Kilroy Realty Corp (KRC) 2018 Q1 法說會逐字稿

Good day, everyone, and welcome to the Q1 2018 Kilroy Realty Corporation Earnings Conference Call. (Operator Instructions) And please note that today's 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, Steve Rosetta, 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 first quarter. Jeff will discuss conditions in our key markets, and I'll finish up with financial highlights and a review of our updated 2018 earnings guidance that was published yesterday in our earnings release. Then we'll be happy to take your questions.

John?

Thank you, Tyler. We're off to a great start this year and are particularly encouraged by the strength we continue to see across our West Coast markets. We've reported solid first quarter financial results with both FFO per share and same-store results exceeding our expectations. Across our stabilized portfolio, we've signed new or renewing leases on approximately 300,000 square feet of space that were up 26% on a GAAP basis and 15% on a cash basis.

We continue to backfill our 4 material 2018 expirations ahead of schedule. We re-leased approximately 70% of the expiring space in Bellevue and are making excellent progress on the 2 San Diego expirations. And as we reported on our last call, we commenced construction on Phase 1 of the Academy on Vine, our mixed-use development project in the Hollywood submarket; and acquired 3 lab buildings in South San Francisco's major biotechnology hub of Oyster Point.

Now let me provide some more color. Market conditions are showing remarkable strength across the West Coast region. Generally, we're seeing declining vacancy rates, higher leasing volumes, increased rents, limited supply and increased demand across our markets. The fundamentals are amongst the strongest we've seen in the cycle so far, with big tech and big content creators continuing to grow and the fire category following.

Seattle remains one of the best performing markets in the country. Bay Area fundamentals continued to improve, both on the office and life science fronts, and new supply remains limited. Los Angeles continues to be the recipient of growth from many industries, including entertainment and content creation. And in San Diego, we're seeing the leasing velocity increase over the past 6 months coming from a broad cross section of industries, including defense, technology, life science and the fire category.

The market strength is evident in our leasing success, where we continue to make progress on our 2018 expirations as well as future expirations. As a reminder, late last year, we backfilled all of the expiring Delta Dental space at 100 First Street with Okta. In Seattle, we signed 97,000 square feet of leases so far this year with various tenants at Skyline Tower in Bellevue. The majority of these leases will replace the 111,000-square-foot move-out we had in February by Valve.

Cash rents on the new leases were higher by 59%, and GAAP rents were higher by 86% when compared to the prior lease. In San Diego, we are in advanced discussions to backfill more than half of the expiring Bridgepoint space on the I-15 corridor. Assuming we are successful in completing these transactions, we will have sufficiently -- effectively completed the re-leasing of the Seattle and San Francisco 28 expirations and be well ahead of schedule on the San Diego expirations.

We have also made some tremendous progress on future expirations, including our only 2 2019 expirations that are greater than 100,000 square feet. ISB, an affiliate of Providence Health, a life science tenant at 401 Terry in South Lake Union, signed an early renewal for 141,000 square feet, extending its expiration from 2021 to 2031. In Silicon Valley, we signed renewals totaling 169,000 square feet with 2 life science tenants, both of which were scheduled to expire in 2019.

We received notice that Microsoft will move out of our Westlake Terry building in South Lake Union in 2019, thereby triggering Amazon's must-take for all 125,000 square feet that will now expire in 2030. And at our Stanford Research Park asset in Palo Alto, the existing biotech tenant has signed its 116,000-square-foot lease under the same terms to Stanford University, significantly improving the credit profile of that asset. These transactions on a combined basis will generate rent increases of 14% on a cash basis and 33% on a GAAP basis.

Moving to development. We remain on track with our current construction projects at 100 Hooper. As we've previously reported, we executed a 314,000-square-foot lease with Adobe last year for the entire office portion of the 400,000-square-foot project. We delivered the core and shell to Adobe earlier in the month and anticipate occupancy in phases late in the year. The remaining 86,000 square feet of project is PDR space, and we just signed 2 PDR leases totaling 33,000 square feet, bringing the overall project to 87% leased on a square footage basis and 93% leased on an economic basis.

