Kilroy Realty Corp (KRC) 2016 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third-quarter 2016 Kilroy Realty Corp earnings conference call. My name is Derek, and I'll be your operator for today. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to 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, David Simon, Heidi Roth, Mike Sanford, Rob Paratte, Tracy Murphy and Michelle Ngo.

At the outset, I need to say that some of the information we'll 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 supplementals.

This call is being telecast live on our website and will be available for replay over 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 third quarter, Jeff will discuss conditions in our key markets, and I'll finish up with financial highlights and a review of our updated earnings guidance for 2016. Then we'll be happy to take your questions.

John?

Thank you, Tyler, and hello, everyone. Thank you for joining us today. We've made substantial progress in all areas of the Company since our last call. Here are the highlights.

On the development front, as we reported last night, we signed long-term commitments with high-quality credit tenants for over one million square feet of space at our development projects. This includes commitments at both 100 Hooper and The Exchange, which on a combined basis are now over 80% committed.

We have said in the past that we wouldn't start construction on 100 Hooper until we made leasing progress on either of The Exchange or Hooper. Since we have now made substantial progress on both projects, we will begin construction later this quarter on 100 Hooper. As a reminder, it is a 400,000-square-foot office and PDR project in the SOMA neighborhood of Showplace Square. The total estimated investment is approximately $270 million.

Moving south to Hollywood, we signed leases at the recently completed office component of Colombia Square covering 71,000 square feet, taking the project to 84% leased. This includes a 31,000-square-foot expansion agreement with Viacom, increasing its total lease commitment to 210,000 square feet, and a 40,000-square-foot lease with a global apparel company.

We are also seeing strong interest in our Colombia Square residential tower. We expect leasing to accelerate even more as we complete construction of the amenities for this space, including the rooftop and ground-level restaurants. We are now 44% leased, up from 22% at the end of the third quarter.

In San Diego, we signed a letter of intent at the recently completed office project in Delmar called the Heights for approximately 23,000 square feet, taking the 75,000 square foot office building to 65% committed. In our stabilized portfolio, we signed new or renewing leases on 314,000 square feet of space at rents that were up 24% on a GAAP basis and 12% on a cash basis.

We generated another quarter of strong same-store NOI growth, with cash NOI up 13.5%. Our stabilized portfolio is now 97% occupied.

We completed our venture with Norges and closed the first tranche in August, generating approximately $191 million. The second tranche is scheduled to close later this quarter and will generate approximately $260 million. And finally, we completed the $250 million debt financing during the quarter with a delayed drawdown feature that allows us to defer the borrowing until February of next year.

That brings us to our three remaining near-term development projects. First, at One Paseo in Delmar, the overall project is entitled for approximately 1.4 million square feet, including approximately 600 residential units, 96,000 square feet of retail and 280,000 square feet of office. The total estimated investment is approximately $650 million, with construction and spending occurring in multiple phases.

Approximately $200 million has been incurred to date.

Phase 1 to begin later this year will include site work and related infrastructure for the entire project as well as approximately 237 residential units and 96,000 square feet of retail space. Our plan is to create a world-class environment with vibrant retail and residential amenities that will enhance the demand for the later phases. We expect incremental spending for Phase 1 to be in the $150 million to $200 million range and that deliveries will begin in late 2018.

Second, in Seattle's South Lake Union submarket, our 333 Dexter project is now fully entitled and ready to go. Our development plans call for approximately 660,000 square feet of office and support retail and a total projected investment of approximately $385 million.

The South Lake Union submarket remains extremely strong, with Google, Facebook, Amazon and others all taking significant amounts of space. We are now very excited about the quality and character of the area with its terrific combination of high-credit companies, retail businesses, housing options and public transportation. While Seattle is not typically a pre-leasing market, we are in discussions with several prospects and are evaluating a start for early next year.

Third, in Hollywood we expect to have final entitlements for the Academy, our 550,000-square-foot mixed-use development project, by year-end. It has a total projected investment of $390 million, with our nearby Columbia Square project nearly fully leased and the Hollywood market demonstrating robust growth. We are also evaluating a first half of 2017 start date taking into consideration our other leasing success throughout the portfolio and overall market conditions.

Now let me review our recently completed strategic venture. In August, we finalized terms with Norges Real Estate Management, the real estate investment arm of the Government Pension Fund of Norway. The fund is making a $452 million contribution to the venture and assuming $55 million in secured debt in return for a 44% equity interest in the two companies that own 101st St. and 303 2nd St., two of our existing San Francisco properties.

The two class A properties total approximately 1.2 million square feet of space and are currently 97.5% occupied. The Fund's investment represents a valuation of about $1.2 billion, or $957 per square foot. We acquired the two assets in 2010 for an aggregate price including renovation costs of approximately $450 million.

