color, at year end we expect our in process development as a percentage of enterprise value to be roughly 12%, down from 19% currently. Depending on market conditions over the next several years, we project our pipeline could stay in the $1 billion to $1.5 billion range and average approximately 15% of enterprise value.

Moving to capital recycling, we sold two non-income-producing projects during the quarter. In April we completed the sale of an undeveloped land parcel in the Rancho Bernardo submarket of San Diego with gross proceeds of approximately $33.1 million. And in June, we sold two vacant office buildings located in the University Towne Center submarket of San Diego for gross proceeds of approximately $29.5 million. We are currently under contract on two other properties, one of which is a non-income-producing land parcel in Orange County, and we are in the market with four other properties throughout our portfolio. We remain on track to complete $150 million of sales by the end of the year and could substantially exceed this target depending upon market conditions.

To summarize, we had a very successful first half as we continue to see strong fundamentals across our markets. While technology and innovation remain primary drivers of growth, we are also now seeing improvement in non-tech industries as well. And in many cases, we are seeing credit profiles improve as large proven companies such as LinkedIn, Facebook, Yahoo, Apple, Microsoft to name just a few are acquiring early and mid-stage companies in both Northern and Southern California.

Going forward we have positioned ourselves to take advantage of increasing tenant demand, a reduction of quality spaces available to meet that demand and predicted rental growth. These dynamics, which are increasingly the case in most of our markets, coupled with supply restrictions such as Prop M in San Francisco, have created favorable landlord environments that should allow us to create meaningful value throughout our portfolio.

We will remain disciplined in terms of new development and focused on maintaining a strong balance sheet. And with that, I'll turn the call over to Jeff for a review of our markets. Jeff?

Thanks, John. Hello, everyone. As John has made clear, we continue to see broad improvement both in economic and real estate fundamentals. Unemployment fell in all of our markets in June, and job growth continued. The San Francisco Bay area posts the lowest unemployment rate at just over 4%, while Los Angeles showed the most improvement with its rate dropping from 10.3% to 8.2%. San Diego posted the best year-over-year job growth, netting nearly 35,000 new jobs, a 3% growth rate. The Seattle region had a June unemployment rate of 4.8% and year-over-year job growth in excess of 45,000 jobs.

Let's take a look at each market, starting with the leader, San Francisco. Halfway through 2014, San Francisco is outperforming once again, generating new leases at a rate the brokerage community predicts will produce another record year for the area. Year-to-date there have been 10 leases signed that are greater than 100,000 square feet, with 2014 projected to be the highest level in 14 years. Brokers are reporting 7.5 million square feet of demand with 15 tenants in the market seeking space greater than 100,000 square feet. These figures suggest that the current plan supply factoring in limitations from Prop M will fall short of the current need for space given pre-leasing activity on current development and the relative lack of large blocks. This should lead to further strong rental rate increases, and that's what we've been seeing in our portfolio.

As an example, at 360 Third Street, we recaptured a space from a tenant who had planned a sublease and ended up with a higher quality credit at significantly higher rents. The new 20,000 square feet space was leased at a rate of 68 IG, which is greater than a 30% increase to the bottom line over the prior rate that was agreed upon about a year ago. Similarly at our 303 Second Street, we are negotiating a renewal and expansion for an existing tenant that will result in greater than a 50% increase to the bottom line on the expansion space.

Class A direct vacancy for SOMA is now under 1%. Currently we are at 98.4% leased in the Bay Area, and in Seattle the region continues to attract millennials at a faster pace than nearly every other major US city and was recently ranked the second best place to live for this demographic. The most recent employment forecast calls for 2014 job growth of 2.5%, substantially higher than the 1.6% expected nationwide.

In our primary Seattle submarkets of CBD, Bellevue and South Lake Union, Class A direct vacancy rates are now at 6.2% and 4.5% respectively, and rents are continuing to increase. The demand is being driven by the high-tech industry, which accounted for more than 50% of all Puget Sound office leasing activity in 2013 and currently accounts for more than 40% of potential activity. We are currently 97.9% leased in our Seattle properties. In San Diego the coastal markets continue the steady improvement with no current new office supply.

Year-over-year job growth continues to outstrip all other West Coast markets, and the region's unemployment rate is now 6.1%. In our Del Mar and Sorrento Mesa submarkets, Class A direct vacancy rates are now 8.8% and 7.2% respectively. In July, we executed a 13-year 176,000 square feet renewal and extension with AMN Healthcare at one of our Del Mar properties. The lease was scheduled to expire in 2018 with early termination rights in mid-2015 and will now expire in 2027. Our San Diego portfolio is currently 93.4% leased.

While larger and more varied, Los Angeles nonetheless experiencing better economic fundamentals with the May unemployment rate dropping nearly 200 basis points and job growth keeping pace with most other growth regions in the West Coast, including San Francisco and Seattle.

In Los Angeles, entertainment, media and advertising industries continue to drive growth, particularly in Hollywood in the Westside, which has seen the strongest rent growth. The overall Class A direct vacancy in Los Angeles is currently 16.8%. Across our Los Angeles portfolio, we are now at 95.2% leased.

In terms of overall portfolio rents, last quarter we reported rents that were roughly 5% below market, and these levels have improved to approximately 5% to 10% below market in the second quarter. For 2014 and 2015, they are 6% and 9% under market respectively.