At The Exchange, we expect to deliver the core and shell to Dropbox in late May. Work also continues at our 3 other construction projects: 333 Dexter in South Lake Union submarket of Seattle; Phase 1 of the Academy on Vine; and Phase 1 of our One Paseo mixed-use project in Del Mar, where we've now leased 51% of the retail space and expect to be over 80% committed next quarter. As a matter of interest, the shops at One Paseo was recently voted best new retail in the region, highlighting the much-anticipated delivery of our One Paseo project.

To summarize, these 5 projects currently total just over 2.1 million square feet of office space, 120,000 square feet of retail space and 237 residential units. Together, they represent a total estimated investment of $1.7 billion, with remaining incremental spending of approximately $700 million. More than half of the office space is leased and on schedule to deliver by year-end. Overall, we expect to generate over $120 million of NOI from these 5 projects.

As we discussed on last quarter's call, in January, we purchased 3 office and lab buildings for $111 million in the Oyster Point submarket of South San Francisco, an acquisition that takes us into one of the most vibrant life science markets in the U.S. today. It is approximately 80% occupied and represents a mid-6% yield upon stabilization. As most of you know, we are pursuing a development opportunity directly adjacent to our new Oyster Point acquisition. We have a confidentiality agreement that prohibits us from discussing details at this time, but we are very excited about this opportunity given the strength of the life science sector as well as this particular location. We expect to be able to provide details on this land acquisition and our development plans at our June 4 Investor Day in New York City.

We're also making progress on our capital recycling goals for 2018. We are in the process of taking to market a combination of noncore and core assets and expect to meet our previously stated objected of -- objective of $250 million to $750 million of dispositions, with closings in the second half of this year.

To summarize, 4 months into 2018, we are seeing rising demand, shrinking supply and upward pressure on rental rates for top-quality properties across our West Coast markets. We have the youngest and most sustainable portfolio geared toward the modern worker and continue to see opportunities to earn strong returns and create shareholder value, largely in developments, and we remain committed to pursuing these opportunities with prudence and financial discipline.

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

Thanks, John. Hello, everyone. Let's begin in San Francisco, where the city's high-tech job growth has increased nearly 40% over the past 2 years, where robust demand and shrinking supply continue to characterize one of the strongest real estate markets in the nation. It was evident in the city's first quarter numbers, with total leasing activity of more than 2.1 million square feet and solid net absorption. Supply has meaningfully decreased with the last remaining near-term delivery believed to be in discussions with a prospective tenant. Given these dynamics, brokers expect rents to further increase.

Class A direct vacancy rates in San Francisco's SOMA, South Financial and Mission Bay Districts, were 5.5%, 8% and 2.5%, respectively. Vacancy in South San Francisco was 2%. And in Silicon Valley, Class A direct vacancy was 7.9%. We are currently 97.9% leased in the Bay Area, and our in-place rents for the region are approximately 26% below market.

It's much the same story in Seattle. Last fall, PwC and the Urban Land Institute predicted Greater Seattle would be 2018's top-performing real estate market in the nation, and it's proven to be true. With a young, educated workforce and twice the U.S. average for science, tech, engineering and math jobs, Seattle continues to experience rising demand for modern workspace while new supply is very limited. Similar to the real estate dynamics of San Francisco, Seattle rental rates are poised to grow even further given the lack of available space and growing demand.

Class A direct vacancy in South Lake Union and Bellevue are currently 3.7%. Our Seattle portfolio is currently 94.7% leased, reflecting the Bellevue move-out in February. Our in-place rents were approximately 8% below market.

In San Diego, the market continues to strengthen. Job growth is positive, and VC funding set a new record. Rents were up 4.7% last quarter across all San Diego submarkets, and there's minimal new office supply in the region. In Del Mar, which commands the region's highest asking rents, Class A direct vacancy was 12.5%, a majority of which is south of the 56 Freeway and not competitive with our product. Our San Diego portfolio is currently 99.2% leased, and our San Diego in-place rents are approximately 7% above market.

