Kilroy Realty Corp (KRC) 2015 Q2 法說會逐字稿

Good day, ladies and gentlemen and welcome to the second-quarter 2015 Kilroy Realty Corporation earnings conference call. My name is Janeda and I will be your operator for today. At this time, all participants are in listen-only mode. Later, we will conduct 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 conference 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 Hawken, Eli Khouri, David Simon, Heidi Roth, Mike Sanford 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 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 second quarter, Jeff will discuss conditions in our key markets and I'll finish up with financial highlights and updated earnings guidance for 2015. Then we will be happy to take your questions.

Thank you, Tyler. Hello, everyone and thank you for joining us today. We had a very productive second quarter at KRC, executing on all fronts. We increased occupancy 60 basis points to 96.7% and are now 97.2% leased. Our same-store cash NOI increased 4.6% year-over-year largely driven by continued rent growth in San Francisco, Seattle and Los Angeles.

We initiated construction on The Exchange on 16th, our 700,000 square foot project in the Mission Bay submarket of San Francisco. And we completed successful negotiations with various community groups regarding both One Paseo in Del Mar and the Flower Mart in San Francisco. We sold 146 million of nonstrategic properties in two transactions and our unsecured bond ratings were increased one notch.

The momentum carried into the third quarter as we delivered the historic office component of our Columbia Square project in Hollywood. We acquired an attractive new development opportunity in San Francisco's south-of-market area that is fully entitled and shovel-ready. We completed the second tranche of our San Diego portfolio disposition that totaled 163 million and we raised $250 million of equity with an existing institutional investor to fund the San Francisco land acquisition and boost the strength and flexibility of our balance sheet as we prepare for potential additional development starts.

Let's take a look at some of the details. We had another solid leasing quarter signing new or renewing leases on 247,000 square feet in our stabilized portfolio. That puts us just under 650,000 square feet for the first half of 2015. Rents on our second-quarter leases were up 20% on a cash basis and 31% on a GAAP basis. We also had approximately 350,000 square feet of letters of intent outstanding in our core portfolio at quarter's end with similar cash and GAAP yields projected.

In June, we started construction on our Mission Bay project, The Exchange on 16th. The campus will encompass approximately 700,000 square feet in four buildings with a total projected investment of approximately $485 million, including land. We expect to deliver The Exchange in the second half of 2017 and our leasing efforts are in full swing. We are in negotiations with multiple companies that in the aggregate represent more than 2 million square feet of space.

We continue to realize significant value from our development program as we just delivered the historic office buildings at our mixed-use Columbia Square project in Hollywood. NeueHouse will occupy approximately 100,000 square feet of the historic building with the balance of the space fully leased to several restaurant tenants.

With the delivery of the first phase of Columbia Square, and the start of work on our Mission Bay project, we now have approximately 2.3 million square feet of space under construction representing a total investment of approximately $1.5 billion. The office component of these projects is 56% leased.

Through the remainder of the year, we expect to deliver 470 million of new fully leased office product adding 790,000 square feet to our stabilized portfolio. With average initial yields of almost 8%, the incremental value creation is substantial.

Earlier this month, we added another terrific new opportunity to our near-term development pipeline. We acquired 100 Hooper, a 3.3 acre site located in the south-of-market area of San Francisco, for approximately $78 million. This is a fully entitled, LEED Platinum-targeted development project located in one of the most sought after areas of San Francisco. We plan to develop two four-story large floorplate buildings totaling approximately 400,000 square feet of space of which roughly 80% of the space will be office and 20% will be PDR. We expect our total investment in the project will be approximately $250 million with a projected cash return that is similar to what we are achieving on our in-process pipeline.

The Hooper site is between Showplace Square and Mission Bay. It is in close proximity to two of San Francisco's premier educational institutions, the California College of Arts and UCSF, as well as many of the city's most dynamic companies, including Salesforce, Dolby, Airbnb, Pinterest, Cisco, amongst others. The location is also bounded by the popular residential neighborhoods of Dogpatch and Potrero Hill.

With both 100 Hooper and The Exchange on 16th in our pipeline, KRC now controls the last two fully entitled available office development projects in San Francisco that are located and designed with clear-cut appeal to the city's young modern workforce. We believe that we are in a very strong competitive position in a supply-constrained market that continues to attract large numbers of high-tech and media businesses.