As we discussed last quarter, the deal establishes a valuable strategic relationship for us with a world-class investor that shares our interest in long-term value creation and also generates capital to fund our near-term development.

During the quarter, we also completed the sale of two small office properties and a land parcel located in the Sorrento Mesa submarket of San Diego for approximately $45 million. Year to date, the Norges venture and our disposition program have now generated almost $800 million.

Before wrapping up, let me comment on the acquisitions market. While over the last few years we have found it very difficult to make the math work on high-quality acquisition opportunities in our markets, we are now pursuing a few transactions that may meet our investment criteria. They all have value creation elements and superior locations near transit and amenities. More to come on this.

In summary, we think our Company is extremely well-positioned. Demand continues to be reasonably good to strong throughout our markets for the type of product we provide. California GDP is exceeding expectations, and West Coast job growth easily outpaces the rest of the nation.

Our stabilized portfolio is nearly 97% occupied and generating strong financial results. Our development choices have proven to be solid and well-timed, and our program continues to add valuable new assets to the portfolio that is already one of the highest-quality, youngest and most sustainable in the country.

We've succeeded in refueling our development pipeline with a range of equally compelling new opportunities, both near-term and over the next several years. And we are now entering 2017 with arguably the most attractive entitled development sites that Seattle, Hollywood, San Diego and San Francisco have to offer.

We have use prudence and discipline in financing our enterprise. both externally and through our own capital recycling program, and we are now entering 2017 well-positioned to fund the next phase of development starts at attractive returns while maintaining a strong and flexible balance sheet, which reflects one of the lowest debt-to-EBITDA ratios within our peer group.

Finally and perhaps most importantly, we operate in markets that are among the most dynamic and resilient in the world. Big technology and life science companies are driving demand in both San Francisco and greater Seattle, and they continue to expand. New-age digital media and entertainment-related companies have both rediscovered Hollywood, as has the fashion industry. In San Diego, life science, health care, defense and others have been slowly but steadily pushing down vacancy rates and pushing up rents in the best markets.

That completes my remarks. I'll turn the call over to Jeff for a closer look at our markets. Jeff?

Thanks, John. Hello, everyone. As John pointed out, our West Coast real estate markets remain healthy with the ongoing expansion of technology playing a big part. California's tech companies alone generate over half of all technology revenues in the country according to Bloomberg data. This backdrop has translated into strong commercial real estate fundamentals. San Francisco net absorption was positive 220,000 square feet and rental rates increased about 1% over the prior quarter, bringing year-to-date rent growth to about 7.1% and 10.2% year over year.

Year-to-date absorption totaled about 750,000 square feet. Class A direct vacancy was 3.2% in San Francisco's Soma district, 6.3% in the South financial district and 3.4% in Mission Bay. In Silicon Valley, Class A direct vacancies was 6.5%.

We are currently almost 100% leased in the Bay Area, and our in-place rents for the region are approximately 32% below market. Seattle remains a major focus of big tech companies expanding their footprints in popular submarkets like Bellevue and South Lake Union.

Premium office space is a key differential for companies competing for local talent, and this flight to quality should continue. 2016 has become the fourth straight year the market has seen more than 2 million square feet of absorption, a level not seen in more than 20 years.

Class A direct vacancy rates in our primary Seattle submarket to Bellevue and South Lake Union were 9.2% and 6.4%, respectively. Our Seattle portfolio is currently 98.2% leased, and our in-place rents are approximately 7% below market. In San Diego, growth continues to be driven primarily by health care and life sciences. This steady growth translated to positive net absorption for the quarter of 202,000 square feet, bringing the year-to-date total to 820,000 square feet, double the number compared to the same time last year.

In Delmar, Class A direct vacancy was 12.4%. In Tirana Mesa two-story corporate office vacancy was 5.8%. Our San Diego portfolio is currently 96.1% leased, and our San Diego in-place rents were approximately 9% above market.

Los Angeles continues to be propelled by technology and media growth, particularly in the West Side and Hollywood markets, where the rent premiums are approximately 40% over the broader market. Class A direct vacancy in West LA was 12.1%, and in Hollywood it was 26%. Although excluding one recent delivery, Hollywood was 7% vacant. Our Los Angeles portfolio is currently 96.5% leased, and our in-place rents there are approximately 15% below market.

Looking across our operating portfolio, we have current lease commitments and LOIs of approximately 314,000, and the average in-place rents on the portfolio are approximately 17% below market.

That's a snapshot of our markets. Now Tyler will cover our financial results in more detail. Tyler?