In Los Angeles, the evolution of traditional entertainment and media firms into technology-focused techtainment firms continues. The region is attracting entrepreneurial talent, with Silicon Beach now home to more than 500 tech start-up companies in Hollywood and Culver City, now home to the large content creators, including Netflix, Amazon and Apple. Class A direct vacancy in West L.A. was 5%, West Hollywood was 6.2% and Hollywood was 8.1%. Our Los Angeles portfolio is currently 95.5% leased, with in-place rents approximately 9% below market. On a portfolio-wide basis, our estimated average in-place rents are 14% below market.

As John discussed, we are making good progress in reducing our exposure to 2018 expirations. Additionally, with further -- we have further addressed our larger 2019 through 2021 expirations with terrific rent increases on those transactions. Specifically, in 2019, we now have only 3 expirations greater than 75,000 square feet and none greater than 95,000 square feet. All 3 are in the San Francisco Bay Area with rents that are approximately 15% below market.

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

Thanks, Jeff. FFO was $0.94 per share in the first quarter. We were ahead of our internal expectations, primarily driven by lower bad debt expense, lower operating expenses and $0.02 of timing differences related to expenses in G&A.

Same-store NOI increased on both a GAAP and cash basis in the quarter, driven largely by higher rental rates. GAAP NOI was up 5.4% and cash NOI increased 4.8%. Occupancy at the end of the first quarter was 94.3%, reflecting the move-out in Bellevue that John and Jeff discussed earlier.

In January, we used proceeds from our term loan to fund the acquisition of Oyster Point tech center. Earlier this month, we launched a $250 million 8-year debt private placement that includes 3- and 6-month delay draw option. We expect this transaction to close in May and fund in July and October. We currently have $625 million available on our credit facility, which is expandable by $600 million under an accordion feature. Our debt-to-market-cap is approximately 26%, and our debt-to-EBITDA at quarter end was approximately 5.7x.

Before moving to guidance, I'd like to comment on the new lease accounting change that will become effective next year. Under the new rules, all internal leasing costs and third-party legal fees associated with leases will be required to be expensed. Lessors will only be allowed to capitalize contingent leasing costs, such as third-party broker commissions. While this is a noneconomic change, it will both negatively impact future earnings and positively impact our yields. We are working to quantify the impact on our 2019 projected earnings, and we'll have more color to provide next quarter.

Now let's discuss in more detail our updated 2018 guidance provided in yesterday's earnings release. 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 and market intelligence as we know it today. Any significant shifts in the economy, our markets, tenant demand, construction costs and new 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 occupancies.

With those caveats, our updated assumptions for 2018 are as follows. The midpoint of our projected dispositions and ventures remains $500 million. We anticipate remaining 2018 development spending on our projects under construction to be approximately $350 million to $400 million. As we reported on prior calls, we project no FFO contribution in 2018 from the Dropbox lease and revenue recognition from the Adobe lease at 100 Hooper later in the fourth quarter. Given advanced discussions at the Bridgepoint building, we're now assuming that about 50% of the square footage will be leased before Bridgepoint's expirations in July and October.

Under this scenario, we would no longer take the buildings out of service. This new assumption would negatively impact 2018 earnings by about $0.015, cash same-store results by about 1% and year-end occupancy about 90 basis points. But the overall economics of the project will be much improved with shorter-than-projected downtime and significantly lower capital costs.

Given the better-than-expected leasing activity across the portfolio, even with the change on Bridgepoint, we remain comfortable with our year-end office occupancy guidance of 94% to 95%. Similarly, we continue to project office same-store cash NOI to be between 0 and 1%. While including the Bridgepoint campus in the same-store portfolio negatively impacting these results, the better operating performance offsets the negative impact.

Last quarter, we provided initial earnings guidance for 2018 of $3.45 to $3.65 per share, with the midpoint of $3.55 per share. Positive changes to that midpoint included $0.02 positive impact from the first quarter results and $0.035 from better projected operating activity over the rest of the year. Negative changes include the $0.015 from leaving the Bridgepoint buildings in service and $0.025 from the debt private placement. Taking these outdated expectations into account, we are increasing our FFO midpoint to $3.57 per share with the range of $3.49 to $3.64 per share. That's the latest news from KRC.