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

Thanks, Jeff.

FFO was $0.72 per share in the second quarter. That included the previously disclosed $0.04 related to the gain on sale in the Rancho Bernardo land and $0.02 from a lease termination fee accrual. As we discussed last quarter, the lease termination fee would be paid in the third quarter, but under GAAP will be amortized over the first three quarters of the year. We also have one penny of acquisition-related expenses in the second quarter.

We ended the second quarter with stabilized occupancy of 93.6%, up from 92.4% at the end of the first quarter, driven largely by two leases in San Diego. Same-store NOI continued to improve in the second quarter, adjusted for a $5.2 million cash receipt related to a property damage settlement in the second quarter of 2013 and the accrued lease termination fee of $1.5 million in the second quarter of 2014.

Same-store cash and GAAP NOI were up 10.2% and 7.8% respectively. Improving NOI reflects the higher rents and occupancy we are realizing across much of our portfolio. We raised $22.6 million of equity during the quarter through our aftermarket stock offering program at an average price of $61.01.

We also completed our bankwide renewal with positive results. We increased the size of our unsecured credit lines at $600 million and extended the maturity of both the bank line and the $150 million term loan to July 2019.

We also reduced our borrowing costs on both facilities. As John mentioned, both S&P and Moody's upgraded our ratings outlook to positive giving us good momentum to complete a potential bond offering. As previously discussed, we plan to refinance our two 2014 debt maturities from public debt transactions. In order to take advantage of current rates, we are considering accelerating the timing of the offering to be sooner rather than later.

Subsequent to quarter end, we had approximately $37 million of early redemption related to our exchangeable notes, which mature in November.

The early redemption will not have any material net impact to our earnings. It be will be a loss on early extinguishment of debt, offset by lower interest expense. We currently have [$15] million of unrestricted cash and a line balance of $165 million. As John noted, we recently announced the execution of an agreement structured in a tax efficient manner for the seller to acquire a development site in the Central SOMA region of San Francisco for $27 million. We expect to issue $22 million of KRC stock to the seller and fund the remainder with cash. We anticipate completing the acquisition by the end of the year. We are limited to what we can disclose beyond the asked for registration statement that was filed with the SEC last week.

Now let's discuss our updated guidance for 2014. To begin, let me remind you that we are approaching our performance forecasting with a high degree of caution. Given all the uncertainties in today's economy, our internal forecasting guidance reflects information and market intelligence as we know today, and any significant shifts in the economy or market, demand, construction costs and new office supply going forward could have a meaningful impact on our results in ways not currently reflected in our analysis.

With those caveats, our updated assumptions for 2014 are as follows. Our occupancy guidance at the end of the year remains the same, but is revised to approximately 93.9% to reflect the sale of the two vacant San Diego properties, which has a positive impact of approximately 90 basis points. As always, we don't forecast any potential acquisitions or acquisition-related expenses. Our projected remaining 2014 development spending for our current construction projects is approximately $250 million. Our current guidance for 2014 capital recycling remains $150 million, although this could increase significantly depending on market conditions, and we project an [FPG] payout ratio of 92% for the year. This includes higher projected CapEx in the third quarter given the leasing commissions associated with the AMN early lease renewal that Jeff mentioned.

To sum up, last quarter's 2014 FFO per share guidance range was $2.66 to $2.80 with a $2.73 midpoint. On an apples to apples basis, that midpoint would go down one penny to $2.72 based on the $0.01 of acquisition-related expenses that were not in our forecast. However, adjusting for the earlier than anticipated occupancy of Synopsys and Mountain View and better than forecasted operating performance for the remainder of the year, we were able to increase our 2014 midpoint by $0.04 to $0.76 per share.

Finally, if we were to accelerate our bond offering by two months from our original forecast, that would lower our estimates by about $0.02 or so. So on a net basis then, we are increasing our midpoint to $2.74 per share and assuming an accelerated bond yield. Our updated and tightened 2014 FFO guidance range would then be $2.76 per share to $2.79 per share.

That's the latest news from KRC. Now we will be happy to take your questions. Operator?

Craig Mailman, KeyBanc Capital Markets.

Hey, guys. Tyler, on the accelerated bond deal, what was the timing in original guidance versus now? Was that just the two months difference?

Yes. Roughly it was early October versus sometime in the near future. We haven't decided exactly when it will be, but it's two plus months earlier than we had originally forecast.

Okay. And sizing on the deal, what kind of a range -- what are you guys thinking?

In the mid-300 range -- $300 million range.

Okay. And then just turning to kind of development and funding, you guys obviously are backfilling the pipeline with the land deals in San Francisco and Seattle. Just curious kind of feel for funding here for the next 12 months? Are you guys just going to take the opportunity to ramp asset sales, kind of what do you guys have on the market right now? Is it just using ATM, or do you guys feel like overnight would be more appropriate?

Well, I think it's a combination. I'll let John talk about the positions, but we are obviously looking at a bond transaction. We issued ATM in the second quarter, and that probably will be something we might look at again going forward. We obviously are doing our disposition. So it's a combination of all of the above. I don't think we have any -- we obviously don't have any plans currently to do an overnight deal. I don't think that's necessary at this point. I think we are comfortable with the bond deal, the dispositions and using our ATM and using our line. We'll have to see over the next year whether an equity offering make sense, but at this point, we don't have any plans for that.

