Kilroy Realty Corp (KRC) 2016 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q1 2016 Kilroy Realty Corporation earnings conference call. My name is LaToya and I will be your operator for today. (Operator Instructions). As a reminder, this conference is being recorded. I would now like to turn the conference over to the Executive Vice President, Chief Financial Officer, Tyler Rose. Please proceed.

Good morning, everyone, thank you for joining us. On the call with me today are John Kilroy, Jeff Hawken, David Simon, Heidi Roth, Mike Sanford, Rob Paratte 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.

The call is being telecast live on our website and will be available for replay for the next eight days both by phone and over the Internet. Our earnings 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 first quarter. Jeff will discuss conditions in our key markets. I will finish up with financial highlights and a review of our updated earnings guidance for 2016. Then we will be happy to take your questions. John?

Thank you, Tyler. Hello, everybody, and thanks for joining us today. Four months into the new year fundamentals in our markets remain healthy. Rental rates and net absorption continue to increase while vacancy rates continue to decrease in the innovation driven submarkets of San Francisco, Seattle, Los Angeles and San Diego.

Cap rates and IRRs on the West Coast transactions continue to reflect strong investor demand for quality real estate. [BC] investment in the Bay Area was up slightly over last quarter. And on an annualized basis was 50% to 75% greater than investment in the years of 2011, 2012 and 2013. BC fundraising was at its highest level in over 15 years and sublease space in the San Francisco market declined 23% quarter over quarter to approximately 1.7 million square feet or only 2% of the total market.

The ongoing strength and resilience of our West Coast real estate markets helped drive our solid performance in the first quarter. We signed leases on 239,000 square feet of space in our stabilized portfolio, maintaining occupancy near 95%. We delivered and stabilized $381 million of new development ahead of schedule and under budget.

We added a key corner site to our Flower Mart project in San Francisco, enhancing the project's overall development potential and value. We closed $267 million of dispositions and we reported strong overall financial results including a more than 20% increase in same-store NOI.

More specifically on the operations front we signed 239,000 square feet of leases in our stabilized portfolio during the quarter at rents that were up 11% on a cash basis and 21% on a GAAP basis. And we are also seeing this trend in letters of intent. We have approximately 330,000 square feet of LOIs in our stabilized portfolio at rents that are up 20% on a cash basis and 40% on a GAAP basis. And 115,000 square feet of LOIs in our development pipeline at rents higher than pro forma.

We also continue to successfully execute on our in process development program delivering and stabilizing our fully leased projects at 350 Mission and 333 Brannan on schedule and under budget. Together these two projects represent a total investment of $381 million with an average stabilized cash return on cost of approximately 8%. At current market cap rates we estimate that these two projects would be valued at double our investment.

That leaves two projects that we recently completed in lease up and two projects under construction. Together they represent a total estimated investment of approximately $910 million.

The first recently completed project and lease up is The Heights at Del Mar, a 75,000 square foot office building completed late last year that is located in coastal San Diego immediately adjacent to our proposed One Paseo mixed use project. We recently signed a letter of intent for approximately half of that building.

The second project in lease up is the 370,000 square foot new office component of Columbia Square in Hollywood that was completed in the first quarter. Since our last call we signed approximately 83,000 square feet of letters of intent with several entertainment related tenants together with Viacom and vendor leases this second phase of the project is now 80% committed and we anticipate being fully committed by the end of the year.

Including the historic office component of Columbia Square the overall office portion of the project is now 85% committed. The first project under construction is the 200 unit 20 story residential tower at Columbia Square that will be completed later this year, leasing has just commenced and is going strongly.

The second project under construction is The Exchange on Sixteenth, our 700,000 square foot office campus and San Francisco's Mission Bay neighborhood that is projected to be completed late next year. We are continuing to pursue a terrific single tenant opportunity and are prepared to move to multitenant strategy if that opportunity doesn't work.

We also made a key strategic addition to our Flower Mart development project acquiring a strategic land parcel at the corner of 5th and Brannan immediately adjacent to the acreage we already assembled for the project. The new land site with its key corner location gives the overall development and site greater market presence, expands the project's design possibilities and enhances its overall value potential.