Subject to continued market strength, we could begin construction on Hooper by year-end. Combined, our near-term development pipeline, including Hooper, The Academy in Hollywood, One Paseo in San Diego and 333 Dexter in South Lake Union represents a preliminary estimated investment of approximately $1.5 billion.

As we have reported, we've made great strides during the quarter at One Paseo, our mixed-use development project in Del Mar. While we are still working to resolve some issues with the shopping center owner across the street, we did reach agreement with all of the community groups and are moving ahead to obtain revised entitlements.

The scope of the project has now been modified. As now planned, the residential component is expected to stay the same, approximately 600 residential units and the office and retail components will be reduced. In essence, we have simplified the project's overall scope with greater flexibility on construction and phasing and leasing and reduced the parking costs while maintaining similar economics.

We also made significant progress on our Flower Mart project, unquestionably one of the most compelling real estate value-creation opportunities on the West Coast today. Its world-class development plan honors the location's history and creates a compelling new destination for the city's residents, workers, businesses and visitors.

Needless to say, it's a complex multi-phased project with a lot of moving parts, but our local management team has successfully found common ground with the local community groups and activists. Subject to final entitlement and market conditions, we expect to commence construction in approximately two years and estimate the total investment to be approximately $1 billion for all phases and that includes land.

Turning to dispositions, we sold $335 million in nonstrategic assets so far this year. Earlier this month, we closed on a second tranche of our nine property San Diego portfolio sale generating gross proceeds of approximately $163 million. For the year, we've now sold 10 buildings totaling over 1 million square feet for gross proceeds of $309 million and a land site in Orange County for gross proceeds of $26 million.

Across our markets, interest in commercial real estate remains very strong from a range of investors around the world with conditions so favorable we continue to pursue additional dispositions and we are already in discussions on other significant sales for later this year or early next. More to come.

Our other top priorities remain unchanged. We are focused on capturing the embedded rent growth in our core portfolio, completing our under construction projects on time and on budget and creating additional value through our strong pipeline of future development opportunities. We are pursuing all of these goals with a clear-eyed view of larger economic forces taking the appropriate steps necessary to ensure a strong balance sheet and resilient financial position.

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

Thanks, John. Hello, everyone. Conditions across our West Coast real estate markets remain strong and healthy with continued positive job growth occurring in every one of our regions. In Northern California, the San Francisco Bay Area's unemployment rate fell to 3.4% on a 4.1% year-over-year increase in jobs.

In Silicon Valley, unemployment fell to 4.1% and net new jobs increased by an impressive 5.5%. In Southern California, the LA Metro area added more than 100,000 net new jobs year-over-year in June, driving its unemployment rate down to 7.3%. In San Diego, June job growth was just under 3%, pushing the unemployment rate down to 5%.

The economic news is just as strong in greater Seattle. Unemployment there has now fallen to 4% and strong job growth continues to outpace most of the nation. The quality of jobs created is equally notable. According to a Redfin analysis of LinkedIn data, the number of tech workers in Seattle climbed 21% in May from a year earlier.

With that backdrop, let's take a look at each market starting in San Francisco. The San Francisco Bay Area is once again on a pace to outperform most of the US real estate markets in 2015. In San Francisco, rental growth remains strong as supply of large blocks of space is very limited and demand continues to grow. JLL reports that there are now more than 35 tenants in the market for office space greater than 50,000 square feet and only three available blocks of space that size.

Class A direct vacancy remains effectively 0% in the Soma district, 5.7% in the South Financial district and 4.2% in Silicon Valley markets, excluding San Jose. In the Silicon Valley, venture capital funding continues to fuel growth as the Bay Area accounted for approximately 55% of total US high-tech venture funding. This ongoing tech expansion has driven Class A vacancy rates in the region down to 4.2%, the lowest in almost a decade. We are currently 98.9% leased in the Bay Area.

Greater Seattle continues to attract technology companies and workers. Oracle, Twitter and Facebook continue to aggressively grow through local headcount as technology accounted for more than 40% of Seattle's tenant requirements in the second quarter and the University of Washington recently announced the launch of a graduate school program, a global innovation exchange in Bellevue to attract top tech talent and research dollars. Microsoft has committed $40 million to the program. Asking rents in the region reached the highest rate in almost a decade.