And just as an update on dispositions, kind of what you guys have in the market, pricing and the appetite you are seeing for those assets and maybe just a sense of what you guys as you look at the portfolio would consider non-core at this point and maybe potentially on the block?

Well, we'll tell you what we've got on the market in terms of talking about what's non-core. Don't be surprised if some time if we sell something that is core just because we think it's the appropriate thing to do, but, Eli, why don't you cover what we've got in the market and what our thinking is.

Yes, sure. So, you know, we've already closed on 63 for the year -- $63 million, and we are not refundable on another similar amount. It is hitting around $125 million that's quote-unquote in the bank, knock on wood, on those in contract. We've got another $50 million to $100 million in the market right now, and those are non-strategic assets. I'm not going to mention them specifically right now that would easily take us up past the $150 million plus number. And then, as John said, we are always evaluating further plans for the year, especially in light of our capital goals and the capital markets that are out there which remain strong. So there could be more to come on that. If you look historically, the last two and a half years, we've now completed $900 million, and we've got another -- on top of the $60 million, $100 million plus to go, so we will be well over $1 billion by the end of this year. And that's where we stand on what's in the portfolio. The things that are out there right now are nonstrategic things up and down all of our different markets, so.

Just one last one, you guys were early in San Francisco, and clearly you are seeing really good rent gross on some of the assets. But where we are on the cycle today and timing of when you originally bought, are there any assets in San Francisco that you guys feel like you squeeze most of the upside out of and could potentially sell, or do you guys still see good runway for everything in the portfolio?

Well, just about everything that we own up here you just about when we are thinking, okay, there's another 15%, 20% to go. All of a sudden, we go, okay, this is a 50% to go because we've seen rapid escalation in rental rates and tremendous increase in demand. Jeff commented on some of the deals that we've done. We are seeing a lot of this up and down the coast, but particularly here in the Bay area where we have a 20% or a 30% or a 50%, and the rents are escalating very, very substantially.

So we're going to harvest value where we think it is appropriate and where we feel it's fairly easy to get to, and then we'll take a look at when it's appropriate to sell something. Right now we have nothing on the market in the city. We have a little building over in Marin. We'll continue to take a look at everything. I've made clear over the years -- I have no -- no offense to any of the women on the line -- I have no mother fixation about any asset.

And just something real quick, John, if you look at the last couple of months, there's been about a 10% jump up in price per foot based on what you just mentioned, the rental increases. And so while we thought there was -- we were sort of out of room with cap rates, I think people held their IRR targets steady but got more aggressive on their back end assumptions because of this rental rate increase. So we're seeing a lot trading now and things that six months ago would have been in the -- three months ago might have been in the $600 range now being in the upper $600s. We are seeing things trade in the $700s, and something will be announced here recently is in the high $700s, and things that can trade in the $800 and $900 range with the right profile are out there in these market conditions. So if we had thought there was nothing left in a particular asset, we would have been wrong in the last three months, and there was a big jump.

Great. Thank you.

Jamie Feldman, Bank of America.

Thank you. So you have pretty upbeat comments across all your markets in terms of things improving. Can you dig a little deeper into both Los Angeles and San Diego and talk to us about maybe across the different submarkets how much think better things are getting in terms of rate growth?

I'll let Jim get into some statistics in a second, but just generally speaking we are seeing -- Jeff, how many quarters of positive absorption have we had over the past -- it has just generally been the past three or four years, chipping away, chipping away, reducing the inventory of quality buildings. Now if you want something that's decent, you pretty much have to have it built. We think that plays to our strengths with regard to some of the development properties.

In Del Mar, we announced today and we've been talking about our NAREIT and so forth that we were going to start this little building at the Heights at 75,000 square feet. We think we're going to get in the sort of high 40s, early 50s square foot on that building, and that's kind of where the market is for newer product there. So it's definitely we are seeing more hiring, as Jeff pointed out, on statistics down in San Diego -- job growth and all those things are good.

Now speaking of the specific markets down there, Del Mar -- we like that market the best. It's very supply constrained. I think we control all the supply now between the little building at the Heights and our (inaudible) project. In terms of Sorrento Mesa, that market is obviously very tight as well. When you get to the outlying markets at 515, Mission Bay, all those things, I personally -- Steve would probably disagree with me -- but I personally look at most of that stuff -- not all but most of that stuff in those markets is a little bit more commodity-like. People gravitate to the nicer project with better amenities, but it's truly the Del Mar, a little bit in UTC, some in Sorrento Mesa where people are really focused on, and rental growth, Jeff, can we just talk about that in San Diego?

Yes, I mean the rental growth year over year in Del Mar is really the standout 24% bank growth chain. So we are really seeing nice lift in that market in particular, and the rest of the markets are doing okay. But obviously Del Mar is a standout.

And, David, in terms of LA, you want to just cover -- that was the second part of your question, wasn't it, Jamie?

Correct.

I mean, LA, Jamie, as you know, a fragmented market. The markets that continue to do well are the ones we talked about in the past. Santa Monica continues to be very tight via Hollywood. I mean the space that's getting absorbed is the product that is creating and attracting the creative collaborative users. Our space and our activity is up in our buildings in Hollywood because of the environments that we are creating, giving and creating a sense of place for these users, especially the entertainment, media, and technology guys.