Now we'll be happy to take your questions. Operator?

(Operator Instructions) And our first questioner today will be Craig Mailman with KeyBanc Capital Markets.

This is Laura Dickson here with Craig. A quick question on the timing differences that you mentioned for other expenses and G&A. How much -- can you quantify that? And how much is going to -- and when those will occur instead?

Yes. It's roughly $0.02, and it's related to professional service fees primarily. And we can expect to see that in the third and the fourth quarter.

Okay. And then just curious about the PDR space at 100 Hooper. Can you elaborate on what that is and the tenants? And how do the rents there compare to traditional office space?

Sure. This is Rob Paratte, Laura. So PDR stands for production, distribution, repair. And it's San Francisco's attempt to keep makers and workers in the city, and Kilroy is a big supporter of that. We're going to have some at The Flower Mart. We have it at Hooper. And the 2 leases that we've signed, one is a publicly traded reprographics and printing company, and it's a relocation and expansion. And the other tenant is actually a really great amenity for the project. Adobe is going to be excited about it. And it's a boutique distillery, food purveyor. So without getting into more detail, but it's going to add life and amenity, which we said we would do at the project, but it will also be additive to the neighborhood. So we're excited about both those. And then with the space we have remaining, we're seeing activity from smaller technology companies that manufacture and create things. So we're really pleased with what we've accomplished so far.

On the rent side -- this is John speaking. On the rent side, they're not -- it's not as high as office space. It's not as highly improved. So it can range, depending upon the type of PDR, anywhere from the low 20s to multiples of that on a per square foot per annum basis. Ours is higher-quality stuff, so we think we're going to do pretty well on it. I mentioned in my comment that we're with less -- or with approximately 55% of PDR to be leased, we're already at 93% of our pro forma income for the property. That's because the office space does rent at a higher space (sic) [price]. But as part of that deal, we actually made possible a 50,000-square-foot facility that's not in our 400,000-square-foot calculation that we were required to do as part of the entitlement that we helped develop and sold for -- at cost to an NGO that provides space at a subsidized basis to craftspeople. So everything that's in the Central SOMA area that has -- that displaces any kind of PDR space, we'll have to reproduce it on site as part of their development. That's now official policy and rules of the city.

And our next questioner today will be Blaine Heck with Wells Fargo.

So great job taking care of some of these move-outs. Now that you guys have backfilled the Delta Dental space and, it sounds like, a good part of the Valve space, can you give us any sense of when we should expect those leases to commence? And is there any contribution in 2018?

This is Tyler. I can take a first crack at that. For the Delta Dental space, Okta is moving in later in the year, so it would be very little contribution in 2018, probably a December timing time frame. And Rob, maybe you can comment on the Valve space.

Sure. The Valve space should be in large part -- so we have the -- we just signed 55,000 feet between 2 tenants, which will be late in the quarter -- fourth quarter in terms of their commencement. And then the remaining space, we have about 34,000 feet. I expect we should have those signed probably by June, July, something like that. We've got a lot of activity. Bellevue is seeing a real uptick in activity over the last 6 weeks or so.

Okay, great. And then just continuing on that vein, can you give any more color on the leasing progress at the Fish & Richardson's space in Del Mar? And I think that was a long-term lease that's expiring, so is there any work that needs to be done at that space?

Yes. On the one building deal that we're working on, there is -- that is a long-term lease. You're correct, Blaine. And there is work that's being done. You'll recall also, we're doing a little bit of a refresh on the project regardless of that in terms of the lobbies and landscaping and that sort of thing. But for the tenant itself, there will be some rework, but they're putting money into the space also. And so that's about 144,000 feet. We have...

That's -- you're talking about the...

The single building.

Yes. Well, you're talking -- he asked about Fish & Richardson.

I'm sorry, I'm sorry. I was talking about -- yes, I'm sorry. And then switching to Fish & Richardson. We have about 54,000 feet of leases that are being negotiated right now. So expect those to be signed fairly shortly.