In our primary sales submarkets of Bellevue and South Lake Union, Class A direct vacancy rates are now 5.8% and 4.9% respectively. Our Seattle portfolio is currently 97.6% leased. San Diego continues to see steady increases in rental rates driven by healthy job growth in professional services, life sciences and technology and a limited amount of large blocks of space.

In our Del Mar and Sorrento Mesa submarkets, Class A direct vacancy rates are now 8.8% and 5.8% respectively. Our San Diego portfolio is currently 96.5% leased. Los Angeles continues to strengthen with strong rent growth in the key submarkets of Santa Monica, West LA, Beverly Hills and Hollywood. Most of the demand is driven by the creative and entertainment industries and new construction remains limited. Google, Verizon and Snapchat have grown organically in the region and have been key drivers of office absorption. In West Los Angeles, the Class A direct vacancy rate is 12% and in Hollywood, it is 5.4%. Across our Los Angeles portfolio, we are now 95.8% leased.

Looking at our overall portfolio, we now estimate that our rents are roughly 13% below market. The remaining 2015 expirations totaled proximally 700,000 square feet with only three greater than 50,000 square feet. As we have previously discussed, we expect approximately 250,000 square feet of moveouts in the third and fourth quarters. The majority of this space has been released with projected occupancies in 2016. We estimate that the remaining 2015 expirations are also 13% below market. That's an update on our markets and now Tyler will cover our financial results in more detail. Tyler.

Thanks, Jeff. FFO was $0.82 a share in the second quarter, exceeding our internal forecast by $0.04 primarily driven by stronger operating results, better than expected occupancy and disposition timing. We ended the quarter with stabilized occupancy at 96.7%, up from 96.1% at the end of the first quarter. Same-store NOI in the second quarter increased 2.7% on a GAAP basis and 4.6% on a cash basis. For the first six months of the year, same-store NOI was up 4.5% on a GAAP basis and 3.4% on a cash basis.

Looking at capital flows since the end of the first quarter, we acquired the 100 Hooper development site for approximately $78 million and repaid $34 million of secured debt. We also spent about $100 million on development and paid down the outstanding balance of our credit line. To fund these transactions, we completed the dispositions that John detailed, raised $25 million of equity under our ATM program and raised an additional $250 million of equity through a direct placement.

Taking into account these transactions, we currently have full availability on our $600 million bank line with the capacity to borrow up to $900 million and we currently have $175 million of unrestricted cash. During the second quarter, both Moody's and S&P upgraded our bond ratings by one notch to BAA2 and BBB [flat] respectively.

Now let's discuss updated guidance for 2015. To begin, let me remind you that we approach our near-term performance forecasting with a high degree of caution given all the uncertainty 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 market tenant 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.

Projected revenue recognition dates for new development are subject to several factors that we can't control, including the timing of tenant occupancies. With those caveats, our assumptions for the remainder of 2015 are as follows. As always we don't forecast any potential acquisitions or acquisition-related expenses. We anticipate remaining 2015 development spending on our seven projects under construction now including The Exchange to be approximately $250 million.

From a timing perspective, we now expect Crossing/900 to be fully delivered in the fourth quarter versus our previous forecast that assumed delivery of only the first building this year. Offsetting that we now expect to deliver 333 Brannan early in the second quarter of 2016 given certain tenant timing issues. The change of timing on these two projects has no impact on cash rents, only revenue recognition from a GAAP perspective.

Our core portfolio assumptions are as follows. We expect straight-line rent to average approximately $9 million per quarter. We expect 2015 cash same-store growth in the mid-3% range. We project year-end occupancy in the mid-94% range. As we discussed last quarter, CapEx remains weighted toward the back end of the year and we now project a 2015 FAD payout ratio of approximately 80% assuming everything else stays the same.

And then to sum up, last quarter, we provided an updated 2015 FFO per share guidance of #$3.25 to $3.39 per share with the midpoint of $3.32 per share. Given the better than expected second-quarter performance, offset partially by the equity raise, we are increasing the midpoint of our 2015 FFO guidance by $0.03 to $3.35 per share with an updated range of $3.30 to $3.40 per share. That's the latest news from KRC. Now we will be happy to take your questions. Operator.