Thanks, Jeff. FFO per share was $0.92 in the third quarter, including $0.05 from a property damage settlement. Same-store NOI continues to trend upward, growing 13.5% on a cash basis and 6.8% on a GAAP basis. The growth was driven by higher rental rates, higher average occupancy and higher CAM revenues.

As John noted, we completed several capital-generating transactions during the quarter. We took advantage of low rates and completed a $175 million private placement of 10-year notes at 3.35% and $75 million placement of 12-year notes at 3.45%. The private placement has a six-month delay draw feature allowing us to delay the borrowing until February.

We closed the first tranche of the Norges venture in August and expect to close in the second part of the transaction, providing us an additional $260 million later this quarter. And we were working on a 10-year $170 million secured mortgage to refinance a maturing mortgage. We expect to complete this transaction later this quarter as well.

These capital transactions will allow us to fund all of our near-term development including The Exchange, One Paseo, 100 Hooper, 333 Dexter and the Academy, which all have an estimated spending of about $500 million through the end of 2017. Pay a special dividend of approximately $160 million related to gains on disposition; refinance our maturing 2016 and 2017 secured mortgages; and redeem our $200 million of preferred stock in 2017 with almost all availability on our bank line and assuming no additional acquisitions or dispositions.

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 today's economy, our current guidance reflects information on market intelligence as we know it today. And any significant shifts in the economy, our markets, tenant demand, construction costs and new office supply going forward could have a meaningful impact on our results in ways not currently reflected in our analysis. Projected revenue recognition days 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. Last quarter we increased our 2016 same-store cash NOI growth guidance to a range of 9% to 11%. Given continued strong results, we are again increasing our guidance, and now we're in the 13% range for the year.

We're making good progress on the residential tower in Hollywood, now 44% leased, and expect to break even on an NOI basis in the first quarter of 2017.

We are now projecting a 2016 FAD payout ratio of approximately 61%. The Board will continue to evaluate the dividend regularly as we approach the potential for additional dividend increases in conjunction with meeting our minimum distribution requirements.

In terms of occupancy, we expect to end the year at approximately 95%. The occupancy decline from the third-quarter level of 97% will be driven by the addition of the Heights and the stabilized portfolio and a few move-outs.

So in terms of earnings guidance, last quarter we provided a 2016 FFO range of $3.36 to $3.44 per share, with a midpoint of $3.40 per share. With the receipt of the $5 million property damage settlement, we are increasing our 2016 FFO per-share guidance range to $3.43 to $3.47 per share, with a midpoint of $3.45 per share.

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

(Operator Instructions) Craig Mailman, KeyBanc.

I was hoping maybe you guys could just clarify the announced million square feet plus of commitments. How much of that was completed in the quarter and shows up in Colombia Square and the Heights? And how much of it -- and could you guys give us the leased or committed percentage on the Exchange and 100 Hooper?

That's a big question. Where do you want to start? Tyler, do you want to take the first part about the --

Yes, you know, the way we disclose it is we show on Colombia Square and the Heights, given that they're in lease-up, the committed and leased percentages. So we've given that number in the script and it's in the supplemental.

Was anything incremental post quarter-end?

The 1.1 million square feet (inaudible) effectively June 30 since our last call. So that's incremental for the quarter.

Okay. And then where do The Exchange and 100 Hooper stand from a commitment standpoint?

84% roughly -- 83%.

Are any of them completely full?

I'm not going to comment on that.

Okay. And just curious, a big piece of it is kind of under LOI. I guess historically what's been the transition rate from LOI to signed leases?

Well, it's been very high. We wouldn't be talking about LOIs if we didn't think it was going to be very high percentage. We are in very detailed leases with construction exhibits and all the rest. I mean, you couldn't ask for things that are much more detailed.

With the life science entities, the nature of those transactions are extremely complex. So you've got to get all the construction exhibits and all the rest completely understood. It's an elongated process, if you will, compared to a normal office lease. But I don't see anything that would interrupt these transactions.

Okay. And then just lastly, relative to pro forma, where are rents coming in on The Exchange and 100 Hooper?

Let's just say we're going to meet or beat both pro formas.

Great. Thank you, guys.

Nick Yulico, UBS.

Thanks. Just a follow-up here on the leasing news. What -- you talked about that, I guess, there's high probability of these getting turned into leases, the LOIs. But any sort of timelines you can give us on how long it might take to actually get firm leases for the commitments?

Well, where we have leases, they are done. Where we have LOIs, it's generally -- with an office, it can take three or four months. With life sites, they can take a little bit longer. But I would think that we're looking at sometime in the first quarter for the outliers.

Okay. That's helpful, John. And I guess the other question was if you could just talk about what the latest is on -- you've talked before about the sort of overall demand in San Francisco types of tenants, how much sort of square footage is tenants in the market right now sort of looking for space?

Go ahead, Rob. Do you want to take that?