Okay, got it. And then, John or David, if he's on, we've seen a couple of big deals trade hands in L.A. recently, and there's, I think, more on the market. Can you just talk about your interest in those deals and expanding in that market, in general, outside of, obviously, the development you're doing at The Academy?

Well, yes, we have a number of things we're looking at. We'd like to expand. We think the pricing and the quality issues on some of the deals that have recently trade hands -- we weren't interested. We know those assets intimately well. They just -- we didn't -- we've looked at the numbers. We understand the numbers. We understand what's going on. We understand things -- and others saw things in there that we didn't, so we didn't have any interest, zero.

Okay, that's fair. Last one for me, John, on The Flower Mart. First of all, what's the latest on entitlement there? And then can you give any update on the interest or activity you're seeing around that project?

Yes. Well, let's start with the schedule. So the Central SOMA approval status or time line is -- and all that has to be done through the 4 supervisors here. It's before the planning commission. They are scheduled to vote on the Central SOMA plan for adoption on 5/10 of this year, May 10, and the Board of Supervisors are currently scheduled to then vote for -- hopefully, for approval in mid-July. And assuming that happens, we are expecting entitlements late this year, early next year. And in terms of the Central Subway, which is part of that whole thing, as you know, it's been under construction. It was originally scheduled for -- the official date is completion in late 2019, well before we have The Flower Mart complete. I think, realistically, it's probably mid- to late 2020, but that's not official. In terms of interest, I'm not going to get into specific companies and all that, of course, but we have a lot of interest from the investment community, from the investors in real estate that want to co-invest with us. We evaluate everything. And with regard to tenants, I can tell you that I think we're teed up beautifully for some major tenants. And as I've said for the last couple of years, I think it will be a handful of tenants or maybe one, and obviously, we're going to do some pretty serious pre-leasing before starting. The phasing of that project, we think is the -- well, first phase will be roughly 1.7 million square feet of office, the 125,000 square feet of Flower Mart and roughly 100,000 square feet of market hall, retail, restaurants, et cetera. And then the second phase will come later, which is about 300,000 square feet of office.

And our next questioner today will be Manny Korchman with Citi.

John, maybe sticking to the transaction environment. There's been some press reports of you looking to expand in San Francisco as well, specifically at 345 Brannan as well as the Ferry Building. Maybe you could share your thoughts on both of those assets.

The Ferry Building is a great building. Love to own it. We are not proposing on it. That's a misread. And in terms of whoever published it, I don't know if it's a broker or whatever. We've evaluated in detail. We just don't think there is a moneymaking proposition there for us. With regard to the other building you mentioned, I'm not going to comment on prospective deals that might be in play or not until they're done.

Okay. And Tyler, one for you. Let's say you go down path on the building that John just mentioned or didn't mention. You got Oyster Point, which is a big project. You got The Flower Mart, which is a big project. Understanding that you have some dispositions teed up, how do you think about funding over the next couple of years as a few of those big projects start to come to fruition?

Yes. Well, one of the reasons we did the private placement a little ahead of schedule is we wanted to lock in some funding for some of these future opportunity. So I think we've talked about our disposition strategy of $500 million. We did the $250 million private placement of debt. And we'll continue that same strategy going forward. Some of the projects you talked about in that list won't need money for several years, but we're going to continue the same strategy. And ventures are an option as well as additional debt. And then we've raised equity when it made sense, and we'll do that. We'll obviously evaluate that if that comes up as well.

And the next questioner today will be Jamie Feldman with Bank of America Merrill Lynch.

So you guys sound very positive on market conditions and leasing demand from tenants, I assume, especially for new assets. Is there a chance we could see you do one-off developments that aren't right now on the future development pipeline? I mean, is there other conversations going on for tenants that just need now and want to get started and don't want to wait?

Well, at San Francisco, it's pretty tough, because it's an entitlement game, right? And with Prop M, there's just -- the only thing that you could develop -- there's a couple of projects that have Prop M that have not started that we've looked at, but we're not players. Elsewhere, we have a lot of discussions going on regularly, and we always do, with some of the big tenants. And we've been asked to go into other markets and so forth, and nothing has signaled there. So we have a lot of discussions, Jamie. Nothing is imminent.

