Kilroy Realty Corp (KRC) 2017 Q4 法說會逐字稿

Good day, and welcome to the Fourth Quarter 2017 Kilroy Realty Corporation Earnings Conference Call. (Operator Instructions) Please note, this event is being recorded. I would now like to turn the conference over to Tyler Rose, Executive Vice President and Chief Financial Officer. Please go ahead.

Good morning, everyone. Thank you for joining us. On the call with me today are John Kilroy, Jeff Hawken, David Simon, Heidi Roth, Tracy Murphy, Rob Paratte, Eliott Trencher and Michelle Ngo.

At the outset, I need to say that some of the information we will be discussing is forward-looking in nature. Please refer to our supplemental package for a statement regarding the forward-looking information in this call and in the supplemental. This call is being telecast live on our website and will be available for replay for the next 8 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 fourth quarter and the year, Jeff will discuss conditions in our key markets, I'll finish up with financial highlights and a review of our initial 2018 earnings guidance that was published yesterday in our earnings release. Then, we'll be happy to take your questions. John?

Thank you, Tyler, and hello, everyone. Thank you for joining us today. I'll address 4 topics in my comments this morning: First, a review of 2017; second, an update on our key development projects; third, our recently completed acquisition of Oyster Point Tech Park; and fourth, goals and objectives for 2018.

2017 was another year of strong performance at KRC. We delivered excellent results across all areas of our business and continued to create value in our operating and development platforms that will drive future earnings and dividend growth. We turned approximately 2.9 million square feet of leases, driving occupancy in our stabilized portfolio to 95.2% and securing long-term, high-quality tenants for more than 60% of our under construction office projects. We stabilized Columbia Square. The property's office space is now 100% leased. We did not make any building acquisitions in 2017, and instead focused on creating value through our development pipeline in the disposition of non-core assets. We commenced construction on 333 Dexter, an approximately $400 million office project located in the South Lake Union submarket of Seattle, one of the country's best-performing submarkets where Class A vacancy is just 4.1%. We acquired a land site in the Little Italy section of San Diego, a terrific urban neighborhood that offers the potential for significant value creation. We generated $187 million through our capital recycling program, selling 11 non-core properties and a land site in the San Diego. We increased our dividend another 13.3%, bringing the 2-year increase to 21%. We continue to strengthen our balance sheet and lower our overall cost of capital. We closed -- we raised close to $675 million in new equity and debt, redeemed approximately $700 million in more expensive debt and preferred stock and expanded our unsecured credit facilities to $900 million. And finally, throughout the year, we continue to build our enterprise capabilities. We added key personnel to our already strong management team, deepening our expertise in the pursuit and execution of our current and future development portfolio and including our projects in the life science area.

Now let me review the fourth quarter, which was led by strong leasing activity. We signed leases totaling more than 1.4 million square feet in the quarter, putting a meaningful dent in expirations occurring over the next 12 months and securing a top quality tenant for the entire office portion of The Exchange at 16th. In our stabilized portfolio, we signed new or renewing leases on 678,000 square feet. Rents were 15% higher on a GAAP basis, and excluding a 1-year lease extension in Los Angeles, 18.3% higher on a cash basis.

The largest executed lease in the stabilized portfolio was a 10-year, 207,000 square-foot transaction with Okta for all of Delta Dental's 188,000 square feet, plus an additional 19,000 square feet at our 100 First Street office property in San Francisco SOMA District. This lease removes a key 2018 expiration and was executed well before Delta Dental's move out at the end of May.

Cash rents were up 27% on a GAAP basis -- cash rents were up 27%, GAAP rents were up 51%. In addition, Okta has a must-take on our additional 48,000 square feet in the building that will become available in 2020. Tyler will provide more color on occupancy in his section.

Moving to our development program. As we discussed in our last quarter's call in October, we signed a 15-year lease with Dropbox for 100% of the office space at The Exchange, our 4-building, 750,000 square-foot office and retail development project in San Francisco's Mission Bay neighborhood. It was the largest single Class A commercial transaction ever completed in the city. The size and churns of this lease are indicative of the robust market demand for this type of creative, collaborative and sustainable workspace design.