(Operator Instructions). Craig Mailman, Citibank Capital Markets.

This is Craig Mailman from KeyBanc. John, just a question, the 100 Hooper is pretty close to The Exchange at 16th if you guys started at the end of this year. Delivery timeframe would be pretty close to each other. Is there any risk of cannibalizing the tenant search with having those two developments going on at a similar time?

Well, you know what's interesting, we haven't even really started our marketing program on The Exchange because we just -- or not The Exchange, rather the 100 Hooper because we just hired the broker. We already have a number of proposals going back and forth on that. Some people prefer The Exchange, some people prefer the Hooper location.

But I want to make clear that I don't see starting Hooper until we have some substantial leasing at The Exchange or some substantial commitment in advance on the Hooper building. I think that the position we have is extremely unique and probably a first in my lifetime, in the real estate business that is, that we have the two projects that really have the kind of floorplates and amenities locationally and so forth that the vast majority of tenants want. There are other buildings that are of similar size, but they are spoken for. [Swipe] recently took 500 Townsend, etc. So I think our competitive position is absolutely fantastic.

Okay. And I know in the past, you've talked about good activity at The Exchange and I thought maybe you guys would have something signed by now. Has anyone kind of spit the hook there or are you guys just taking longer to trade paper?

Well, we don't want to get into a lot of discussions on these phone calls. As I've said before, all this stuff is public record and we don't like brokers and tenants and so forth knowing exactly what we are doing, but we have increased the level of activity on that project substantially with proposals going back and forth. Some of them are tech, some of them are non-tech. Non-techs typically take longer and people keep changing the amount of square footage. We have one tenant that wanted 300,000, then they wanted 150,000, now they want 200,000 or 250,000. They are all trying to figure out what their long-term needs are and that has become more intense because of the dearth of space available. The tenants are really worried about getting it right because there is so little space coming through in the pipeline.

Okay. Then just lastly, sounds like dispositions may continue to ramp here at the end of the year into 2016. What do you think your bucket of non-core assets is at this point and are we at a point in the cycle where maybe it makes sense to sell some of the earlier cycle San Francisco acquisitions?

I don't really want to speculate on that, but in terms of the non-core stuff, most of the stuff that we've sold has been kind of non-core, non-strategic, more suburban, lower rise. We will sell some stuff that is less of that character in all likelihood. We're just going to be opportunistic and do what we think is right to create the best value for our shareholders and I'm not going to speculate on what we're going to sell in San Francisco. Otherwise, the rumor mills are always -- it drives us a little crazy because we hear we're selling stuff that we haven't even talked to the market about nor have we considered. So I don't want to fuel any more flames. We are going to continue to sell and recycle as we see appropriate, which is what we've done for 17 years.

Fair enough, thank you.

Nick Yulico, UBS.

I was hoping you could talk a little bit more about leasing traction in Hollywood and just remind us whether you are only looking to start Academy once you get Columbia Square filled up.

Well, I'm going to let David talk in a moment about what the leasing activity is. We are pretty substantially leased at Columbia Square and with what we are working on, we think we are going to have the lion's share of the space done before Academy can start. And we would start Academy, again dependent upon the market conditions -- if the market continues to look favorable then we start it. In terms of just a leasing update without getting into any specifics on deals we're working on, do you want to give a sense of color there, David?

Yes, sure, sure. As you guys know, we did the big deal with Viacom last year. They are going to be taking over the premises and starting their TI first quarter of next year and the NeueHouse tenant is finishing up their improvements as well. With the activities we've been doing on the balance of the space, about 120,000 to 140,000 square feet we have remaining, we've been trading proposals with some users that want all of it and there has been lately a flurry of activity of 40,000 and 50,000 square footers as well, both media, entertainment and technology tenants. So we are pleased with that and we feel pretty confident over the course of the next six to eight months we're going to be in good shape at Columbia with the balance of this space.

The balance of the space is what, roughly 150,000 (multiple speakers)?

Yes, about 140,000 to 145,000 feet, yes.

Yes, so --.

Okay, that's helpful. And then looking at the development pipeline, if you add up the current pipeline plus the near-term development pipeline, looks like altogether you guys are going to need, if you build everything there in that near-term development pipeline, I guess, $2 billion of total capital. What's your latest thoughts on the mix of asset sales versus equity versus debt? Thanks.