We acquired the land for $31 million in cash and roughly 870,000 operating partnership units which brings our aggregate FAR cost to approximately $73 per square foot of these 7 acres that will constitute the Flower Mart and that is in a market that is trading at north of $250 an FAR foot.

Looking ahead, we are mindful of the volatile macro environment that will continue to diligent -- and will continue to diligently monitor all economic and real estate market indicators. As of now though West Coast market fundamentals remain favorable.

Job growth continues with year-over-year increases averaging 3% to 4% compared to 2% for the rest of the country. Nearly 75% of West Coast first-quarter leasing activity was expansionary. And at the current rate of growth JLL projects 2016 net absorption may outpace last year.

We have four projects in our near-term development pipeline. We are working on completing all necessary entitlements, developing and evaluating market interest, in some cases having detailed pre-leasing discussions and ensuring that we have a funding strategy in place should we choose to move forward.

Our four projects include 333 Dexter in Seattle's dynamic South Lake Union submarket. We are on track to receive final government approvals this summer. Tenant activity remains strong with limited competing supply. We already are in advanced discussions with a number of strong credit companies that are interested in taking substantial space in the 333 Dexter project.

And at One Paseo, our mixed use development project in the Del Mar submarket of San Diego, we also expect to receive final entitlements this summer. We would likely start the residential and retail components first given the strong demand for these project types.

The third potential 2016 development story is 100 Hooper Street located South of Market in San Francisco. It is fully entitled and shovel ready. We will wait for significant leasing momentum at The Exchange or at Hooper itself before we break ground. But have been -- (inaudible) seen increased interest from a number of tenants just in the last month or so.

The fourth potential 2016 start is The Academy, a mixed-use project in Hollywood. We expect to receive final approvals in the third quarter. With the office component of Columbia Square mostly spoken for and our Sunset Media Center fully leased, we are seeing increasing inquiries on The Academy project.

On the disposition front we continue to receive or rather review our existing portfolio for opportunities to sell assets into today's strong market for top-quality real estate. As we noted on our last call, we completed $267 million of dispositions in January including the Intuit campus and a land site in Carlsbad. We are working on completing the sale of the remaining Carlsbad sites later this quarter.

We are also in detailed discussions on a large joint venture transaction. We can't get into specifics yet, but if we move forward with this proposed transaction we would likely significantly exceed the high end of our initial 2016 disposition guidance of $650 million. More to come on this.

That wraps up my remarks. To summarize, we continue to see fundamental strength and opportunity in our markets, but we are not taking anything for granted. We remain highly focused on execution, on capital recycling and on maintaining a strong balance sheet. With that I will turn it over to Jeff.

Thanks, John. Hello, everyone. West Coast real estate markets continue their solid performance in the first quarter with growth in demand, net absorption and average rental rates outperforming the rest of the country. In the San Francisco Bay Area demand continued to outstrip limited supply pushing up rents. Class A direct vacancy remained effectively 0% in San Francisco SoMa District and was 7.4% in the South financial district. In Silicon Valley Class A vacancy was 7%.

We are currently 99.1% leased in the Bay Area and our in place rents for the region are approximately 33% below market. The story is essentially the same as Seattle; demand for prime space remains strong. Net absorption in the first quarter was 840,000 square feet of Class A direct vacancy rates and our primary Seattle submarkets of Bellevue and South Lake Union were 10.5 and 8.9 respectively. Our Seattle portfolio is currently 98.1% leased and our in place rents are approximately 6% below market.

San Diego continued its steady improvement and also had strong leasing in the quarter with net absorption of 660,000 square feet, driving rents up 10% year-over-year. In Del Mar Class A direct vacancy was 10.5% and Sorrento Mesa two story corporate office vacancy was 5.8%. Our San Diego portfolio is currently 91.2% leased and our San Diego in place tents are approximately 8% above market driven by a few large leases.

In the much larger Los Angeles market growth in creative services and entertainment is having an impact on both rents and vacancy rates in the submarkets of West LA, Playa Vista, Beverly Hills and Hollywood. Class A direct vacancy rate in West LA was 11.9%. Across our Los Angeles portfolio we are now 95.2% leased and our in place rents there are approximately 14% below market.