With The Exchange fully leased, we commenced construction in January on the first phase of Academy & Vine, which will follow Columbia Square as our second mixed-use project in Hollywood. The first phase of development includes the project's 306,000 square feet of office space, 24,000 square feet of retail and parking and site work for the overall project. The anticipated completion date is 2020, and total incremental spending for Phase 1 is projected to be $190 million. Hollywood continues to benefit from strong market fundamentals of low supply and strong demand.

Market strength is not only being driven by growth and content creation from Apple, Netflix, Facebook, Amazon and others, which have all announced plans to invest billions, but also by small and midsize companies across various industries. Phase 2 of Academy & Vine is a 200-unit residential tower that has a projected total incremental spending of $150 million. We're currently evaluating the timing for this phase.

To summarize our development program, we now have 5 projects under construction, The Exchange, 100 Hooper, Phase 1 of One Paseo, 333 Dexter, and Phase 1 of the Academy & Vine. All projects are on schedule and budget. Together, they total just over 2.1 million square feet of office space, 120,000 square feet of retail and 237 residential units and represent a total estimated investment of $1.7 billion, with remaining incremental spending of $800 million. We expect to generate over $120 million of NOI from these projects, which represents a 25% growth in our company-wide NOI from 2017.

With respect to the remaining residential phases at One Paseo, our intent is to start the 371 units over the course of the next 6 months. The remaining incremental spending for these units is approximately $110 million.

Lastly, we continue to focus significant effort on our entitlement work at the Flower Mart project in San Francisco and the recently acquired Little Italy project in San Diego.

Before I move to our 2018 key objectives, let me review our most recent acquisition, Oyster Point Tech Center. Yesterday, we completed the acquisition of 3 2-story lab buildings for $111 million in an off-market transaction. The 3 buildings total 146,000 square feet and are located in the Oyster Point submarket of South San Francisco, a leading hub for the biotechnology industry and one of the strongest life science markets in the country. The project is approximately 80% leased to strong credit companies and generates a mid-6% yield upon stabilization.

We were attracted to this acquisition for several reasons. In addition to a strong cash return upon stabilization, it provides the potential for significant redevelopment over time. Also, as most people know, we have a recorded option on the substantial development opportunity in the Oyster Point submarket. The Oyster Point Tech Center is adjacent to this opportunity and could provide significant strategic benefits over time. Under confidentiality, we cannot discuss the details of the development opportunity, but we are making good progress and we expect more announcements on this throughout 2018.

Let me finish with a quick summary of our key 2018 objectives. They include: Making significant progress on our 3 remaining large 2018 expirations; ensuring solid execution of our development program, including delivery of core and shell at 100 Hooper in the spring, and The Exchange on 16th in the second quarter; securing entitlements on our future development opportunities such as the Flower Mart; continuing to recycle capital. We are focusing at -- we are forecasting asset dispositions of approximately $250 million to $750 million, with a midpoint of $500 million to fund our development program; and finally, keeping our balance sheet strong with conservative leverage and a conservative debt-to-EBITDA ratio.

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

Thanks, John. Hello, everyone. I'll begin our market review in San Francisco, which continues to show strength. Large leasing deals totaling almost 4 million square feet set a new annual record with 18 deals greater than 100,000 square feet in 2017. Venture capital funding saw the second highest inflow for the region since 2011, and subleasing space was at a healthy 1.8 million square feet. According to JLL, there is 8.2 million square feet of demand from tenants in the market and there's currently only one contiguous block of Class A space above 100,000 square feet available south of market. Class A direct vacancy rates in San Francisco SOMA and South Financial Districts were 5.3% and 7%, respectively. Vacancy was 1.9% in Mission Bay and 2% in South San Francisco. And in Silicon Valley, Class A direct vacancy was 9.5%.