Hi, Nick, sorry. We're looking at demand in San Francisco current -- third quarter, it's approximately $8.7 million, and we see that continuing to track going forward. And I think it's interesting -- tech continues to lead the market, but it's significant also that there's about close to 650,000 feet of higher-category tenants that are in various stages of documentation.

So we are comfortable on what we are tracking that fourth quarter will show some significant executed transactions.

Okay. And just one last question on Hollywood. It sounds like there is a lot of demand in that market right now from streaming content companies -- likes of Verizon, PlayStation -- looking at the market. You talked about The Academy maybe starting in the beginning of next year. How do you think about starting the project on spec based on the level of demand you think is in the market right now?

Well, as we always say, we tend to be pretty prudent here. And we -- it's just like we said: we weren't going to start in the same market 100 Hooper without substantial leasing either there or at The Exchange, and that's what we've announced here.

And with regard to Hollywood, we're going to take a look at where we are across the entire portfolio -- how we feel about the markets, how we feel about Hollywood. Hollywood is not generally a pre-leasing market, nor is Seattle, nor is San Diego. And we have three great projects -- we've announced we're going ahead with One Paseo on the retail and the first phase of the resi. We're just going to make a call, button up a lot of this LOI stuff that we've announced, and more to come. But we're not going to do anything crazy.

All right. Thanks, John.

Blaine Heck, Wells Fargo.

John, you've been pretty transparent that you were pursuing a couple of different options at The Exchange. Can you now tell us whether it's the single large user or multiple small tenants? And then can you also talk about the profile of kind of the whole pool of prospective tenants you are negotiating with? Was it predominantly life science and medical, or was there a kind of similar demand from tech?

Well, there was significant demand from tech. As I've made clear over the last year, that we needed to make a decision. And what we finally decided was that we ended up with some very big transactions. I'm not going to get into the breakdown. I just have to tell you, and I've mentioned this many times before, we have confidentiality agreements and confidentiality concerns regarding most of these deals. Even the ones that are leases, the tenants want to make the announcement and we can't usurp them.

So I think you'll see a lot of good news over the next couple of quarters from Kilroy on some pretty significant transactions that involve both life science and involve technology up and down the platform. But there's -- just to put it in connection with demand, you know, you all have heard me at various conference calls or at NAREITs or other conferences that are held talk about the kind of product that the users in the market want.

And I may have a few little smaller ones that I've left out. But if we in San Francisco -- the city of San Francisco -- break down into two categories, one is high-rise product, and the other is sort of the low- to mid-rise, larger floor plate product. And you just think of those two products. And if you look at the high-rise product there are four high-rises under construction or one that's recently been completed that total 3.2 million square feet, that have had announced leasing in aggregate of 31%. That's 3.2 million square feet, 31%.

If you look at the other category, which is the lower-rise, bigger floor plate that we specialize in, that's what The Exchange is, that's what 100 Hooper is, that's what the Flower Mart will be. If you look at that, there is 2.2 million square feet either underway or about ready to start that is 92% committed.

That's helpful.

The only reason I point that out is there needs to be an understanding of what people want and what's underway, and it's not all fungible. So we have a lot of tech and a lot of life science that are scrambling for product. Life science in Mission Bay, Tracy, is what percentage vacant?

It's like sub-5%. There's nothing.

Sub 5%. What is it in South San Francisco?

3%.

3%. So, you can see where this is all going and why we are focused on the kind of products we are. We ultimately had to make choices. And in the connection with the 1 million-plus square feet that we announced up and down the platform, the weighted average lease term is in excess of 17 years. In the case of 100 Hooper and The Exchange, it's greater than that.

Thanks for that, John. Kind of related to that, there's still a number of large, more mature tech companies in the Valley that don't have a meaningful presence in the city. We've been speculating on some of those moves for a while. But do think you'll see some or one of those tenants make a statement here soon and take that major space in the city? Or have they maybe become little bit more cautious lately?

You know, we deal with a lot of folks, and we are so tied up in NDAs that I can't really comment other than a big general statement that we have not begun marketing of the Flower Mart. We're still getting our entitlements. We haven't selected a broker or a brokerage firm, and yet we have had a number of inquiries from big techs that's located in California and not located in California that have major inquiries with regard to the Flower Mart because it represents the kind of product that they want at the kinds of locations they want.

So I would have to say that there will be some big users coming into the market over the next several years, I would guess. I can't speak to other people's projects because I only know about ours.

Great. Thanks a lot.

Manny Korchman, Citi.

John, on the acquisitions you mentioned earlier in the call, what has changed that all of a sudden your interest in acquisitions is that they've come to market and they have just interested you? Have you broadened your underwriting standards with them alone or maybe in JVs. Maybe just give us some ideas about how you're thinking about acquisitions.