Overall for our stabilized portfolio in place rents are approximately 17% below market. For the remainder of the year we have approximately 520,000 square feet of expirations and over the next two years we only have one lease expiration greater than 100,000 square feet.

That is a snapshot of markets, now Tyler will cover our financial results in more detail. Tyler?

Thanks, Jeff. FFO per share was $0.82 in the first quarter. We beat our internal budget by about a penny with the early delivery of 350 Mission in mid-March and 333 Brannan Street toward the end of March. As I mentioned on our last call, we will see meaningful growth in cash NOI in 2016 with the biggest bump occurring in the first quarter and moderating over the remainder of the year.

In the first quarter same-store NOI grew 20.3% driven by higher rental rates and the burn off (technical difficulty) primarily to the [LinkedIn] and Synopsys leases, offset by lower average occupancy. Same store GAAP NOI was up a more modest 0.1% in the quarter driven by the lower average occupancy and lower tenant reimbursements offset to the positive by the higher rent.

You will note that our property taxes were down year-over-year by about $1.5 million. This was due to conservative estimates at one of our (technical difficulty) development properties which was completely offset by lower (technical difficulty), so it had no impact on same-store results or the bottom line. We currently have $260 million of restricted cash on hand and $130 million drawn on our $600 million bank line.

Now let's discuss updated guidance for 2016. To begin let me remind you that we approach our near-term performance forecasting with a high degree of caution given all the uncertainties in the state of the economy, our internal forecasting and guidance (technical difficulty) market intelligence as we know today.

Any significant shifts in the economy, our markets, tenant demand, construction cost and new office supply going forward could have a meaningful impact on 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 occupancy.

With those caveats our updated assumptions for 2016 are as follows. As always, we don't forecast any potential acquisitions or acquisition related expenses.

We anticipate remaining 2016 development spending of approximately $200 million on our projects under construction and lease up properties. We expect straight-line rent to average $8 million per quarter, approximately 60% of this is attributable to recently completed development projects.

We are increasing our projected 2016 same-store cash NOI growth to a range of 7% to 9%. GAAP same-store is expected to be in the 2% to 4% range for the year. Last quarter we provided a year-end occupancy range of 94.5% to 95%. We are now comfortable at the high end of that range.

Our recurring CapEx budget remains approximately $80 million which would result in an FAD payout ratio of approximately 65% assuming everything else stays the same. In terms of capital recycling, our current 2016 range is between $350 million to $650 million with a $500 million midpoint. But as John indicated, if we are successful in completing a large joint venture transaction we could significantly exceed the high end of that range.

And lastly in terms of guidance, last quarter we provided an initial 2016 FFO range of $3.31 to $3.51 per share with a midpoint of $3.41. Given the early delivery of the two San Francisco development projects and the continued strength in our markets we are increasing the midpoint of our 2016 guidance by $0.02 to $3.43 per share and updating our range to $3.36 to $3.50 per share.

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

(Operator Instructions). Blaine Heck, Wells Fargo.

Just starting with the investment market, I know you guys look at everything on market. And it sounds like pricing has been holding up thus far and you haven't seen much change in demand in cap rates. But are there any other indications out there that pricing could see a bit of a break whether it be bid-ask spreads or the depth of the buyer pool or anything else such that you might want to increase or accelerate dispositions?

Well, this is John speaking. I don't know about accelerating dispositions. We have a very disciplined plan and we seem to have pretty good success. In terms of do we see anything that is changing, I think others have talked about over the last quarter or two, and we have, that you don't see as many bidders at some of the really core real Class A sales. Although you still see a dozen or so and it generally narrows down to two or three in a final round. But pricing has remained very strong.

If you look at land, which is an interesting thing, land is being acquired pretty -- there is not much to acquire in San Francisco. Down in the Valley, Mike, it is very robust, the pricing is strong.

Yes. No, I think across-the-board asset demand remains strong, as John said, on the land side continues to increase quarter over quarter.

Thanks, that is helpful. And then can you talk a little bit more about demand for The Exchange? I think one of the major prospects was supposed to have a meeting with their Board soon. So did that happen? And I guess behind that tenant are the same prospective tenants all still involved or has the prospect pool changed at all?