We are currently 99% leased in the Bay Area and our in-place rents for the region are approximately 27% below market. In the Greater Seattle market, strong economic fundamentals continue to drive leasing. 2017 experienced a record year in net absorption with 4.1 million square feet across the market, bringing direct vacancy to 8.9%. Investment activity also increased with 2.8 billion trading hands with a price per square foot high of $925. Class A direct vacancy in South Lake Union is 4.1%. In Bellevue, it is 3.8%. Our Seattle portfolio is currently 95.7% leased and our in-place rents were approximately 8% below market.

In San Diego, the market continues to see steady growth, with Amazon now housing 500 of its engineers in the region, and several other large technology companies looking to enter the market. Class A product in Del Mar continues to command the highest rents in the county, and some of the urban submarkets closer to downtown are also seeing rent growth. In Del Mar, Class A direct vacancy was 11.5%, and Downtown San Diego was 7.7%. Our San Diego portfolio is currently 98.3% leased and our San Diego in-place rents are approximately 7% above market.

In Los Angeles, as John said, activity and growth continues to be primarily concentrated in media, entertainment, and technology-related industries. 2017 net absorption was just under 1 million square feet. Class A direct vacancy in West L.A. was 8.2%, West Hollywood was approximately 7.7%, and Hollywood was approximately 9.3%. Our Los Angeles portfolio is currently 94.6% leased, with in-place rents approximately 10% below market. On a portfolio-wide basis, our estimated average in-place rents are 14% below market.

As we have discussed in previous quarters, we have 4 large lease explorations in 2018 totaling 723,000 square feet. To date, we have backfilled approximately 30% of that space with the Okta lease and a smaller deal in San Diego. While we do not want to comment on specific deals until they are signed, we are seeing good activity on the remaining space with roughly 850,000 square feet of tours and active negotiations. We hope to have more good news to report on our progress in subsequent quarters.

With respect to Bridgepoint space in San Diego, we now plan to renovate and modernize the property upon lease expiration in the third and fourth quarters of 2018, which will include taking the project out of service.

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

Thanks, Jeff. FFO was $0.85 per share in the fourth quarter, which includes $0.06 related to the early redemption of the senior notes. The $0.06 includes a $0.05 charge on extinguishment of debt and $0.01 of additional interest expense and double carry. In addition, FFO per share $0.015 benefit from a one-time property tax reassessment. For the year, excluding the one-time charges from the preferred and bond redemptions, FFO was $3.53 per share. Same-store NOI was largely unchanged in the fourth quarter on both a cash and a GAAP basis. For the year, same-store NOI was up 3.2% on a cash basis and 1.1% on a GAAP basis. We ended the year with occupancy of 95.2%, higher than our guidance, which was driven largely by the commencement of the 152,000 square foot Amazon lease at Westlake Terry in Seattle in mid-December. While commencement of the lease had a big impact on occupancy, the contribution to FFO was approximately $200,000.

Moving to the balance sheet. We completed a number of transactions during the fourth quarter that have positioned us well for the new year. In November, we repaid $124 million mortgage note at par. The debt encumbered to property is part of a venture and the partners repaid their respective shares. In December, we raised $425 million of 7-year unsecured senior notes at 3.45%, and redeemed all of our $325 million 4.8% bonds that were due in July 2018. Also, in December, we issued $17.5 million of common stock through our ATM program at a weighted average price of $75.40.

As forecasted, we borrowed $75 million against $150 million unsecured term loan facility, the first of 2, 6-month delay draw option. With these transactions, including funding of the $111 million acquisition in Oyster Point that John discussed earlier, the dispositions we completed last year as well as the planned disposition this year, we will have secured sufficient capital to fund the projected 2018 spending on our development program. We also retained substantial financial flexibility to act on unplanned opportunities that may arise. We currently have $755 million available on our $900 million credit facility, which is expandable to $1.5 billion under an accordion feature. We also have a large unencumbered portfolio, significant initial debt capacity, no 2018 debt maturities and very limited floating rate debt. Our debt-to-market cap is in the mid-20s, our debt-to-EBITDA is approximately 5.6x, pro forma for the Oyster Point Tech Center acquisition.