Well, we are not thinking of buying core product that is leased and buttoned up because the cap rates are not compelling to us. The things that we are looking at are where they are drastically under market in their rent, so we think there's some big upside, and/or they are screwed up.

Think of 6255, which we call Sunset Media Center, in Hollywood. It was totally messed up. And now it's become a terrific asset because we had the imagination and the capital and whatnot to straighten it out. So it's kind of a combination of those things. Manny, you're not going to see us buy coupons.

Great. And then Tyler, can you remind us what the move-outs are coming into the year-end?

Yes, there's a few move-outs in San Francisco and Seattle -- our 303 2nd project and up in our Fremont project in Seattle. The good news there is the rents are about 50% below market. So it will be a nice pop in rents when we re-lease those spaces.

And then when you add in The Heights to the occupancy, that's why the overall occupancy will drop about 150 basis points.

And maybe one more for John. Just so I'm clear, you said Seattle is not technically a pre-leased market when we toured up there a few weeks ago. You made it sound like you're waiting for pre-leased to go with 333 Dexter. Which one is it, or can it be either?

Well, it could be either. I don't know what all was communicated to you up there by us or others, but I think you saw that there was a project that was done a year and a half ago or so, and Facebook came along and took it. Google has just signed a lease for a build-to-suit by Vulcan for 600,000 square feet that, Rob, I think is expandable to 800,000 feet or so. We couldn't play because we didn't have the ability to grow into a second phase.

So there has been some just-in-time leasing or pre-leasing, but it historically has not been a pre-leased market. It's historically been a market we your are under construction and you may do -- make the lease while you're at or under construction or your in completion. In fact, if you look at the market right now, there are a couple of buildings that are 300,000 feet each in the Denny regrade, which is between downtown and South Lake Union that are both -- those have been lease now, Ron?

They are committed. One is not leased, but in LOI and the other one is leased.

Okay. And if you look at Bellevue as an example, there's three buildings, 1.5 million square feet there now. Big announcement on was it Amazon going out there -- announcement to the sales force and so forth. So it looks like that market with 1.5 million square feet, Bellevue of what was spec just a few quarters ago looks like there's maybe 400,000 -- 300,000, 400,000 square feet that's not committed in that market.

South Lake Union, Rob, there's been, what, roughly 0.25 million square feet of positive absorption year to date. There's another 0.25 million or more that's in lease negotiation right now. It's tight as a drum. So we'll see. We haven't pulled the trigger yet.

Thanks.

Tom Packerwood, BTIC.

A quick question, John. You partially answered this through your answer to the acquisition question. But taking it from the sales side, we've heard of a bifurcation in the sales market with core, well-located assets with terms still going at low cap rates. And yet deals that have a little more value-add component, the spread is widening there. Are you seeing this in your primary markets, and can you give us a sense if you are what level of widening you're seeing in that pricing?

We track just about everything, but we don't really pay attention to anything that's not in the markets we like. Nor do we pay attention to the things that are not -- don't have the physical characteristics we like. So there's probably better sources to ask than our team about that. But what we are seeing is that there are -- I don't know, I just would leave it at that.

We are focused on what we do. We haven't seen cap rates back up in any of our markets. And if anything, we've seen added cap rate compression. Because what's going on now -- there are a number of assets that are being bought by companies that are foreign that aren't real estate companies because in their host countries, they can borrow at 1% and then get a 3.5% coupon on the lease transaction or the sale transaction that they buy. And that's a massive spread. So, if anything, it's for great stuff, I think cap rates could compress further. But I don't know about the tertiary stuff; I just don't follow it.

That's a very fair point. I was thinking more in lines of if you guys changed strategy at all with any of your sales just as far as what you were seeing in the market.

Anything we've had for sale, we've had multiple bids, very competitive process. And I think that's reflected in the level of transactions we did. We could have done a lot more, but level of transactions we did in the pricing we got over the last couple of years. So I don't see anything backing up there. If anything, it's -- the sales and disposition activities in our markets are pretty robust.

I think that's very fair. When we look at 2017 expirations, only 1.1 million square feet, you've been successful pulling a lot of those leases forward over the past year. The expirations that are out there are primarily weighted towards LA and San Francisco. Do you have a sense of the confidence interval for renewals there, and can you give us a sense of what the mark to market might be on those 2017 renewals?

Jeff?

Yes, this is Jeff. As you pointed out, we have 8.3% of the portfolio rolling next year. 1.1% mark to market for 2017 is about 22% under market. There's one large lease, it's over 100,000 square feet, up in Seattle. The good news is we have an LOI on that space. We'll be moving out -- the current tenant will be moving out at the end of September. And the new tenant will be moving in the middle of the first quarter of 2018. So we are feeling pretty good about the roll at this point that is spread throughout the rest of the portfolio. But the largest transaction is one that we think we have buttoned up at this point.