Okay. And then can you talk about, just generally, the -- like rent growth in the markets? I mean, what do you think we can see this year across the major markets?

Jamie, it's Rob. Again, just given the strength of the markets, and this is kind of up and down the West Coast, clearly, the West Coast is a technology gateway now, and more and more tech is moving here. It's the world-renowned leader in tech and attracting that kind of talent. So with the limited space availability from Seattle down to San Diego generally, we think there's opportunity for significant rent growth, particularly in San Francisco. So San Francisco, even brokers now are saying upwards of 8%. Seattle, I think would be in the same ballpark in terms of percentage increase in rents. Los Angeles, a little bit more moderate, but I think in depends on the submarket you're in, whether it's Santa Monica and the west side, where conditions are very tight. Hollywood is also poised for, I think, improved rent growth, probably in the 5% range; and San Diego, probably in the 4% to 5% range. Again, very depending -- dependent on the submarket you're talking about.

Yes. Jamie, one other -- this is John again. One thing I'd say is that Rob's talking about sort of the market, the general likelihood of rent increases sort of on average product. And obviously, the modern user is very discerning of the type of product they want, and they're going to pay a lot more for state-of-the-art stuff than they are for generic office space. So that could be many multiples of those rental increases. So we should -- we've always been conservative with regard to projections, and we always like to be surprised by higher rental increases that happen. A lot to be seen. I think it's teed up. When you -- it's classic Economics 101, right? A lot of demand, very little supply, it tends to be a pretty good time to be a landlord.

Okay. And then finally, just more color on leasing at 333 Dexter and The Academy.

Sure. I'll start with Dexter up at South Lake Union. Again, Seattle has a lot of the same market dynamics that the Bay Area has that John and Jeff mentioned in their commentary. We have a significant group of tenants that were prospects that we're talking to, all of which are over 100,000 feet. And in fact, we're able to sort of selectively prioritize those that we're really focusing on and others that are sort of -- we'll continue to talk to. But there are some, just based on the type of tenant, type of business, that we're moving forward. And the project itself is now just getting above grade. So it's going to start coming up on the skyline here over the summer, and we're really pleased with that activity. On Academy, I'd say, in a similar vein. We have 4 to 5 different prospects, some could take the entire project, some could take components of it. And it's just -- it's situated in a perfect location in that Hollywood submarket adjacent to Columbia Square. So a lot of good interest considering we just started in January.

Okay. I mean, are these markets where you just -- you tend not to see the pre-leasing until the building's almost done?

Yes. They've always -- pre-leasing in a lot of markets is a tough sell. But in these markets -- and I don't want to predict when we're going to be announcing things, but the activity that we have on both these developments is as strong as I've seen it.

Yes. Jamie, let me put in context the completion of the shell and core at 333 Dexter is scheduled for the end of the third quarter of next year, and revenue recognition, we forecasted, is the fourth quarter of '20. The Academy, shell and core completion is scheduled for some time in the first quarter of 2020, with revenue recognition in late '21. So what I like is that we're building great product in markets with very little demand, with very little new supply, with big creditworthy tenants out needing space, and rising rentals. It's -- and we've got quite a bit of time, so we're going to try to be thoughtful with regard to how we fill these particular buildings.

And our next questioner today will be John Kim with BMO Capital Markets.

Just sticking with Dexter, given the strength and the upward pressure on rent in Seattle, can you just comment on where rents and yields are versus your original underwriting for that asset?

On rents, rents had historically not been -- they'd been sort of in the low to mid-$30 triple net plus parking, and rents now have jumped to $40 per square foot per annum plus parking. I personally think, if you look at San Francisco, where rents today, on a triple-net basis, are -- for a similar products are sort of in the mid-$60 a square foot plus parking. I think Seattle rent growth is poised to grow pretty tremendously over time. With regard to underwriting, obviously, we've said that we expect to be in the high 7s, low 8s for that area, and I think we'll achieve that.