Now let's discuss our earnings guidance for 2018 that we provided in yesterday's earnings release in more detail. To begin, I'll remind you that we approached 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. Any significant shifts in the economy, our markets' tenant demand, construction cost, and new office supply going forward could have a meaningful impact on our results in ways not currently reflected in our analysis. Projected revenue recognition dates are subject to several factors that we can't control, including the timing of tenant occupancies.

With those caveats, our assumption for 2018 are as follows. As always, we don't forecast potential acquisitions. As John discussed, capital recycling remains a key focus for us this year and our current target range for dispositions is between $250 million to $750 million, with a $500 million midpoint. We anticipate 2018 development spending under our current program to be approximately $500 million. With respect to the Dropbox lease, as we reported last quarter, we're forecasting no FFO contribution in 2018. With respect to the Adobe lease at 100 Hooper, we're projecting revenue recognition in late fourth quarter.

We expect year-end office occupancy to be in the 94% to 95% range. The decline from the reported year-end 2017 occupancy of 95% will be driven largely by one of the large San Diego lease expirations and the Bellevue lease expiration. The other 2 large expirations are not expected to impact our year-end occupancy as follows. The Okta lease at 100 First backfills the entire Delta Dental lease expiration occurring in the second quarter. Okta is expected to take occupancy in phases, starting with 19,000 square feet in 2Q, with the remainder of the space phasing in at the end of the year. On the Bridgepoint lease, a 300,000-square foot space, we expect to take the 2 buildings out of service upon lease expiration to modernize and upgrade the properties. Given that the project will be out of service, it will not be included in our year-end occupancy calculation.

We project office same-store cash NOI growth to be between flat and 1%, given the time it will -- it is projected to take to release large expirations. From a 2018 FFO perspective, we expect the impact from the expirations to about $0.10 per share negative. The impact from our projected disposition can be about $0.15 per share negative, subject to actual timing. The impact from development deliveries to be about $0.08 per share positive, and the impact from same-store financing and other factors to be about $0.12 per share positive. Taking all these assumptions into account and adding them to our normalized 4Q run rate brings us to our initial earnings guidance for 2018 of $3.45 to $3.65 per share, with a midpoint of $3.55 per share.

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

(Operator Instructions) The first question comes from Craig Mailman of KeyBanc Capital Markets.

Tyler, maybe on the dispositions, could you give us a sense of kind of anticipated timing in the guidance, is it more front-end loaded, back-end loaded to get to that $0.15? Then, maybe just a makeup of it, is it going to be all non-core or could it include some JVs of kind of lower cap rate assets?

Well, I'll take the first part of that and maybe John can take the second part of that. But from a timing perspective, we're modeling midyear, maybe a little bit later than midyear into the third quarter.

Yes, Craig, on the makeup, I don't want to get too specific on that but you've seen us sell off the assets that we thought didn't have the legs for the future or didn't have as high a pecking order in kind of the strategic sense of location. We'll continue to do that. We're going through an analysis right now, as we regularly do every quarter, about our portfolio. And I really can't get too specific, but we could end up doing some ventures. We certainly are going to do some dispositions. Whether some of that is core remains to be seen. More to come. It's early in the year.

That's helpful. And then, just on Bridgepoint being taken out of service, could you give us a sense of how much capital you guys think you would need to spend on that ultimately and maybe where a stabilized return could come in?

Tyler, you want to handle it?

Yes, on the capital side, there's a couple of components to it. One is the modernization of the ground plane and the lobby areas and so forth, and we're roughly at $7 million to $10 million for that component of it. And then, there's going to be TIs and leasing conditions, obviously, to release it. And the space was -- part of the space was formerly a school, and so we'll be upgrading that school space to modern office space. And so to be determined what the TI packages are going to be. But overall, in the long run, if we get it fully released, it could be as much as $35 million, $40 million.