Yes, I think it's pretty consistent with what we've been doing. It's sort of a third, a third, a third over the last several years. We obviously did the equity transaction earlier this month. And as John said, we are going to be doing more dispositions. We have a bond maturity in November, which we will be refinancing and probably raising more than just the amount necessary for the refinance and it will continue that way going forward.

I think dispositions probably -- the bulk of -- between equity and dispositions, we're weighted on dispositions, but our leverage is extremely low. In a debt to market cap basis, we are at 25; on a total asset basis, we are in the low 30s. We have a lot of capacity there as well.

And Tyler, what's the assumption we should use on the bond deal later this year?

Well, in terms of timing, depending on the market, it's September, October probably. In terms of rate, I would say right now -- it obviously moves around every day. It is in the low 4% range. That would be on a 10-year basis. Where if we do a seven-year, it would be in the 3.75%-ish range. (multiple speakers)

And the amount?

Well, we have 325 maturing, so my guess is it's between 350 and 400. (multiple speakers)

All right, thanks. Thanks, guys.

Jamie Feldman, Bank of America.

Great, thank you. I guess starting with Tyler, can you walk us through your occupancy outlook through the end of the year? Just in setting expectations in terms of the moveouts?

I might let Jeff jump in here, but we are at 96.7% now and our guidance is taking us down to 94.5%, but Jeff can go through the details of that.

Yes, Jamie, as I mentioned, we have about 250,000 square feet of moveouts and those will actually commence in 2016. So as Tyler mentioned, we are going to go from where we are now to approximately 94.5% by year-end occupancy.

Okay. And then I guess a question for John. Just thinking about land pricing in San Francisco right now and the price we've seen lately, just what are your latest thoughts on that market and how much more you can invest there and just where you think we are in the cycle?

Jamie, I think a lot about, we all think a lot about where we are in the cycle and I think over the last couple years, you and other analysts, investors and so forth have asked the question, that same question, where are we and I've been probably wrong -- I don't know wrong or right -- but as I've said we don't see any signs of deterioration -- we are not saying any signs of deterioration. In fact, we are seeing an acceleration of (inaudible) moving into the area.

You probably have read that IBM has moved into -- just signed a deal for south-of-market. Apple signed a deal for the city in south-of-market, not a big deal, but like 75,000 feet or so, but that's a first for them. We are well aware of a number of other folks that have their sights on some big requirements downstream. We think that bodes very well for our Flower Mart.

But in terms of -- in terms of where we are on the cycle, who the heck knows. It's one of the reasons why we operate with such a conservative balance sheet. If you're going to do the development and so forth that we do, you want to make sure you are well-insulated. With our Flower Mart project, remember that based upon the projected entitlements, we are somewhere in the neighborhood of $45 in FAR foot costs in a market that's trading at $300 plus or minus.

There are a bunch of folks that have options on sites that are optioned at completion prices in the $200 plus, $200 to $300 range depending upon when they get entitlements, at least according to what the brokers tell us. I wouldn't see buying something that's entitled at a high price right now unless it was very strategic to one's plans.

In terms of the question of how much in San Francisco, one thing about San Francisco, remember, it's 45 square miles. A shade less than 10% can be developed for nonresidential and there is a dearth of development sites that are good and there's increasing demand. So you have this incredible Economics 101 of supply/demand imbalance. We like that. I'm not a fan of the policy of Prop M. I think that's a bad policy, but it is the law and it's the reality and we are the recipients I think of that supply imbalance.

So rents I think are going to continue to go up where there are seeing some nonessential users to San Francisco, of smaller companies or older companies that have thin profit margins. Occasionally you'll see them move over to Oakland or somewhere else, but by and large everything we see looks good.

Now having said that, it's that old thing about hope for the best, plan for the worst and we want to make sure that we're just looking at things with a very conservative, very sober eye at all times so that we can play the market correctly.

Okay, that's helpful. And as tenants get pushed out to some of these secondary submarkets, is that interesting to you to get ahead of that demand?

Well, Eli is here. He's got the data, responsibility for that. I have to tell you personally I'm not a big plan of the Oakland market and there are some people that have moved over there at cheap rents. But ultimately if you build a building in Oakland, you're going to pay the same price as you pay for building a building in San Francisco. The only delta is going to be the land cost.