So rents are moving with the quality product. In LA, you have a lot of commodity buildings. You don't have the same users looking at the commodity buildings as you do the creative buildings that we are creating in these various markets. So it's fragmented, but it is growing for the quality products.

Jamie, this is Jeff. Just to give you a little more color on the change in rents. So in the 101 corridor of Calabasas, year over year up 37%, Hollywood is up 18%, and West LA is up 17.6%. So really, really strong rent growth.

So then what are you guys seeing in the Wilshire Corridor and Olympic Corridor? Are those kind of getting passed over as you go from Santa Monica to Hollywood?

Yes. I mean it's a commodity space, Jamie, so it's a different class of tenants typically that look for that. It's a little more competitive with pricing there. It's hard to move rents in some of those. Some of them are better than others, but these nondescript buildings that are just stand-alone buildings with not a lot of amenities don't have really an environment or really a commodity. You know, if you are a tenant that really has a sense of place in your employees and you want to be in an environment, you're not even looking there.

The comment I would make is the common thing that we are seeing up-and-down our West Coast markets is there is a real premium for, as David points out, the kind of environments people want that they use to help attract and retain people, and there is just a real problem now with a lot of the office stock is technologically obsolete, and with higher employment densities, existing buildings have issues with the elevator or restrooms ventilating, stairway capacity and all that kind of stuff that I talked about for a long time. So commodity buildings tend not to do as well, and we are seeing -- even in markets where there is a bit higher vacancy, we expect you will continue to see new construction at the margin, simply to accommodate the new workplace of the 21st century type tenant. It's -- you are going to see higher rents in office buildings and those that have the right kind of environments and a dense configuration and that cost less on a per employee basis than a lower density building. So those trends just continue to magnify in the markets that we are doing business in, and we think we are particularly well-positioned with our portfolio in our development.

Okay. And then just finally, so you guys know how since you are anchoring Columbia Square in the old classy building on Columbia Square, what does this mean for your strategy for the rest of the project?

Jamie, it's David. I made the strategy continues to be -- we've always envisioned this project to create a sense of place, environment -- creative environment, collaborative space, indoor/outdoor opportunities. You know, NeueHouse fits perfectly into that. It's going to be a creative hub for higher net worth and entrepreneurs, people in the film, publishing industries and stuff like that.

So with respect to the other two office buildings, it is only going to add more fuel, and the activity will increase. It's been pretty good over the last couple of months. NeueHouse has been well received in the market, and the activity continues to be good. So I think with respect to the other two buildings, by the end of 2015, when they come online, we should be in the position where we have them substantially leased.

Okay. Great. Thank you.

Michael Bilerman, Citigroup.

Hi, it's actually Manny Korchman here with Michael. John, given your commentary on tech consolidation and sort of what has been happening in that space, are you concerned that when you take sort of a large high-growth company buying a smaller high-growth company that all-in-all they will need less space, or do you see the opposite happening?

Well, generally when they are buying them, it's because they figure it's a great add-on product or a way to get into a market or a segment of the market they want to be in that there's already somebody that's there and has technology and has some better mousetrap. And generally it's because they want to expand the activity.

So we think it's a positive, not only from a credit standpoint but from a standpoint that it's all about -- I can't emphasize this enough, you have all heard me speak multiple times. You've heard me at NAREIT. You've heard me on all these calls. I think I was speaking about this before -- just about anybody else in the space, it's all about the employee. It's all about attracting and retaining the best and the brightest, and that's frequently what they are buying. They are buying -- they might be buying an algorithm or whatever the heck it is, but they are buying the people to go with it to make it happen. And we're seeing it -- I can tell you that in talking with some of the PCs and Angel investment community about things that they are working on with their early and mid-life companies that there are a lot of big companies snooping around and taking action. We just think it's going to continue, and frankly, as a landlord, we think it's good.

Great. And then on NeueHouse, two questions there. One, in your press release, you commented that there's going to be potential future deals there. If you can give us maybe a little bit of color on that.

I'm sorry. I don't know if you cut out or whether my ears were closed, but what was the question again?

On the NeueHouse deal, I believe in your press release you talked about future opportunities with that tenant. Could you give us some more color on that?

Sure. Dave, do you want to comment on that?

Yes, I'll take that. Look, they are a growing company with a great business model that is extremely successful in Manhattan that will translate into a couple of key markets, markets that we are in on the West Coast. So to the extent that there's opportunities in the other markets we are in -- in the portfolio, we have a great relationship with management. We think there could be some other opportunities for us to do business with them.

And are they putting up the capital or are you for the improvements?

Well, in terms of expansion into other markets, it is we have no obligation, if you will. We found that we really see eye to eye on what -- where the markets are going, where the industry is, what's needed in the markets and whatnot, and we enjoy working together. So each deal is going to be looked at as an individual deal. I hope that answers your question.

And then one last one for me, on the Flower Mart parcel, it looks like just sort of the site overall is owned by several different owners. Do you need to consolidate further there to make that a success, or can you just build on the site you are about to buy?

We can build on the site that we are about to buy, and I can't comment on the rest.

Perfect. Thank you so much.

Vance Edelson, Morgan Stanley.