And just from a same-store perspective, when do you think this ultimately comes back in?

Probably mid -- well, it depends on leasing, obviously. But I mean, with the lease up plan sort of midyear next year.

Okay. And then, just lastly, John, you guys bought some more life science this quarter; have the option for the site next to it. How big should we expect this could become as a part of the portfolio?

The portfolio is moving around a little bit, right, with dispositions and development and so forth, so it's hard to give you a specific answer to a nonstatic environment. But right now, I think, it's pro forma with all of our development to be somewhere in the 20% range.

The next question comes from John Guinee of Stifel.

John Guinee here. A couple of comments. Looks to me, Tyler, like Bridgepoint's about a $47 a foot gross rent. When you put in $35 million to $40 million all-in, is that $47 still achievable, or will it be higher, or will it lower for the next tenant? And then, for John, looks like Oyster Point's about $780 a foot. Could you sort of elaborate on $780 a foot and how much of that may be attributable to future development and how much is the existing bricks-and-mortar?

Yes. John, it's about $760 a foot.

$760. Sorry.

And as we commented, we think we're in the mid-6s with leasing of the balance of the space. I can't get into some of the strategic values that we think we -- accrue to us in regards to the adjacent development property, for the reasons we mentioned before, until we can announce that officially. All we can say is we have options and whatnot. But we think the whole is greater than the sum of the parts, if you will. So we think there's some real value there. There's also the ability to significantly expand that site. It's only 146,000 feet today. And we think it can be multiples of that in the future. So hopefully, that addresses your question.

And John, on the Bridgepoint question, I mean, we don't really want to get into -- we're obviously negotiating leases with tenants, so we're not going to comment on where we think rents are, but we think the incremental return on investment makes sense.

So is it a roll up, or a roll down on rents, just big picture? And then...

Well, the Bridgepoint -- given the length of the Bridgepoint lease and the installations that were in it, as we mentioned on previous quarters, there's a roll down in rent. But given the modernization plan, it's higher than it would be if we didn't do it, obviously.

The next question comes from Blaine Heck of Wells Fargo.

If I'm following your calculation correctly, it looks like the 70.5% margin that's included in guidance might be a little bit lower than recent results. Is that right? And if so, can you just comment on what might be driving the change?

Yes, I mean, we model that with -- we have other property income. In prior years it probably would have moved that margin up. We don't really model that in a budget, so it may be a little bit lower than we've achieved only because we always seem to find some other property income. But there's nothing material changing in the portfolio that's driving that.

Okay. And then, maybe more broadly, I guess, what are you using on the expense side? Are you expecting kind of outsized or abnormal increases in expenses this year that might be hampering same-store NOI, like you've seen in the past couple of quarters? Or should we expect that to level out?

Yes. No, I don't think we're expecting any large increases in expenses. The typical 3% to 5% type range.

Okay. And then, last one for me, maybe for John or Jeff, there's been some concern that the Valley has softened given some new supply and increasing sublease space. Just wanted to get a little bit more color on what you're seeing out there in the Peninsula and how you guys feel about your exposure in those markets?

Blaine, this is Rob Paratte speaking. As we said on previous calls, I like to call up the transit effect. And the projects and availability of space that are located along the transit lines, primarily Caltrain, are going to consistently do well. They're going to lease quicker. There is quite a bit of activity right now. There's 27 deals over 100,000 feet in the market right now looking for space. There's 25 deals in the 70,000 to 99,000 square foot range. So again, I think, if you're in Cupertino, Mountain View and Downtown San Jose is having its own resurgence, those projects will do well. And Irvine is delivering their new project and leasing and getting quite a bit of activity. So I'm actually thinking that the value will have a real uptick in the next year, given everything that's going on in the Bay Area and demand for space.