Got it, appreciate it. And one more for me. Just any early read-throughs or impressions from the draft central sum-up plan that came out in August?

This is Mike. We're studying like everyone else. I think there's a ways to go, as you mentioned, in sort of the first one. I think we'll continue to monitor it throughout the process. Right now we think they're still tracking to late in 2017 for a completion, and we'll be monitoring it throughout and discussing it internally.

Got it. That's it for me. Thanks, guys.

Steve Sakwa, Evercore.

John, my understanding is on the 100 Hooper site when you bought it, there was another parcel that had some PDR requirements. And I guess there were some certificate of occupancy needs on that site as it relates to your site. Are there any -- has that been cleared up? Are there any kind of things that could cause any delays or issues with your site?

Hey, Steve, it's Mike again. Yes, you're right. We -- on that project, it's both developing a 400,000-square-foot office and PDR building and then a 50,000-square-foot nonprofit PDR building. And we've been working very closely with SF Made, which is the main nonprofit that works with all the manufacturing companies in San Francisco. And we've been structuring a relationship with them to move forward on that building.

We don't anticipate any delays related to that given the leasing activity there at the project.

Okay. Thanks.

Jed Reagan, Green Street Advisors.

Can you just remind us what you'd underwritten at Exchange and 100 super in terms of stabilized yields?

Approximately 8%.

Okay, thanks. And how do you see labs and life sciences fitting into your portfolio longer-term, and if you see that becoming a much larger piece of the business over time? And then is Dexter -- is life sciences a possible option for Dexter?

I'm not sure we're going to go that way in Dexter. But to the first question, there's a reason that Tracy Murphy came aboard as Executive Vice President of Life Science. Her background was with Biomed in their West Coast portfolio both on their developed in major transactions. And as we said I think in an earlier call or maybe it was at NAREIT that if you look at the four big clusters of life science, the biggest is Cambridge. The next biggest is the Bay Area, and then after that it is Seattle -- San Diego, then Seattle. We are in three -- four of those markets. About 15% of Kilroy's revenue comes from a combination of life science and health care. We are in those markets. We've developed a bunch of the stuff. So, yes, I would say that we are going to be very judicious but it's an appropriate and a very easy add-on for us.

Okay, thanks. And I guess sticking with Dexter, should we think of that as being potentially a single-user project or is that likely to go multi-tenant? And then do you have a specific pre-leasing hurdle you're thinking about there and at Academy as well?

Don't have a pre-leasing hurdle. It's more about how we feel about what's going on in the rest of the portfolio and the world. We'll see what happens after November. We'll comment on the caliber of people that are going to be in -- our new leaders. But we are going to take all that stuff into consideration.

Obviously, we love pre-leasing. As to your comment about Dexter, all the stuff we are designing is designed to go multi-tenant. We don't want something that's just designed for a single tenant. So we have the flexibility to go big tenant, a couple of big tenants. We have the flexibility to go multi-tenant. We did in Dexter what we did in The Exchange and what we're doing -- will be doing in the Flower Mart. As we have, in that case, Dexter two buildings, but they are interconnected on three floors so that the buildings that have, say, 25,000-square-foot floor plates that are typical to each, we can have 55,000-foot-floor plates on the super-floors. So we think we've got developed a pretty good mousetrap where we can have people -- give them scalability vertically or horizontally.

So we'll see, Jed. If somebody comes along and wants to lease it for 15, 20 years with great credit on a basis that we like it, then we'll do that. If we need to break it up or just feel that it's better to break it up into two or three or four tenants, then we'll do that.

Okay, great. Thanks for the color.

John Guinee, Stifel.

I believe our question has been answered. Thank you.

Jamie Feldman, Kilroy.

Great, thanks. I guess you guys hired me. (laughter)

Jamie Feldman, Kilroy. That's got a nice ring to it, Jamie.

Yes, that sounds pretty good.

I'll send you a bottle of -- a case of Guinness and a bottle of Jamison come March 17.

Perfect.

I guess you have obviously announced a lot of progress here in the development pipeline. Has anything changed in terms of tenant sentiment, decision-making? Is there an inflection point that we have hit here in your markets?

I don't know. The tea leaves are always interesting to read, and hindsight becomes 20/20. I would say that people are concerned about the availability of space, and they need to make decisions. So that's been a driver for some. The race is on, if you think about it.

Amazon is the huge user in South Lake Union. Now they've moved to Bellevue. There also, recently bought a company in San Francisco. They are talking about taking over the film industry. You've got the Facebooks and the Googles that are expanding throughout the country and the world. Everybody has got their various expansion plans and whatnot.