This is Rob Paratte. I will answer that question. The large prospect we are still speaking with has ongoing meetings with their Board and management and we think it is coming to fruition here shortly. We have about 2 million square feet of life science and medical interest in the project, we have five NDAs signed and there is interest outside of the life science medical use as well.

So, from an activity point of view we are really pleased with what we are seeing and we're -- our construction and development teams are busy working on all of these different prospects.

Great, thanks, guys.

Craig Mailman, KeyBanc.

Just a follow-up on the acquisition environment question. You guys have about $260 million kind of set aside for potential 1031s and I am assuming there could be some gains if you ultimately go forward with the JV transaction. Just curious your thoughts on putting that capital to work in the acquisition market versus paying potentially a special dividend.

Well, on the Intuit sale, which was the lion's share of that $[268] million, about half of that is gain and we are evaluating -- we are continuing to evaluate whether we do an exchange -- a series of exchanges or whether we do a special. I am thinking it's -- if I was [waging] it I would say it is 70/30; it is going to be a special for that half, in other words the gain portion.

And on the venture, we have it structured in a way where we do not require -- it is not a taxable event, so those funds would be available for general corporate purposes.

Okay, that is helpful. Then just a follow-up on The Exchange and 100 Hooper, how long are you going to give the full building tenant until you guys decide to go the multitenant route? And how much overlap is there between the two buildings in terms of the demand?

The two buildings being Exchange and 100 Hooper?

Yes.

Yes well let's deal with the first -- the last question first, how long are we going to give the big tenant. I would say that if we don't have a deal with them, subject to the documentation, done by the end of the second quarter, then we will flip to the multitenant scenario. And with regard to overlap between Hooper and The Exchange.

They're independent; we have interest in Hooper that is unrelated to The Exchange. But we have people that have looked at The Exchange and looked at Hooper, but we have two different specific prospects looking at Hooper only.

Okay, you have the 2 million square feet on The Exchange. About how much do you think is unique on 100 Hooper?

I don't understand the question.

How much demand you guys have at 100 Hooper? It would be totally different, right, than the 2 million square feet, just curious.

Yes, totally different tenants. We have two different tenants each that are interested in roughly 200,000 square feet.

Great, thank you, guys.

Nick Yulico, UBS.

Thanks. John, can you just talk a little bit more about the motivation to do the joint venture? And then what you would be using the proceeds for?

Well, I think the proceeds would be used to fund development. We are not interested in selling stock; we would like to sell [funds] as best we can. And in terms of the motivation, it is -- strategically I think it would be a great relationship to have for the future.

Okay. And then just going back to the 2 million square feet of tenants looking at Exchange. If we look at stats from brokerage firms, it talks about roughly 3.5 million square feet of sort of office demand tenants in the market today. But it sounds like the 2 million might include other types of tenants that wouldn't be in the sort of traditional office demand, is that the way to think about this?

Yes, I think you should look at it as Mission Bay continues to improve and have a great story behind it. Sandy Weill just made a $185 million donation to the UCSF. It is a very specific location for a lot of users. And we think more desirable than other submarkets. So I think that is the right way to look at it.

And is there any change in the economics if you are going more on the life science route than traditional office development?

Well, remember our yields were pro forma there at around 8%. And we think we do that or better in either scenario.

Okay. Thanks.

Manny Korchman, Citi.

If we think about the recent sublet space that has been taken up in the San Francisco market or is about to be taken up, do you think the ease or the speed at which that was taken up will inspire other people to list their sublease space? Essentially they look out and say, hey look, these guys put up space; they got it leased, why don't we do the same?

Manny, hey, it is Mike. Obviously really hard for us to say. I don't think one sort of begets the other. I think, as we have discussed, what you have seen is a sublease space that is more in line with what today's modern user wants like we saw at China basin. I know there are spots, that is the kind of space that is getting leased up faster.

And we continue to see that that space is staying on the market in sort of that call it three months plus or minus average for that kind of space, a little bit longer for other sectors. But if it is desirable for the modern tenant it is moving fairly quickly and we expect to continue to see that.