Yes, I'd add to that a little bit that we've said many times before that older product that hasn't been modernized is a tougher road to hoe, I think, given what's going on. The trend has been towards modern facilities that help attract and retain people. And as Rob mentioned, transportation is a huge component of the decision-making. So everything we're hearing from the brokers is that the Valley's future near-term looks pretty bright. We don't have anything underway in the Valley currently.

The next question comes from Nick Yulico of UBS.

So for the expirations and move-outs this year, putting aside what you're doing with Bridgepoint, how should we think about when, in 2019, you could get commencement of some leases on a cash basis for the expirations?

I'm not sure we can give you exact date on that. But Rob, if you could comment on where we are, we've mentioned on Okta, that's -- Okta taking the Delta Dental space. So maybe you could kind of go through the other 3 expirations, what they are, when they come up and kind of the activity level.

Right. So we're working right now in Bellevue on the Valve space, and I don't want to get too specific but we've got substantial discussion going on with 2 different tenants that could take roughly 70% of the space we have available this year, and we get a chunk back in April and then a chunk back later in the year in the third quarter, I believe. So we're very pleased with that. And then, in San Diego, we have the Fish and Richardson space as well as Bridgepoint, which we've mentioned. And in both cases, again, without getting too micro on this, there's really pretty strong activity, and especially so on the I-15 corridor. The talk about the renovation plan we're doing and what that space will become has attracted pretty significant interest.

So it's a little hard to pin it down right now with deals in progress and paper being traded and so forth. And hopefully, we can be more specific next quarter. But we've got great activity in markets that are strong and improving, and it's very encouraging.

Helpful. And then, in San Francisco, you mentioned rents for your portfolio being 27% below market, that's, I think, for the whole SF Bay area. Do you have any expectation on what type of rent growth you might see in San Francisco this year? I mean, seems like there's a lot of optimism in the market, suppliers being picked -- has been leased up. I mean, is this a market that could grow rents 5% to 10% this year?

Nick, it's Rob again. It's really hard to pinpoint what rent growth will be. And the people that pull the data together at the various brokerage firms have different ranges in every firm. What I would say, based on conversation with brokers, boots on the ground people, there's quite a bit of optimism that rents will grow in 2018, given what's going on, on the supply side. There is no let up on demand. And I wish we had more space to lease right now because it's a very dynamic market. And there are some significant tenants in the market right now actually that have just popped up in the last 10 to 15 days. I mean, we're only in February right now, it's pretty amazing.

And then -- and just lastly, in terms of Flower Mart, you talked about working on the entitlements, do you have any latest timeline there?

Well, Michelle, do you have the most recent data -- I'm sorry, Nick, I'm just coming off a case of flu and my head is a little bit heavy. Michelle, do we have that in your stack there?

Yes, I think, Nick, when we talked about last at NAREIT, we said the central SOMA zoning plan would be approved sometime mid this year or so. And we could get the first phase of approvals for our project sometime in early '19.

The next question comes from Manny Korchman of Citi.

In terms of disposition plan, I was wondering how much of that is being driven by portfolio pruning or assets you want to get out of versus capital needs and funding for developments, and any additional acquisitions might think about doing?

Yes, I think, it's natural, what -- it's the same thing you've seen us do for the last 20 years is that we're going to sell things that we think where we have a better use of the capital. I like the idea of selling nonstrategic stuff at 4 and 5s and reinvesting in strategic things, which command higher -- or rather, lower cap rates, higher values and better markets where you're getting returns in the mid-7s, mid-8s. I mean, that, to me, is pretty easy math to do and that's what's driving the bus.

And Tyler, could you just share with us what same-store NOI growth would be on a GAAP basis as well as you've given the cash guidance, could you give GAAP guidance as well?

Yes, I didn't hear the last part of that, but in terms of same-store GAAP for 2018, it's about a point higher than cash, about maybe 1 to 2 points -- 1% to 2% growth. What was the second part of that?

No, that was it.

The next question comes from Jamie Feldman of Bank of America Merrill Lynch.

I guess, sticking with Tyler, do you have an outlook for AFFO or FAD?