Great. Thank you. So assuming you would like to continue development in Hollywood over the longer-term, even beyond the academy, I'm just wondering given the limited land availability, what are the prospects that some of the older establishments in the neighborhood that maybe have seen better days, that they sell out, allowing the land to be repurposed? Is that how you see it playing out in the coming years so that Hollywood can continue to be a growth opportunity for you?

Well, hang on, David. With regard to Hollywood, remember that there's areas where -- it's like everything else. If you think of gentrification, it generally starts in an area, and then it moves out in a circle or sometimes it is not a circle because there's obstructions or whatever. That will occur over time in Hollywood. We think that our Columbia Square project and Academy Square project are both extraordinarily well located, but what they have going for them is there are entire city blocks where we can create the kind of environment that people really want to be in as opposed to -- you couldn't do that in just a one-off building or a one-off little parcel. But over time, we think other things will become available. They always do. But you've got to get through a lot different hurdles. If you have something that's historical, they are not going to let you mess around with it. They are going to be very, very tough, and if you have things that have poor adjacencies, then you've got to determine whether or not that's an appropriate thing to develop.

David, do you want to expand on that?

No, I agree 100%. Look in all these markets that are gentrifying, there is opportunities. There is assemblage opportunities. We are low on the ground down there, and we see what is going on. So, as John said, things could come together in a way that are hard to envision now. But given our feet on the ground there, our eyes are open and looking at everything there. So we think there is good runway in that market.

Okay. Great. And then just given the length of the lease with NeueHouse, anything you can tell us about your due diligence on their financial health. I assume it's solid, and I assume you have the LOC and everything else necessary to reduce risk over time?

Yes. They have an operation in Manhattan, and we have obviously done our due diligence on that operation, and we are comfortable with it. We are also not going to get into the details of the specifics of the financials, but we are comfortable at this point.

Okay. And then lastly, just sticking with Columbia Square, you mentioned the projected rents have increased. Can you tell us about the pricing for the resi units there? Are we talking in the low [4s], for example? What's the variability around that? Are the furnace units a lot more expensive and so forth, and have these numbers climbed some since Columbia Square was first envisioned?

I will -- it's David. So on the residential tower as a percentage, rents are probably up 8% to 10% given where we originally underwrote for both product types, and we think that trend is going to continue. So the time we come online in early 2016 with some little bit of pre-leasing, you don't do a lot of pre-leasing with resi, but call it five or six months in advance. We expect that trend to continue given the product and the environment that we are creating there.

Okay. Great. Thanks, guys.

Gabriel Hilmoe, ISI Group.

Thanks. Tyler, could you give an updated range for cash same-store NOI guidance just given the results here today? I think last call you were at 3.5% for the year, but I also think there's some free rent coming in the back half?

Yes, there is free rent, although we do think our number will be up over last quarter's projection, probably in the low 4%s now, low 4% for cash same-store. But there is some free rent in the back half of the year that will moderate our same-store in the third and fourth quarter.

Okay. And then maybe for Eli, as far as Seattle goes and John you mentioned the new partial in South Lake Union, but what kind of opportunity going forward do you see there in terms of expanding the development pipeline just given where market rents and land prices are today?

Well, look, we put our hands on really a good site. I mean we like South Lake Union a lot. I mean it's really -- is already the SOMA of Seattle, and Seattle is the next market behind the Bay Area where these tech companies want to be. I mean it is already home to the two biggest cloud companies, which are Amazon and Microsoft, and I know people like to talk about Amazon. But the real inside tech people that we bother to try to talk to and get to know what's going on expect Amazon Web Services to be the big news over the next few years, and they are about $5 billion of revenue. And reasonable people expect that to grow to about $25 billion, so that's going to be a big area of growth. You know, the University of Washington continues to be one of the best cloud-based computer science departments.

So we like South Lake Union. You've seen the big guys move up there. You've seen Google, Twitter, Facebook, VMware. A lot of the stalwarts from the Bay Area are going up there, and it's in a very virtuous cycle right now where the right companies are attracting the best employees, and new employers are attracted to go try to seek out those employees as well, and this creates a very positive milieu up there, and that's what's going on. And it shows no signs of abating. And because it's such a fundamental place, the cloud has a long way to run here as the whole industry transitions from computing on-site to computing off-site. Microsoft is a big player in the backbone of the buildout of the cloud, and they are a big player in cloud services, too. And Amazon is the biggest player in cloud services. So I think the trajectory of Seattle is very good.

All right. Thanks. Appreciate it.

And I would just add that it's a lot more than the cloud that goes on up there, but I am mentioning that just as an avenue of growth. There continues to be a whole startup environment there that is very similar to the Bay Area. You have the Expedias and the drugstore.coms and the [Concurs] and the Traffic Tech and the T-Mobile and many other industries out there. So it's just a very robust environment overall out there right now. Like I said, I think it's in very virtuous cycle that has some legs.

Okay. Thank you.

Brendan Maiorana, Wells Fargo Securities.

Thanks. Good morning. John, I think you mentioned that you had an LOI for all of crossing 900. Can you share kind of where rents are now that you think you are likely to get relative to pro forma when you originally commenced that deal?

Well, I don't want to get into a lot of specifics until we've signed the lease, but let's just say that it is -- as has been the case in many of the development deals that we -- our initial underwriting we exceeded pretty substantially. Because the market improved, demand increased and rates went up. Maybe we were too conservative. I would expect and I believe that the same will be true when we look at that deal more specifically, that's about as much as I can give you.