And maybe just to prolong the Hooper discussion for another second here. Do you see any life science or sort of that medical use tenant going sort of outside of Mission Bay down to Hooper? Or is that just outside of that realm and that is going to be more a typical San Francisco tenant that we all think about?

Hooper would be -- the only life science that would come to Hooper would be the administrative component of larger companies. But Hooper is really strictly office space.

Thanks.

John Guinee, Stifel.

A couple of questions. Just, I am looking at your land bank, John. And you talked about an incredibly low basis at the Flower Mart, but I'm sure there is a lot of cost until you are essentially pad ready.

And then you look like you have some relatively low per FAR amounts in some of these land positions, but you seem to be pretty full in others. Can you sort of talk through where you think there is maybe a high basis on some of these land positions and maybe a very low basis on others?

Well, our Flower Mart is hugely low; it is less than a third of what current market is. If you look at Dexter that we recently bought you could argue that is at market but things are now -- what things are trading at today is significantly higher. Where we'd be full is at One Paseo, but fortunately the math on the development program we have still is pretty good.

We are not going to be in the yield on average that we have kind of hit everywhere else at One Paseo, but roughly half of that project is residential and then roughly a quarter of it is retail and a quarter of it is office. So we are probably going to be in the 7% range there on total project cost.

And then -- on any given parcel it just depends -- while we bought some of these things a while ago and we have accrued expenses, there is very little land left anywhere where we own our parcels. So we think we are in a pretty good position.

Okay, and then the second comment is -- I guess this is probably for Tyler. It looks, if I did the back of the envelope math, as right now you have gone a run rate of $0.87 a quarter for second, third and fourth quarter FFO. By the same token you have been expensing a lot of -- or I am sorry, you've been capitalizing 55%, 60% of your overall interest expense. Are you going to be reducing the percentage of interest capitalized and still be able to get the $0.87 or how does that work?

Well, it really depends on what we start this year. I think with our current forecast obviously the numbers will also be impacted a lot by dispositions. So we are comfortable with our current forecast that I laid out. We don't give quarterly guidance, but obviously if we stop development then we won't be capitalizing interest.

But our plans -- we have another roughly $300 million of spend on our existing development. And then if we start Dexter or One Paseo or whatever in the future we will continue to capitalize. So it really depends. But at this point we are comfortable with our forecast.

Great, thank you.

John Kim, BMO Capital Markets.

I was interested in your commentary that JLL projects 2016 net absorption to outpace last year. Was that for all of your West Coast markets or San Francisco in particular? And do you agree with that investment?

It is for all of the West Coast.

And is that consistent with what you are seeing?

Well, I don't know about San Francisco, weather it outpaces last year. It is simply -- in terms of net absorption, simply because there is so little space that is available right now.

Okay. And then on your balance sheet I just had a couple questions. Assets held for sale, there is nothing in there this period. Should we just assume that any dispositions will be sort of the second half of the year?

Yes. Well, as I mentioned, we are working on I think John mentioned a couple little land sites in Carlsbad which would be in the second quarter. We have another transaction in process; don't know when that will happen but more likely the third quarter. And then the remainder of what we talked about would be in the third and fourth quarter.

And, Tyler, you mentioned restricted cash balance has gone up. What was this in relation to?

That is that Intuit sales processes that we are currently holding in an account allowing us the option to think about either 1031s or a special dividend which John commented on.

Got it, okay. Thank you.

Michael Carroll, RBC Capital Markets.

With regard to the large tenant that is looking at The Exchange, what is actually holding up the tenant's decision? Do they just need to get the approvals from the Board to proceed or is there something else that they are waiting for?

It is the former. They need to get approval.

Okay. And then we know you feel pretty good about the San Francisco market. But is there anything in that market that worries you that you're looking at right now?

Well, there is things that always worry you in every market. I mean San Francisco is in an odd place compared to some places. They have a lot of things going on with regard to rent control ratios, they are increasing. This is for apartments; they are doubling the amount of affordable housing that you have to provide.

That always hits office people in a way because we also have to provide -- as part of the extractions for office you have to provide funds for housing and so forth. So all of those things are always in the back of our mind.

The thing that we are looking at right now is construction costs, which have spiked, it is basically labor driven. Down in Silicon Valley right now labor costs are up considerably. How long it will stay that way we don't know. We have been able to manage costs to where we forecast generally about 5% per year and we have been able to -- as we mentioned, we had savings on the two buildings we just delivered.