And then you have other companies -- the Ciscos and the Adobes and all the rest -- that have been -- IBMs have been reinventing themselves and needing to buy companies and talent. I think there's just a lot of that momentum that sometimes is in fits and starts.

In the case of San Francisco, there's Prop M. People are really worried about their ability to expand in the city because there's a restriction on supply, and then there's whatever there is in the pipeline now and it's not very much.

We are not seeing the level of small startups and so forth that we were. We're still seeing that, but we're not seeing it to the level we were. There's been comments that many people have talked about or written about that say VC funding is down. Well, let me just tell you that VC funding year-to-date is $16 billion, on track for $21 billion, which would be the third highest year ever in the Bay Area.

So we are feeling pretty good about what we're seeing. I do believe that there was a lot of stuff in the markets by you and by others, rightfully so, asking has tech reached a peak. Is it going to go in decline? Is it going off a cliff or whatever, going south? We're not seeing that. In fact, what we're seeing is the big tech, the big finance, big balance sheet techs making big plays. And I just hope it continues.

Okay, that's helpful. The development -- the acquisition -- potential acquisitions you talked about, can you frame the size and how you guys would finance?

Well, until we -- it's sort of speculative talk until we accomplish something. But most of this stuff that we bought over the last number of years has been in $100 million or $200 million or more. So I don't see us buying a bunch of stuff in the $50 million range. That just doesn't seem to be real good use of management's time.

In terms of financing it, I'll let Tyler address that.

We obviously have options, right? We have a lot of capital that we raise for our development. And if we did an acquisition and we could use some of that capital now, we could not redeem our preferreds next year. And that's $200 million that we could use for acquisitions, and we could raise debt at that point to do that. So we have lots of capital currently and obviously lots of sources of capital for the future.

Would you lever up to do value-adds or would you bring in a partner?

We certainly have the ability to bring in a partner. With regard to levering up, everything we underwrite is -- correct me if I'm wrong on this, Tyler -- is everything we underwrite is leverage-neutral.

Right.

(multiple speakers) I don't think now is the time to be levering up.

Right. So you're staying stabilized, leverage-neutral or even going in?

Stabilizing.

Stabilize, okay. And it sounds like you're thinking about multiple transactions. I thought you were maybe just setting the stage for one.

Well, I think we always have things that we are looking at. And if they get too pricey or something changes in the underwriting, then we drop them like a stone. And so I'm not signaling anything that's imminent, but we've got -- we always have oar in the water.

Has anything changed in the market that seems to be more interesting now or there was maybe a deal coming back?

No, I don't see any deals coming back. I guess there are some, but I'm not aware of any that we're looking at. I think for us, we have a bigger footprint than we used to have. We have a little differentiation in our product type. We have tenants that ask us to get involved in various markets or situations. So there's no big news here, Jamie. It's just incrementally looking at how we create shareholder value in a responsible way.

Okay. And then just to clarify the million square feet you put out, did I hear you correctly that Columbia Square and Heights, the information in the third-quarter supplemental is up to date, meaning the rest of that activity is really coming at Hooper and The Exchange? Or did I hear that wrong?

Tyler?

When you say the rest of the activity -- in the million square feet includes leasing or LOIs at all four of those projects. The data in the supplemental is up to date in terms of what's committed and what's leased.

Okay.

Does that answer your question?

Well, I was just -- I'll take another look. If I have a question, I will call you guys. All right. Thank you.

John Kim, BMO Capital Markets.

Just to clarify the leasing announcement you made today, I know a lot of people have asked about it, but is it 1.1 million square feet that's commenced -- or committed? And also the 83% committed, that was for The Exchange and 100 Hooper standalone, is that correct?

What is it, Tyler? 82%, 83%?

Yes, it happens to be 82%, 83% for both Hooper and Exchange on their own and also for the four on their own as well. That number just happens to be the same.

Okay. The residential at Columbia Square, can you just remind us or update us on what percentage of the units are the fully furnished, shorter lease term units?

David?

This is David, John. It's about 50-50. There's a little less furnished plus or minus 95 units and about 105 unfurnished. And as John noted in the script, we've kind of more than doubled where we were at the end of the quarter. We are pushing past 44% on the resi tower.

And what's a typical lease term for the fully furnished?

The fully -- it ranges. It could go anywhere -- we have some fully furnished that are a year, some that are six months, that are three months. So it ranges, but plus or minus a couple of months.

Okay. And maybe a few modeling questions for Tyler. The straight-line rents had gone down quite a bit this quarter. What's a good run rate going forward?

Yes, for the fourth quarter it should be roughly the same as the third quarter. And then next year it will pick up a little bit as Viacom takes occupancy. We'll give guidance on 2017 next year. But for the fourth quarter, it's about the same.