Okay. And I think you mentioned -- I think you mentioned timing, but I didn't quite catch it. Did you say sort of middle of 2015 is maybe when if LOI goes through the rent could commence there?

Jeff, what quarter -- I have so many facts and figures in my head, I'm not sure I have the right one for the question.

This is Tyler. They would take -- assuming it worked out, they would take the two buildings in phases, one being in the second half of 2015, the first phase. And then a year or so later, I think they would take the second building.

Okay. Great. And this question is probably for Eli, but Menlo Park, you guys have really done a great job moving the occupancy up there. I think you were in kind of the mid to low [80s] a year ago, and you are now essentially fully leased. Do you still see more upside there, or have you kind of captured the upside in rents and occupancy that you saw when you did that deal two or three years ago?

Well, a couple of things have happened recently. That's a good question, and we think about it all the time. And if you look at Facebook's earnings, Facebook is kind of a stone's throw from here if you are a good thrower. And they had great earnings recently. They are expanding. They are solidifying their position in the Menlo Park market. This is a really well-located site.

So we are very confident in kind of the performance of this site. It took us a while to get our feet underneath us and for Facebook to kind of gain the solid ground that they have to more solidify the Menlo Park location as it's the home of one of the big tech players. We think that's been accomplished, and what we do next is up for evaluation with that. But we would be confident continuing to own it. I can see scenarios where at some point in time we would say we could deploy that elsewhere, but no current plans in the change of direction right now.

Okay. Fair enough. Last one. You guys have very nice rent spreads on both cash and a GAAP basis. You know, I think the spread between the two is about the 9% or 10% on a six-year average term, which would suggest that the in-place bumps are pretty healthy. Can you kind of give us some color in terms of what your annual bumps look like in your leases now, and are you pushing on that metric at all as a way to improve rent economics, or is it just trying to move the base rent as much as you can?

Let me give you just sort of a general thing and then Jeff can give you more specifics. You know, we have always pushed rent. I mean that's our job. And we converted a lot of tenants' thinking in San Francisco. Not just we, but we pushed hard and I think the market followed and tenants got with it. But it used to be $1.00 a bump market in San Francisco, and we had some leases like that. But now we are typically getting 3% or more per annum mandatory bumps. The same thing is happening in Seattle. It doesn't happen on every deal. It doesn't happen on every building, but generally speaking it's happened more and more, and we think that is the nature of the landlord's market and sort of broke that mindset that it was a set rate plus a buck. So, as rents have increased, obviously a buck is less than 3%. So we favor the latter.

So, Jeff, do you want to give a little bit more color on that?

Yes, John, thanks. I'd say historically over the last year or so, 3% was sort of the norm, but we have definitely been pushing that in the various margins, various buildings. So it's anywhere from 3% to 5% whether it goes to 3.5% to 4% or 4.5% to 5%. So we are definitely pushing the envelope and continue to push where it makes sense, and we can get it. So things are definitely on the uptick.

Okay. Thank you.

Dave Rodgers, Robert W. Baird.

Maybe for John or for Eli, I think very early in the call Jeff talked about getting AMN back a little bit early and then being able to push that lease out with a nice spread. Given that you've got a very low role in San Francisco over the next couple of years, I think 600,000 square feet or so, can you talk about maybe getting some of that space back or actively working that space to maybe get at that space a little bit early?

Well, you have seen us. I mean when we bought 201. We had a lot of Wells Fargo in there that had term, and we were able to get them out, and they were at a low rate. We were able to have them carry the space until we repositioned it and tendered improvement for new tenants at much higher rates.

You know, we are going to continue to do that where we can. It's harder to give you a rule of thumb because each one of those is an individual negotiation. I don't know that we have a 100,000, 200,000 footers where we can do that, but we have lots of 10s and 20s, and we are going to continue to milk that.

Jeff, do you want to add to that?

I think that's right. If you look at our role over the next couple of years, we don't have any really sizable transactions, but again we are very active with our portfolio and constantly talking with tenants to see if they need to expand or move out of the space or if they don't need the space. So, again, I think you will continue to see us be very aggressive in managing actively the portfolio.

Great. And maybe for John -- thanks for the color around the development pipeline relative to your enterprise value. I think that's helpful. I guess if you think about maybe playing this cycle versus next cycle and how much capital risk you are willing to put to work, in terms of that 15% average to EBITDA or to enterprise value, are you comfortable being all spec on that or a certain percentage of leased? I mean how do you think about that range with regard to what's at risk?

Dave, I have to kid you a little bit and say I can't believe you asked me that question because I think I've been pretty consistent over the last 17 or 18 years. I hate empty space. So why manufacturing if you think it's going to be empty. We'll build spec when we think we are building to a very strong market, but we are always watching before we start other things in the same market what our preleasing or our early leasing is across the company in each market. Obviously we've got to feel good about the macro environment. Take it as an example that we are buying up in Seattle.

The land price -- I'm not going to get into it because we do have an NDA and so forth, but it's an okay purchase price. It's not a huge amount of money. It's about $70 on FAR would cost on a net basis, and we did not forecast starting construction on that building for I think three years. If we started earlier, it is because we have a tenant in tow or we think we are uniquely positioned.