But all those factors you have to really keep control of. And if you have a project that is you have got to start soon, you better make sure you have forecasted your cost correctly. Now all our costs at The Exchange, we have a guaranteed price max there and we updated our cost on Hooper and we are in great shape.

But those are the kinds of things that we are worried about. I know there's been a lot of speculation about is tech going south and all the rest. We are not seeing that, we are seeing the contrary.

Okay. And then lastly, with the heightened Del Mar and Columbia Square you guys have in committed space already, what are the chances that those LOIs fall through? Or do you feel pretty confident that those will transition to signed leases?

Hey, Michael, it is David Simon, the four LOIs at Columbia Square which account for about 85,000 square feet are all in these negotiations. So high probability that those will all get completed. And the balance of this space which is about 65,000 square feet. There's a good amount of activity that has been touring it, trading paper. But before that we talk about in the script a high probability they will get done.

And this is Rob Paratte. At The Heights we are getting lease comments back from our prospect on Friday and have a conference call set up to discuss them. So it is the normal process for making a deal.

Great, thank you.

Vincent Chao, Deutsche Bank.

Just a quick question going back to the JV potential. Just curious if there is any other details you can share there. Who approached who? Which markets we might be included in that and maybe number of assets, that kind of thing.

Couple of assets, San Francisco, can't disclose who it is. We are all bound by confidentiality agreements.

Okay, so a couple assets in San Francisco, got it. And is this something that you approached them about or did they reach out to you?

We have had dozens of sovereigns and like entities come into our office wanting to do transactions with us. We like these folks a lot.

Okay. And then just another question on The Exchange. If the single tenant user -- they are going through approval process right now. But just curious, it sounds like The Exchange would be relatively -- would be available relatively quickly. And if they are looking for that amount of space quickly I mean I guess what other options do they really have today or would they be considering other markets potentially?

As I said earlier, there are a lot of reasons why Mission Bay is so attractive and for the large user there is a very specific reason. So that is all I'm going to comment on.

They have told us they are not looking at anything else.

Got it, okay. That is it, thank you.

Jed Reagan, Green Street Advisors.

On the potential JV transaction, can you help us just think about the timing for making a decision on that deal one way or the other?

Soon. I think by the next quarterly conference call.

Okay, that is helpful. And so you have got the four developments in the shadow pipeline that could potentially start this year. Can you help us just handicap the odds that one or more of those moves forward this year? Is it possible that all four could start this year?

And then, I know that Hooper is sort of linked to The Exchange in terms of pre-leasing. But do you have a specific pre-leasing threshold for moving forward on the other three?

Well, we don't have a specific -- where we are in Dexter right now based upon the various entities that want that building, and the fact the market is just on fire, a couple of -- at this time last year, Rob, what kind of -- we had what, 4 million square feet under construction in that market with about half of it leased. That is now all leased.

Google just announced that they are going forward with Vulcan on a new build to suit that starts out at 600,000, I think it goes up to 800,000 square feet. You have got Juno Therapeutics under construction; you have got the University of Washington that is going to start something for their medical school.

We have got tremendous demand at a time when it is probably -- you couldn't script it better than this. We're kind of the only game in town that's going to be entitled here shortly and it can start in that market. I think we're going to have a substantial pre-lease, that is the way it feels in that. So that could go fairly soon. On One Paseo we should have our entitlements I think it is an June, David?

Yes.

And our plan there?

Yes, our plan for One Paseo is to do it -- the first phase is the retail. There is a lot of pre-leasing probably, a good portion of that will be pre-leased. And then we roll into the first phase of apartments. So we feel pretty good about kind of the demand associated with the retail and apartments.

And the office, Jed, is just going to be dependent on the market and what we are seeing, kind of activity and people we are talking to on the office piece. But the project is set up in a way where it could be phased like that so we can take advantage of the demand.

My current guess -- and by the way, when we do all the infrastructure for One Paseo, which is for the entire project and the lion's share of the retail that gets built in the first phase and the first couple hundred apartments, the first phase of that, order of magnitude that is about $150 million new spend. The project up at 333 Dexter in South Lake Union is just below $400 million. So I think those two are likely to go forward this year.