Okay. And then just given you're maintaining of your same-store NOI guidance, I realize there's a lot of moving parts you may have. But just given your current occupancy levels and what you achieved in the first quarter, what are the components that would cause the internalized decline to be negative for the remainder of the year?

Yes. It's really the expirations, the move-outs that were related to the expirations in our portfolio. So we have -- Valve moved out in the first quarter. We've got Fish & Richardson and Bridgepoint moving out in the summer and the fall. And as someone else noted, Delta Dental moving out in -- or is moved out, and we're not going to backfill that until the very end of the year with Okta. So it's really that profile of expirations.

Which total roughly 725,000 feet.

And what would be your guidance range if the Bridgepoint asset was taken offline?

It was about 1 point higher. So if we hadn't decided to make this change on Bridgepoint, assuming we do this deal, we would have raised our number by about 1 point.

Our next questioner today will be Dave Rodgers with Baird.

On the lab acquisition that you did in the first quarter, going-in yield and stabilized yield on something like that? And is that really just kind of a lease-up stabilized asset? Or is that part of the bigger plan with what you've got adjacent to that?

Dave, it's Tracy Murphy. Yes, our going-in was just over a 3%. We've got 20,000 -- or sorry, 20% vacancy at the project, 30,000 feet in shell condition, which we've got really healthy activity on. So I think our year 2 stabilized rate is 6.3% or 6.4%, something like that. And Tyler can correct me if I'm wrong, but, yes, your observation is correct.

Yes. The bigger play is that it's next door to the property that we, call it, have an option on. And ultimately, we have a plan that those 2 assets working together will be very synergistic. And more to come. Come to our Investor Day. Learn all about it.

And I realize that you have the confidentiality on it, so I don't know if you can answer it. Is that confidentiality with the developer or landowner? Or is that an actual potential tenant?

Yes, I'm not going to comment. We just can't talk about it.

Yes, no worries. And then lastly just down in San Diego on, I think, Bridgepoint and Fish & Richardson, you said 25% potential roll-down in rent. The speed at which you re-lease it and not -- kind of not going through redevelopment, how does that change that math?

The math on the rents is roughly what we have projected, so the rents really haven't moved much. We are having lower on the -- as I mentioned, on the Bridgepoint tenant that, if we complete that deal, we'll have a much lower CapEx, lower TIs and then move in a lot earlier than we had projected. But the rent levels are roughly the same as we had originally talked about.

And the next questioner today will be Jed Reagan with Green Street Advisors.

Just back on The Flower Mart, it sounds like you've got close to 2 million square feet planned for Phase 1. Do you have contingency phasing plans for that project, where -- in the scenario where entitlements are maybe spread more broadly and you get, say, half that amount or less that you could kind of accommodate that?

Jed, I'm not trying to be coy. I just don't want to go down that road.

Okay, fair enough. There's been a push recently to put a repeal of Prop 13 for commercial properties on the ballot in California. Just curious to get your thoughts on how you think that might play out. And can you frame up how a repeal could impact your financials over time, potentially?

Yes. Let me deal with the first point, and Tyler can deal with the financial impact. The last 4 or 5 attempts at this all ended in failure with them pulling -- the people or proponents of repealing Prop 13 pulling it off. Never getting on a ballot, that's what happened this time. Does it come back in 2020? I'm sure 2020 or 2022, somebody will bring it back. The -- politics is kind of a blood sport out here, as you know. You live in California. You got the idiots running the whole place, both sides of the fence, sort of a microcosm of the bigger picture. And so we're going to continue to see stuff like this, and we all got to work to defeat it. And successfully -- we've been successful in that as an industry time and time again, but the crazies are running the joint. Potential impact?

Jed, on the -- yes. On the financial side, it is a difficult calculation because, if it's 2020 or 2022, then it depends on what you own at the time, what are the ages of the properties, what have we sold between now and then, how do you value that. We have a lot of new product that doesn't have a reassessment. So a lot more to come on how that number will shake out down the road. If we were to have it today, a reassessment right now, it's roughly $0.03 or $0.04 a share. That number would grow over time as leases roll. Obviously, it's just the triple net leases and nothing in the State of Washington. So it's a complicated calculation, but it's so hard to predict what it could be out in 2021, 2022, given that our portfolio may be different.