We are not going to get into 15% enterprise value spec. I'm just not built for it. I'm too old for it, although I'm still pretty young. I say that because I want to refer everybody to the fact that I've been doing this a long time. Our team has been doing it a long time. We do not want to get over our skis. We are going to continue to show a very strong balance sheet. We are just not going to -- trees don't grow to the sky, and more spec development doesn't mean better. It's just -- we are going to be conservative. (multiple speakers)

For total LOIs for new and renewal leases -- I don't know if you quoted that in your comments, John -- I think you usually provide it. I don't know if you can give us an update? If I missed it, I am sorry.

Tyler or Jeff, we are in two different locations. That's the reason I am fielding things back and forth. You are talking about LOIs? We have -- what is it 450,000, something like that?

Yes. 450,000 of LOIs, and about 36% of that is new and 64% is renewal.

All right. Thanks, guys.

Vincent Chao, Deutsche Bank.

Hi, everyone. Just a couple of cleanup questions here. Just going back to the dispositions, I think there's still $63 million in the contract. I think one of those two was land partial. I'm just curious of the other stuff that is in the market and under contract, how much of it is non-income producing?

There is one more piece of land in that.

Okay.

$20 million.

Okay. And then that's one of the ones being marketed?

No, it's committed.

Okay. And then just maybe going back to the Central SOMA land partial acquisition, you talked about the Mission Bay project being fully entitled. What is the title status of Central SOMA? I know that's not planned for start for quite a while, but.

It requires entitlements. It's going to be in the same boat that just about everybody else's partial in the city is going to be, which is that there is Prop M limitation, and there are going to be quite a few people queued up, and the city is going to have to determine which projects it considers to be the most worthy, etc.

Okay. And I'm sure you combed over all of the potential land in that market. I'm just curious if there's anything else that is sort of out there that meets the criteria that you would be interested in.

Again, not to be a smart aleck, but I'd be pretty foolish to tell that to you when our competitors can listen to this call.

Right. Fair enough. That's it. Thanks, guys.

Jed Reagan, Green Street Advisors.

Good morning, guys. Related to that, we heard some speculation in the market that the city of San Francisco may perhaps loosen up Prop M restrictions over time to kind of help keep startup tech companies in the city. I'm just wondering if you can comment on anything you've heard along those lines and if you think that's even a possibility?

It would require voter action across the city, and it, like any campaign, would have to persuade a majority of the voters that that's the right way to go. I probably know some things that others may not know, but I'm not at liberty to discuss it. But that's all something that is going to require special elections, etc., so it is nothing that is imminent.

Is it on the ballot?

No, there's nothing on the ballot now, if it's possible.

Okay. And the Crossing/900 LOI, just wondering if you can talk about kind of where those negotiations are, timing wise? Are you close to the finish line there?

I'll answer that in one second, Jed. Let me just go back to the other thing. I would not bet on Prop M loosening up. I think that would be a bad bet.

Okay. That's helpful.

Crossing/900 LOI, are we close? Yes.

Okay. Any updates on One Paseo or the potential Santa Fe Summit developments in San Diego?

One Paseo, we believe we will have entitlements by the end of the year. The EIR has been gone through by the city. We think we are in good shape there. It's going to be released. We expect to be before the planning commission. I believe it is in summer, early fall, and the city council. As I have always said, in California anybody with $33 can file a SQL lawsuit. From what our attorneys tell us, they feel we are in very good shape if somebody does that. Hopefully they won't.

With regard to Santa Fe Summit, we've had interaction with a major tenant down there. We continue to have some interaction with them, but other than that, we don't have anything specific to talk about at this time.

Okay. Thanks. And then just last one on San Diego, just wondering if the UTC asset sale signal that you are essentially conceding that submarket to your big competitor down there. Would it be fair to kind of conclude from that that other San Diego submarkets beside Del Mar and Sorrento Mesa can be considered non-core at this point for you guys?

Well, I think I made it pretty clear that we have pruned out the stuff on the 15. We may have a couple of assets left to go. We like our Kilroy Sabre project there. We don't think that's replaceable, particularly at the location of the intersection of 50 and -- rather the 50 and 56.

Mission Bay, we have a few assets down there we are looking at. But, by and large, we have moved towards more CBD and urban-esque type properties because that's where most people want to be.

In terms of conceding UTC, we never really had a lot in UTC. We have Governor Park, which is a little submarket of UTC. We have the assets that we just sold. And we have the one building that we are entitling for an MLB. That will be, we think, a slamdunk, the MLB portion. The others we don't consider strategic.

So we are going to continue to put away those things that are smaller. We are really not looking to buy. Of course, now it's hard to buy anything at a price that makes sense that we want to own. But we are really not looking at buying and developing things in the $50 million. Generally they are multiples of $100 million. They have a much more strategic long-term nature about them. We think they would command if they were to be sold much lower cap rates, higher values, and that's just the way the Company has been directing itself.

So I think you will see more asset sales in San Diego. A little bit here and there and some land parcels.

Okay. Thanks. You said Mission Valley you are looking at some things. I assume that's on the disposition acquisition side.

That's right. Nothing specific to announce there. I want -- for all my people who are listening in from San Diego, this way we don't have some giant plan to get out of San Diego. We love San Diego. Just remember as I said a few years ago, if you think of San Diego as X, we will probably be somewhere in the bandwidth of 80% to 120% of X as we sell things and as we develop things. I think that's still a pretty good thing to focus on.