And then Academy maybe a little less likely?

Well, it just depends; you ask me if there are certain thresholds. I don't want us to be sitting on massive amounts of spec space whether it is in different markets or not. I want to make sure we are consuming this stuff.

So besides the obvious macro things we are going to monitor where we are with our leasing and our under construction projects very tightly. I am reluctant to give you a specific number. But I like the fact that if we have said before, if The Exchange -- if we have a substantial deal at The Exchange would we start Hooper? We will certainly think about it.

If we have a substantial pre-lease at Hooper will we start it? Yes. But we are not there yet. So, we are going to remain flexible and we are going to remain -- we are not going to get over our skis with regard to funding or spec space.

Okay, that makes sense. And just last one for me, it looks like you guys bought back a little bit of stock last quarter. It seemed like a good idea at a pretty big discount to NAV. I'm curious why you didn't do more of that. And then maybe just how you are weighing additional buyback here versus other uses of capital?

Yes, we got Board approval late February. We jumped in, did a little bit of buyback and then we got blacked out with that Flower Mart transaction where we were issuing units. So we were out of the market for a while. Then when that came out of blackout we -- the stock price had jumped back up again.

So, we have a capital allocation decision between buying back stock or investing in development. And given that we still like our development activity, as John just went through, our bias is to save our capital for that. So at this point it would probably be less buyback and more development.

Got it. Okay, thank you, guys.

Jamie Feldman, Bank of America.

Can you talk more about demand for the Academy and whether there is maybe single tenant users or the type of users that are lining up for that project?

Yes, hey, Jamie, it is David. As you know, in Hollywood you have seen Viacom come in, large user consolidation; you have seen Netflix come in, large user consolidation. And we have always known that that market is ripe for those kind of consolidations.

But the interesting thing about Hollywood as evidenced in our 6255 project and what is happening in the balance of Columbia Square, it is a smaller tenant market which has always been robust and terrific in Hollywood, anywhere from 10,000 to 15,000 to 20,000, 25,000, 30,000 foot users, organically grown, coming in over the hill from Burbank, recognizing product quality and all the things that they want in Hollywood is starting to really, really be there for kind of the live work environment.

So the demand is really good. There are some big users that we talked to on El Centro before we decided to split it up, but we didn't have enough space for them. And they are still at in the market.

So, there is not a lot of supply for the large users, but the small demand that we are seeing in El Centro and in 6255 has really helped us move rates in the direction that we want to move it. And we don't see in end in sight because of the product quality out in the market. So we feel pretty good about that.

Where do you think rents need to be to start that and hit your target?

Well, rents are there today. I mean we can hit our target and drive 8% plus or minus yields on the office. It would be nice to have a large user to start something; there is also consideration on how many smaller users are in the market.

As you know, smaller users don't typically pre-lease, a 25,000 footer doesn't make a decision three years in advance. So there is additional risk associated with that if you rely on that. But that is something we consider and we knew El Centro would lease up fairly quickly as soon as we opened it up to multitenant and that is exactly what is happening. So more to come, but we feel pretty good out there.

Okay. And then I guess just bigger picture, it is a good six months into the fears over BC funding and concerns over tech and financing for tech. What would you say is different today in terms of tenant activity, the kind of space people are looking for, the size of the leasing pipeline? Now that the dust has kind of settled here what do you think feels different and what should we expect going forward?

Jamie, hey, it is Mike Sanford, I will start in San Francisco. I think for the most part the space they are looking for is much of the same; it is likely what we've been talking about for a number of years.

Beyond all the statistics we have talked about demand being up, BC fundings trending in the right direction, all of those things, sublease space is down. I would say the best thing I can tell you is out on the street there is just more activity, more tenants coming through the buildings looking for space. And that boots on the ground feels pretty good to us.

This is Rob, Jamie. I would echo what Mike said in other regions we are in, Seattle has great activity, San Diego had one of its best quarters this Q1. And we are seeing a lot of interest from a lot of different industry types, so things seem good on the West Coast up-and-down.