Well, we don't provide guidance, but I mean, our payout ratio is expected to be in the sort of the mid-70s ratio. So you can back into that a little bit. We have -- our CapEx estimates are, on a second generation perspective, are relatively equal to 2017 where we're in the low $90 million range. We do have some bigger projects that we, Bridgepoint for one, that will -- that aren't in second generation, but that will increase CapEx on a first generation basis. But from an FFO -- FAD perspective, there'll be some growth, but the CapEx numbers are in that low $90 million range.

Okay. And then, can you talk more about the current leasing prospect at Dexter and The Academy and how those conversations are going?

Sure. Jamie, it's Rob Paratte and I'll David Simon handle Academy. At Dexter, we're just almost getting to the street level in terms of construction. We've been working on the parking structure since June, concrete and everything, pouring, that sort of thing. So there's nothing on the skyline yet. But given that, our activity has been strong. Seattle, as you know, as Jeff and John both said in their comments, is probably the most dynamic market in the country and particularly South Lake Union. And the buildings, the way they're designed, can accommodate a single user, they can accommodate multi-tenant and we're seeing activity on both fronts. And we're very pleased. I was an optimist about Seattle when we started construction and I'm even more optimistic now about it just given what's going on in the market and the energy that's there, both with respect to what you hear from brokers but also just speaking to tenants directly.

How far ahead of time do tenants usually take down new construction in Seattle?

Well, it's changed over time. We've said before on other calls that Seattle is not typically a pre-leasing market, but over the last 2 to 3 years, that's changed where tenants have had to make choices based on growth that they have. So I would say it's improved from being a no pre-leasing market to something where you have a better shot at it maybe. I don't know what percent improvement you could say that is but we're seeing significant activity for uses that are coming up in that 2019, 2020 delivery time frame.

Jamie, it's David. On Hollywood and The Academy, when you think about the Hollywood market, where we were 5 years ago before Columbia Square came in and the Viacoms and the Netflixs and all the ancillary businesses associated with them have now moved in, the activity on Academy now that we've broken ground is continuing to increase. You're starting to see users that, 5 years ago, wouldn't have looked in Hollywood that are now looking at Hollywood. The bigger users, entertainment media dominate the landscape of who we're talking to. So in short, I think, the project is going to be received really well. They know the environments that we create, Columbia Square has been huge success and really well-received. And replicating that kind of environment and that dynamic is very interesting to a lot of big tenants as well as a lot of small tenants. So the pitches and the activity and the meetings in the office are on the calendar and continue to increase now that we've broken ground.

Okay. And then, finally, for me, how do you think about the competitive landscape at Oyster Point? It seems like there are several different developers with entitlements there. How do you think that plays out over the next 5 years or so?

Jamie, it's Tracy. So I think, as it relates to Oyster Point Tech, it's extremely tight from an existing supply standpoint. I mean, we have a little bit of vacancy at that project. Otherwise, there's largely nothing until Phase III delivers their Centennial Towers, which the first tower has been totally leased. The second one will come online later this year and they have a lot of activity in that sort of smaller segmentation of the demand. BioMed's project has broken ground this year and will deliver early '19 is my guess. And then, HCP's Cove, as you know, phases 1 and 2 have been entirely pre-leased, and the third phase has a bunch of activity. So from my standpoint, the supply will be gobbled up before the next project comes online.

The next question comes from Jed Reagan of Green Street Advisors.

Just sticking with the Oyster Point acquisition. You guys mentioned the redevelopment opportunity there. Is that as of right that you could get that higher density? Or would you have to go back for entitlements on that, reentitlement?

Jed, Tracy. So the easy way to think about Oyster Point is it's 150,000 feet today, it's underutilized in the existing 3 building footprint. As of this day, we could more than double it with the existing zoning and density allotted. The existing density though is a lot less than you see in neighboring master development plans that South San Francisco has approved. So with relative ease, I would say, the business friendly South San Francisco city, you could see more on that site.