All right. Great. Thanks for the color, guys.

John Guinee, Stifel.

Great. Job well done. One sort of big picture question and some knickknacks. A couple of things. I guess, John, you are talking about $600 million of annual development deliveries. You've got some big gains on sales. My recollection is it is very hard to 1031 income-producing asset gains into development. What's all that mean for the ability to not increase your dividend, and what's that mean for the ability to not go consistently to the equity markets?

Well, that's a big question, John. Obviously we want to minimize the amount of tax that we can through 1031 so we can do those forwards. We can do those reports. That's one of the things that Eli and Tyler and others work on regularly.

But you can always do the special dividend. We haven't had to do that. We hope we don't have to do that. But we also want to make sure that we continue to recycle and fund our development and so forth. So that is just big picture. Eli, you might want to comment on that more specifically. I know you are living and breathing that and in the weeds on it each and every day.

Yes, two caveats to what you just said there. Everything you just said is true, but one thing that we've been very careful to do is where we are getting at some of the smaller nonstrategic things as we had aggregated them and traded them into the land parcels that we bought. For example, we have the block 40. We have assets that are filling up the full potential of block 40 land.

Secondly, we do have some assets where we have a little bit of room that the tax gains on them are manageable, and we don't need to do 1031 exchanges. And then we have a couple of other strategies that would still allow us to raise cash through dispositions without getting too convoluted over special dividends and all of that. So it's not a zero bank account in terms of delivery sales proceeds against development. It's not a one for one either, and you are correct on that. So we try to maximize that the best that we can.

Okay. And then a couple of just cleanup questions. David Simon -- the other David Simon, if I look at NeueHouse, just really quickly, is it a staged takedown, or are they taking all the square footage at once? And then what's just the big picture breakeven for those guys in terms of how many quarters, months or years until they are covering their lease costs with their operating business?

And then, Eli what was the price per pound on the vacant buildings in UTC and sort of drill down into the specifics of those assets so people can get a sense for what vacant product goes for in Southern California?

John, David. The takedown is 100%. First-quarter 2015 occupancy should be up and running buildout amount completed. With respect to breakeven just by way of example, New York was up and running positive within the first couple of months. So we expect to have that kind of activity level here, if not higher given the way they curate their base and the people they bring in, and a lot of them are coming from New York. So we are pretty positive about it all the way around and hit the ground running really strong.

Eli, do you want to handle --

Yes, I will handle the Towne Center building sales. I mean I think the most important thing I can tell you about is we went through that a bunch of different ways, and by the time we realized the price we could get in that for the market and we added our costs to get it leased and get it rehabbed and then our sales proceeds from doing that, it was a better economic decision to sell it into. We got a very favorable price for it. The solid returns by the next buyer -- and I'm not disparaging any buyer -- they can look at things the way they look at them -- but our solid returns for going through all the work versus selling them empty was it was a very clear decision to sell them empty. I think the stabilized price upon doing all of that work was going to be [$300] and something, and you had to back out of that the cost to get there.

So if you back out of what you assume the costs are, then you can figure out sort what our disposition price was on those buildings. Those are older buildings. They were never strategic to us. I don't think they are really representative of our product portfolio in any way. It ended up being just a really good opportunistic deal for us do where we wanted to be out of them, and the two ways were, get out now for a really good price or put in the elbow grease. But in doing so, we wouldn't have made any additional money, and we might have gone backwards a little bit. So that's the story on those.

Great. Thank you very much.

John, this is John Kilroy. Just one further comment. We got these buildings as a result of buying the Allen Group back in 1997, and these were probably the lowest quality buildings in that portfolio, probably the lowest quality buildings or a bunch of the lowest quality buildings. We had San Diego, and it just was required -- they were built kind of merchant builder style -- how cheaply can you build them to accommodate the tenants' needs, and they didn't fit the more modern user without a lot of rework, and those are the kinds of assets we want to get rid of where we don't think they have real legs.

And you sold them for, what, [$234] a square foot?

Yes.

Okay. Got you. Thank you.

Jamie Feldman, Bank of America.

Great. Thank you. Just one final NeueHouse question. Can you just talk about some of the other sites they were considering around LA and how they ended up deciding on Hollywood versus some of the other submarkets like Playa Vista, Burbank, West Hollywood parts district?

I would give you some color on that. Look, they are a very sophisticated group. I think history and film and television is very important to them. Branding is very important to them. The location of Hollywood is central. Creative community that it is and continues to be and to continue to develop into is very attractive to them.

The uniqueness -- they wouldn't go into some stand-alone building. The environment that we created. It's the whole community that we are creating in Columbia Square, coupled with the historic component of the building and the history in the entertainment and media field, made it very attractive to them.

So what other sites where they considering?

Well, they looked in downtown, they looked on the Westside, but there wasn't anything obviously as unique and interesting as what we were creating in Hollywood.

All right. Great. Thank you.

Thank you. There are no more questions, and now I'd like to turn the call over to Mr. Tyler Rose for closing remarks.

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

Thank you. Ladies and gentlemen, that concludes your conference call for today. You may now disconnect. Thank you for joining, and enjoy the rest of your day.