Okay. And the timing of the remainder of the joint venture sale?

Well, we're working to close that. And what we said is this quarter, at this point it's probably late -- mid-to-late November.

And finally, the start date and stabilization date for 100 Hooper. I think it had a quicker build-out time, but any guidance on that?

Well, the start date is going to be next month.

And build-out time is like 12 months or so?

I think it's longer than that. What is it, Mike?

Like 16.

Great. Thank you.

Vincent Chao, Deutsche Bank.

I think most of my questions have been answered here, but maybe just to clarifying one. In terms of the guidance on the FFO, you talked about the settlement boosting that. Also raised the same-store guidance. So, just curious how much of that was also just driven by the settlement?

That number was not in the same-store result. So the 13.5% excluded the damage settlement.

Okay. Thanks for that. And then just maybe one on LA. It sounds like the commentary there has remained pretty positive, West LA and Hollywood. Just looking at the BLS data, though, it doesn't look like there's been some slowdown in job growth in the greater LA area. I'm just curious if you had any thoughts on that and maybe some commentary, and if you seeing any changes in the demand profile.

This is David. As we've always talked about, LA is so fragmented. The markets that continue to do well -- West Side, Hollywood, aspects of Beverly Hills -- continue to have good growth. And the product quality within those markets are seeing the most demand. So it's lumpy at times in different markets around LA. But the ones that we are in and the ones that we travel in, it's been pretty steady -- the growth and the rental increases over the last year. And our expectations are that's going to continue going forward.

Okay. Thank you. Thanks a lot.

Jed Reagan, Green Street Advisors.

I know it's early and you're not giving 2017 guidance yet, but how should we think about 2017 dispositions? I mean, do you think that it's fair to say they'll look similar to this year in order to fund your development spending, assuming you do start all of the near-term projects kind of on your radar?

More to come, Jed. We're going -- we've been -- I'm really proud of our management team. And I think you can see there's been a lot of progress made throughout the year and into this quarter. And we are running pretty fast. We are going through that process right now of the annual budgets and our strategy. And as part and parcel to that, we go through various plans based upon starts that -- what does that relate to with the way of dispositions et cetera, et cetera. So it's a little premature.

But I think I can say that -- or I will say that if you take a look at our track record of dispositions and development, they've had -- it's kind of been the right and left hand. And we kind of continue to see that as a very important part of our funding strategy. We're not going to get out over our skis. I'm too old be doing that.

Okay.

I'll take anybody on a snowboard or skis going down a ski hill. I'll gladly challenge anybody. But, we're going to be prudent We're just going to be prudent and keep doing what we do well, executing on our development, building first-class products that people want. Continuing to be the leader in sustainability, continue to have strong balance sheet and continue to be conservative.

Okay. That's helpful. And I guess just sort of hypothetically speaking on a disposition, do you see non-core sales or more JVs of stabilized assets as being kind of the preferred way to go as you look ahead?

You know, we're kind of agnostic. We -- I -- somebody once said don't have a mother fixation about your assets, and we don't. We give birth to these things, we love them. But to us, they're all an ends to a -- or a means to an end. And we'll -- I just don't want to get specific because I don't want people to run off and say Kilroy said they're going to do this and do that. We don't have that plan in place yet.

We obviously look at a lot of different assets. We go through the portfolio every year. Nothing is a sacred cow. We look at things on the basis of -- for debt to EBITDA reasons and all the rest. And we're just going to -- give us a couple of months to go through that process.

Okay, fair enough. And then I guess last one, sort of a jump ball for you guys. If you had to rank leasing demand in your markets based on how things feel currently, kind of going up and down the coast in your core markets, how would you rank-order those?

Meaning, which markets are the strongest and which markets are the least strong?

Yes.

In part -- are we talking about office or are we talking about resi or are we talking about life sciences?

Let's talk office and life science together, let's say.

Sure, Jed. You take office and Tracy can take life science. How's that?

You know, I think -- you said jump ball; I think it's a horserace right now between Seattle and San Francisco. Seattle continues, as John said earlier and we talked about, to really come into its own now in terms of companies moving in from the outside. I would say that after that, Silicon Valley is in there somewhere and then LAA and San Diego, is how I'd rank it.

Jed, this is Tracy Murphy. I'll just jump on Rob's comments. I, generally speaking, share the same sentiment. But San Francisco and Seattle continue to be very strong. San Diego tends to or has trended in terms of demand kind of outpacing in terms of life science demand. But tenants seem to just be generally more proactive in life science based on limited supply. So, very healthy across all three life science markets.

Okay, great. Thanks again.

At this time I am showing no further questions in queue. I would 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. Bye.

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