Safe to say it's a lot easier to get new entitlements and new density in that part of -- the Bay Area than the City of San Francisco?

Yes.

It's like a different world.

Yes.

Interesting. Okay. But that doesn't concern you for the dynamics of that market longer term in terms of just use of supply?

Well, this is something we looked at very, very, very strongly and what you've seen HCP do and now what BioMed's done and, of course, ARE before them, but there's been very strong demand. There's a lot of demand for projects 3, 4 years from now. We've had a lot of discussions with folks, continuing to have discussions for really big requirements. And again, we can't get into the specifics of the property that we have some rights on, but we think we're going to have something that is going to come on stream right at the right time and be the right kind of product, with the right kind of amenities and of a scale that is going to be pretty eye-popping.

Yes, Jed, I would just add to that, keep in mind that the sort of preferred northern end of south San Francisco or the Oyster Point corridor is zoned for a commercial lab and office. The southern half is more industrial in nature, so it's not like all of South San Francisco could be converted overnight to supply, if that's what you're after.

Okay. That's helpful. It looks like the expected cost at Academy moved up about $25 million. I guess, what drove that change? And does that dilute expected yields at all? And maybe just if you can remind us what yield expectations are for that project?

Jed, it's David. So they're -- as all these projects evolve, design and scope changes and square footage grows and it's primarily due to that. So with respect to yields, it's no different than all our development yields in our pipeline, mid-7s to 8%, a little bit higher depending on where things ultimately shake out. But given where the costs are and we haven't baked in our budget and our costs are locked, we feel good about it.

So mid-7?

Jed, let me just add one thing on what David said. Those yields are office, they're not resi. And what we're talking about, what we started now is the office at the retail, so we feel pretty good about where we're going to be on yields. And the resi component, which is about $150 million, it would be the next phase. Obviously, we're not -- we'd love to get 7.5% on resi. I think it's going to be a little bit lower.

Sub-7%?

Yes, I think it's -- I think that if you can get mid-6s plus or minus in resi, that's pretty strong.

Okay. And then, maybe just last quick one for me. So just to clarify, maybe Tyler, is Bridgepoint part of this year's same-store pool then, or has it already been taken out?

It will be out -- it hasn't been taken out yet, but we haven't reported on first quarter. But it will come out as the expirations occur. And I think the first one's in the second -- the third quarter and then the second one is in the fourth quarter -- or they're both in the third quarter, sorry. So yes, it will come out in the third quarter and it will be out at the end of the year.

Okay. So the current same-store NOI growth guidance includes Bridgepoint expirations?

Yes.

The next question comes from Richard Schiller of Baird.

Similar question I have probably for Tyler. Thoughts on funding in 2018 given the ramp in development and the spend on 333 Dexter and The Academy, what does the trajectory look like in the funding sources for 2018?

Yes. So with the dispositions, we're modeling in at midpoint of $500 million and development spending of roughly $500 million. It's heavy on dispositions right now. Obviously, if we do other things, there's debt capacity, there's joint ventures, depending on where the market is, there's equity. But right now, the main focus is the disposition, which ties into the amount of development spending.

Okay. Great. And one smaller cleanup item, the 135,000 square foot lease executed in the 4Q that impacted the lease statistics, can you guys share any more details on this, when does it expire and where is it?

This is Jeff. It was scheduled to expire fourth quarter of '19. It's been extended to the fourth quarter of 2020. But given that we're still in negotiations, we really don't want to comment further at this point.

The next question comes from Rob Simone of Evercore ISI.

Just a cleanup item for me. Tyler, in the past, you've given capitalized interest in G&A guidance, just wondering if you could do that again for us this year?

Yes. On cap interest, it's about 52 -- sorry, Michelle's telling me $50 million to $55 million (sic) [$60 million to $65 million] for the year. It increases over the year, given our spending is up over the year. And G&A is in that $64 million, $65 million range.

This concludes our question-and-answer session. I would like to turn the conference back over to Tyler Rose for any closing remarks.

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

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.