Okay. And then just finally looking at the expiration schedule for the rest of the year in 2017. Any large spaces we should be aware of?

Hi, Jamie, this is Jeff. As I mentored in my comments, we have a pretty light row (inaudible) this year, 4.1% and in 2017 9.9%. We have one lease that is up in Seattle third quarter that that tenant is going to vacate and we are actually already talking with a couple folks for that space already today.

Third quarter 2016?

No, this would be 2017.

2017, okay.

2017.

And what is the square footage?

About 183,000.

All right, thank you.

Steve Sakwa Evercore.

(Technical difficulty).

Steve are you on a headphone or something because about every other word is coming through?

Yes, sorry, is that better?

Yes, that is a lot better.

Okay, I guess most of my questions have been asked. But I guess, John, big picture, as you're just sort of having discussion with tenants whether it be for expirations later this year or even in the 2017-2018. I'm just trying to figure out the dynamic. Are tenants coming to you sooner wanting to try and lock in? Or are you kind of holding off? I mean just what is sort of the dynamic today?

And when those tenants are coming to you and having discussions what is sort of the maybe percentage looking to expand kind of stay where they are or contract? I'm just trying to figure out where we are in that kind of contraction phase.

Well, you always have -- in a portfolio of our size you are always going to have some people expanding, some people contracting. By and large most -- I think what was our comment about how much -- it is 75% of leasing has been expansionary. So that continues to be the case.

On the same hand we have a little tenant that -- or a tenant that (inaudible) has got themselves into trouble that their lease comes up in a couple years and we already have a tenant that wants some of the space they would like to sublease. So that is pretty strong.

We have seen a couple of tenants pause to figure out what their big requirement their consolidation is going to be in two or three years rather than go out and just make a -- one of the dilemmas that people have is that they just do incremental expansions.

In a strong market like we have they have to do 10-year terms. And then they want a new facility, a consolidated facility two or three years from now, then they have got all these properties they have got to figure out what to do with.

So, we have a couple of tenants that have said, hey, we are going to try to crowd people in while we figure out what the right solution is a couple years down the road. In terms of people coming to us early, Rob, do you want to comment on that?

I think and not just in San Francisco, we are seeing particularly from the larger tenants an interest in talking about 2018-2019 space because of growth they have in their (technical difficulty).

We also have -- just in the last two or three weeks -- we had a senior management meeting earlier this week. And just in the last -- well, call it the last 30 days we have about 1.5 million square feet, which is a handful of tenants, of new requirements for about two or three years out up and down the portfolio where they want to talk to us about build to suit.

So, what we are seeing is very strong demand from tech and entertainment, we're continuing to see very strong demand particularly the mature tech. And you are going to see some other companies moving into San Francisco that are not there today.

Okay. And then just to circle back on the large JV potential, it sounds promising. I guess is that something that would be sort of a phased closing or is it something that would sort of happen all at once?

I am just trying to think through the desire to fully fund future development at the risk of taking kind of a big earnings dilution and how do you sort of trade that off? Or is it something that you could phase over time to maybe minimize near-term earnings dilution?

Yes, we are sort of looking at -- is it a third and fourth quarter?

Yes.

Two assets, one in the third quarter, one in the fourth quarter this year towards the end of the fourth quarter. So there would be a little dilution. Order of magnitude, Tyler, do you know?

On the dilution?

Yes. It depends which one we elect.

Yes, we are not ready to comment on that yet, yes. We have $500 million in our current numbers, the midpoint of our guidance. $250 million has already been completed. And that other $250 million is spread out through the -- generally the third and fourth quarter. So this would be larger than that number but it would be also spread out through the third and fourth quarter.

And, Tyler, just to be clear, is the $650 million the total gross value of the two assets or that would be the share of the gross value that they would be purchasing?

The $650 million was our previous guidance range --.

High range.

High range for our guidance. It doesn't have anything to do with the joint venture transaction. So what we said is our range for the year, excluding the JV, was $350 million to $650 million with a midpoint of $500 million. So the $650 million isn't related to the joint venture. If we did the joint venture we would exceed the $650 million is what we are saying.

Got it, okay. Thanks for the clarification.

I would now like to turn the call over to Mr. Rose for closing remarks.

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

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