Okay. Appreciate that. Maybe just one other one for me. So about 60% of your office NOI is now in the Bay Area and Seattle. I guess, looking 5 years down the road, do you feel like that proportion stays roughly steady? Or is there a top-down strategy to shift that mix over time?

I've always said that -- I remember when we were all in Southern -- when everything was in Southern California, we used to get asked that question. As we started growing Northern California and Seattle, what do you expect the mix to be? And I said, well, I don't know that I can say precisely because development, dispositions, acquisitions, all the rest affect everything. But I used to say sort of 50% Southern California, 50% Northern and Seattle. Obviously, it's grown in Seattle and San Francisco. They're the 2 best markets in the country. And we've sold off a lot down at San Diego, and we'll be selling off some stuff that will mostly be Southern California-based, right, Steve?

Correct.

And so that will change the numbers a little bit. And then, of course, as we develop our venture, the number is going to bang around. I don't know that there is an ideal number, but we do look at it, and we will continue to look at it and make sure that we're feeling comfortable about it.

And the next questioner today would be John Guinee with Stifel.

David Simon, the other David Simon, Academy and Vine looks like it's coming in at close to $800 a foot to build. That seems to be a lot higher than my recollection of a couple of years ago for Columbia Square. Did -- is that correct? And what's happened to hard costs and land costs in the last few years in your backyard there?

Maybe before we answer that, the one thing to consider here is that the first phase includes all the parking for both phases. And that's all subterranean parking at about $50,000 a space.

Oh, got you. That will make the difference, okay. And then 333 Dexter still coming in under $600 a foot. Any -- did you get that at the low land bases? Or does that land at market come in at $600 a foot?

We bought the land at a pretty favorable basis compared to where things have gone today, plus we've seen construction costs escalate and whatnot. And I think you're going to see -- I used to say you're going to see values go over $1,000 a square foot in San Francisco, and that happened faster than I thought. And I think you're now going to see them -- I don't think it'll be terribly long before you see them at $1,500 or $1,600 a foot in San Francisco. And I think you're going to -- you're seeing trades in Seattle now at mid- to upwards of mid-$800 a foot. And all that stuff is going to be reflected -- as you have construction cost increase and diminishing supply of land and as cities invariably impose more exactions on properties in development, but you're going to see costs continue to go up. So we've got a very favorable cost structure there. They're very efficient buildings, and that's all subterranean parking as well. So that's what's going on.

And our next questioner today will be Rob Simone with Evercore ISI.

John, just a quick follow-up on your commentary around 333 Dexter. Did you say that you guys were budgeting revenue first quarter '20 or fourth quarter '20?

Michelle, help me out. I don't know whether -- I think I said late '21 for revenue recognition on...

That was Academy, I believe.

And fourth quarter '20 for 333.

Got it, okay. So on -- my question then on 333 Dexter, are you guys, because it's a spec project, kind of budgeting a longer build-out period at this point? Because if you're delivering it in the third quarter of '18, it feels like 6 to 9 months to build out and then maybe like 12 months free. You should be looking at booking revenue maybe like the first or second quarter of 2020. Am I thinking about that the wrong way? Or is it just kind of...

No, no. When we underwrite spec stuff, we assume that it's going to take a lot longer to lease up than if we do a pre-lease or a significant lease during construction. We just underwrite it more conservatively, which I think is the prudent thing to do.

Got it, okay. Makes sense. And then, Tyler, just a quick follow-up. On the Bridgepoint impact, just want to understand why if you're re-leasing 50 -- up to 50% of that space versus taking it fully out of service, there'd be $0.01 drag on FFO.

Well, because there's 2 buildings there. So we're -- we would be getting the rent from the building that would be leased. But the other building, which we originally were taking out of service that we'd be capitalizing interest on, now would be staying in service empty until we lease that. So it's that other building that would be the drag.

And this will conclude 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 hope you can join us for our Investor Day on June 4 in New York City. Goodbye.

And the conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.