So ultimately that's a very small market over there. If more people move over, it's not a lot of capacity. The question is are people going to start moving out, way out the BART system or way out in the East Bay and everything we see trend wise with regard to how these companies want to operate, how they want to have their people together being at campus, whether it's vertical, horizontal, the collaborative workforce, having the team together flies in the face of moving way out to hither and yon, out to the suburbs.

So I think we've got a good -- it feels like there's a couple really good years ahead of us, but we will see.

Yes, John, I would add one thing to that, which is every single solitary day we are paying attention to what's going on in those secondary markets because it does affect us and we're also looking for good investment opportunities and I will tell you paying very granular attention to them, we haven't seen the opportunities that have been compelling for us. We will keep an eye on that. If that develops over the next year or two years that we think it's really something interesting, you'll definitely hear about it.

Okay. And then finally can you talk about the decision to do the private placement in the quarter and if that's something we will continue to see down the road for that third of capital Tyler was talking about?

Yes. Well, I think the direct placement opportunity was a unique opportunity where an investor reached out to us. My guess is we probably won't do it in that form very often in the future. I think the decision was made based on the accretive opportunities and the unique use of processes with 100 Hooper starting, The Exchange and the future development. So it was a very efficient transaction for us that we completed at a very low cost and it's positioned us so we don't have to use our ATM for a while, probably into next year. So it allowed us to fund Hooper and the future development that we're going to be doing.

Okay, great. Thank you.

Brendan Maiorana, Wells Fargo.

Tyler, I think in prior guidance dispositions was listed as (technical difficulty) to 400. You're sort of in the middle of that range; it's halfway through the year. Is that 400 upper band still a reasonable outlook or is there any change likely in dispositions?

Yes, it's still too soon to tell. We are at 335 right now, so as you say, we're in the middle of that range. We are working on some things as John mentioned that could happen the end of this year or early next year, but it's unclear whether that number will go up this year or next year. It's just too soon to tell, but from a modeling perspective, it's probably, if it were to happen, it's going to be the end of the year.

Okay, so probably no impact in terms of the guidance that you offered. Asset recycling isn't likely to have a material impact at least on 2015?

Not a material impact.

Not based upon what we are looking at right now.

Okay, great. And I think you guys had said rent spreads probably heading into the year thought it was going to be around plus 10 for this year. I think Jeff mentioned that you are 13% to 14% below market. John, I think you mentioned you thought spreads were probably going to be pretty healthy through the back half of the year. So is it fair to think that we are going to be above that initial guidance on rent spreads as well?

Yes, rent spreads have moved in our favor in almost every market and particularly in Los Angeles. So we are 13% under market for our 2015 expirations. We are 11% under market for next year's expirations. We are 13% under market for our overall portfolio.

Okay, great. And then just last one, probably for John or Mike Sanford. So the 100 Hooper site, I can definitely appreciate that you guys are in a great competitive advantage with that and The Exchange relative to other entitled projects that are out there. If you just think about 100 Hooper long term and maybe if the cycle ended sooner than we all thought is that a development site that you think stacks up well with other sites that maybe aren't entitled today but could be if they got their Prop M allocation if 100 Hooper is a site that doesn't work this cycle?

I don't understand by doesn't work this cycle. What does that (multiple speakers)?

Let's say I think, John, you had mentioned that you would start that project if you had good demand or saw that you had good leasing at The Exchange. Let's say something happens to the economic cycle and you determine that it doesn't make sense for you to start 100 Hooper this economic cycle.

Yes, I get it. Yes, I think it's going to be a great site whether we start this cycle or next and I'm betting that we are going to be able to start it this cycle based upon what we are seeing in activity in the market and with its floorplates. Remember that these are four-story buildings with 50,000 foot floorplates and that is really unique. Most of the stuff that's going on that can be built over and around the Brannan corridor or whatnot does not have those kinds of floorplates and these are very much in demand.

So I think it has some physical characteristics that put it up towards the top in receptivity. So I think it's going to be a very strong site. I have to tell you, when I first went to San Francisco five years ago, I thought Mission Bay was 10 years off and everything changed so quickly. And when I first was looking at the areas out here where 100 Hooper is and so forth, I thought that was probably six, seven, eight years off and five years later, it has all happened. It's just again the fact that there is a limited amount of space and product that the people want to be in and of course this Prop M thing.

So I feel strongly. We don't buy something or think about building something that isn't in our view going to be long term. I want to make that perfectly clear. That doesn't mean there are other sites that aren't better. I think the Flower Mart is a better location, particularly for transportation, it's a little bit easier, but I think it's a very good site.

Great. All right, thanks, guys.

Vincent Chao, Deutsche Bank.

Just going back to your comments about San Francisco, not really seeing any signs of a slowdown here, but I'm just curious, there was an article in the Journal today talking about a unicorn bubble. Just curious if you had any thoughts on that and then also if you had seen any shift in the tenants that are taking space. I know you mentioned IBM and Apple, which are obviously high credit tenants, but are you seeing more the newer stage companies taking space at this point?

There's a lot of companies looking for space that are newer stage and older stage and all the rest and you have to make some decisions along the way with regard to their credit and what their likelihood of survival is or what their likelihood of expansion is and so forth. We've always said there's going to be some failures. The nature of -- it's just like baseball. Not everybody gets up and hits a home run and not every team with a winning season wins every game. And I don't mean to be cute here except for there are going to be companies that fail. That's just the nature of it.

What's very important is that there are -- is that there's just strong demand, just fantastic demand. So what happens is some of these companies reduce their footprint. If they do, they generally get snapped up by somebody else. So I think if anybody thought that all these companies are going to survive, they'd be smoking something funny.

Well, I guess the question is more there's a lot of demand overall, but are you seeing any change in the quality of the demand I guess overall?

In some respects, I think the quality has improved because you end up with some of the big name companies that have come in and with companies -- like Airbnb or Uber, a couple years ago, you would've called those companies probably unicorns and today they are real cash flow big companies that have really strong financial wherewithal. So that's the other side of the evolution. The nature of evolution is some of them don't make it and some of them become strong, but we are seeing more and more strong companies coming into the marketplace, which is encouraging.

Okay, thanks for that. Just a different topic, if you include the second tranche of the San Diego portfolio, what's the total gain right now?

Total gains?

Yes, total gain on sale?

Of what?

Of the two dispositions?

Yes.

The San Diego tranche is about 100 --

Yes, 100 million.

125 million I think roughly off the top of my head.

Got it. And any additional thoughts on what -- it doesn't sound like 1031 is probably going to work out given where prices are, but any other thoughts on --?

We have been successful in doing reverse exchanges into development in the sense of both the Dexter project and the Hooper project were used as exchange properties for those gains. So at the moment, in terms of whether you are getting at whether we're going to need a special dividend or not if we don't find anything else, that amount would be very small if any at all, but that's more to come on that. It's a complicated transaction or a complicated calculation so we were -- but we have been successful in reversing into development.

Okay, thank you. That is what I was getting at. Thank you a lot.

Manny Korchman, Citi.

Hey, guys. It is still Sawyer here for Manny. I just have a quick question in regards to asset sales that you mentioned that are in the works for either the second half of this year or early next year. I understand that obviously we won't be getting specifics on those yet, but would you be willing to shed any sort of color on perhaps asset type or geography or magnitude of the sales that are in the works?

No.

Okay. All right. That does it for me. Thank you.

John Guinee, Stifel.

Just total curiosity question, probably Jeff, any of you guys been to your El Segundo assets or Long Beach assets in the last year and do you have any pricing power in that segment of LA County?

In El Segundo and Long Beach?

Yes. You have a couple million square feet down there where it used to be a core part of your portfolio and now sort of a tertiary part. We are just curious if the strength of West LA is going as far as Long Beach or El Segundo.

Yes, I think between the two, we are definitely seeing an uptick in El Segundo. There's been a lot of activity and a lot more folks moving to El Segundo and rents are going up pretty significantly so I think we are definitely seeing a rise in the tide in El Segundo. Long Beach is I think steady. I don't think we've seen as much in Long Beach. I mean the benefit of Long Beach, it serves both counties, both Orange County and LA, but that's been a great project for us for a long time, but I don't think we're seeing as much of a lift in Long Beach as El Segundo.

All right, thank you.

At this time, we have no further questions. I would now like to turn the call back over to Mr. Tyler Rose for any closing remarks.

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

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