Kilroy Realty Corporation (KRC) Q3 2012 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen. Welcome to the Q3 2012 Kilroy Realty Corp Earnings Conference Call. My name is Beverly, and I will 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 your host for today, Mr. Tyler Rose, Executive Vice President and Chief Financial Officer. You may proceed, sir.

Good morning, everyone. Thank you for joining us. On the call with me today are John Kilroy, our CEO; Jeff Hawken, our COO; Eli Khouri, our CIO; David Simon, our EVP in Los Angeles; Heidi Roth, our CAO; and Michelle Ngo, our Treasurer. 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 7 days, both by phone and over the Internet. Our press 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 an overview of the quarter. Jeff will give you a brief review of conditions in our key markets, and I’ll finish up with financial highlights and updated earnings guidance for 2012. Then we’ll be happy to take your questions. John?

Thanks, Tyler. Hello, everyone and thank you for joining us today. Before we get into the quarterly - KRC’s quarterly activities, I’d like to say on behalf of all of us here at Kilroy that we know many of you and your families and colleagues have been hit with a horrible storm and we want you to know that everyone affected is in our thoughts and prayers. Going back to Kilroy, our forward momentum continues at KRC as we are making significant progress on all fronts. We've signed 558,000 square feet of office leases since the end of the second quarter, at cash rent 7% higher than the prior rent and increased our pipeline of office LOIs to approximately 670,000 square feet. The cash rents on the LOIs are 25% higher than the prior rents. We made significant progress at our 410,000 square foot, 360 Third Street Building in San Francisco, which is now 80% committed, up from 37% last quarter. We executed a letter of intent at one of our Brannan Street Buildings for over $60 per square foot on a full service gross basis, which equates to more than $50 a foot on a triple net basis. Our pro forma rent for that building was in the $30 triple net range. For the first time since 2008, we estimate that rent levels in our overall portfolio are now at current market levels. We reached definitive agreements to sell our entire Orange County industrial portfolio at a very attractive price. We closed the acquisition of a West LA office building, the acquisition of a site in Hollywood for a mixed-use development, and the acquisition of a site in San Francisco for the development of a 27-story office tower. And finally, while we remain cautious about the general macro environment, we are pursuing select additional acquisitions and pre-lease development opportunities that could add to our near-term and medium-term growth. Let me start with some comments about our markets and then I will review our latest acquisition and growing development activities. We are seeing meaningful improvement in all of our markets at varying rates. In San Francisco, there has been a significant increase in traffic with more tours and visible demand and with the bulk of the activity in the 25,000 square foot to 75,000 square foot range. CAC, the large brokerage outfit in San Francisco has reported a continual inflow of tenants into San Francisco as it has become a have-to-have location for knowledge based companies. Given the very limited supply of desirable space available in the SOMA, we have seen rent grow more than 90% on a triple net basis since 2009. Our recent leasing activity is with tenants in a variety of industries, including technology, entertainment, sports, advertising, software, and retail services. After a slower second quarter, the Peninsula and Silicon Valley have rebounded with 700,000 square feet of net absorption in the third quarter, the highest volume since 2001. Brokers are reporting that 2012 absorption should be on track to equal a very strong 2011. Most significant large blocks of quality space have been taken, driving rental rates up more than 34% on a triple net basis over a one-year period. We increasingly see pre-lease development opportunities in the better Peninsula, Silicon Valley submarkets. We expect continued demand and rental growth in the Bay area well into next year and beyond, although it is obviously harder to forecast too far out. The Seattle markets are also performing extremely well, as they are leading the nation in job growth. Vacancy rates are falling and rents are increasing. Southern California is more mixed, although we are seeing a lot of activity in West LA and significant interest in our Hollywood opportunities that we will touch on later in the call. Finally, San Diego has experienced its twelfth straight quarter of positive absorption and we are making significant leasing progress, both in Del Mar and in Mission Valley. Moving to our latest acquisition, in early October we acquired Tribeca West, a 151,000 square foot, 97% leased office complex directly across the street from our headquarters building in West LA. The purchase price was $73 million, and the first year cap rate is 6.3%. The multi-tenant property was significantly improved and upgraded by the previous owners. Together with KRC’s recent Sunset Media Center and Columbia Square acquisitions in Hollywood and our other Westside properties, including Westside Media Center and Santa Monica Media Center, we have created a significant platform of media-related properties in Los Angeles that will cater to KRC’s expanding roster of entertainment-oriented tenants, generating marketing synergies for the company across the region. As we have discussed for several quarters now, core asset pricing has become increasingly aggressive in top West Coast markets. Given current market pricing, we don’t anticipate being able to acquire high-quality core assets in scale at attractive returns. We will continue to pursue the occasional core building, but in general we are primarily focused on value-add and highly accretive development opportunities. We are proceeding with discipline and pursuing opportunities with attractive economic returns in locations with transportation and retail amenities in markets with strong fundamentals and visible demand. We will develop new product that is ideally suited for what the market wants and will pay for. We won’t get over our skis in terms of spec development, and in most cases intend to have significant preleasing before starting a project. Let me quickly review the status of our near-term pipeline that we discussed on our last call. 690 Middlefield, a $200 million, 341,000 square foot fully leased office campus in Mountain View is under construction and on schedule. 333 Brannan Street, a site in one of the strongest sections of SOMA is forecasted to receive final entitlements in 2013. We bought the land at an extremely attractive price and plan to start an $85 million, 175,000 square foot office building late next year that includes all the features, amenities and systems that the tech and media tenants need to accommodate their increased densities. As I mentioned rents have - here are in the $50 range on a triple net basis, 25% above our underwriting. And we have 2 projects that are pending. First, we expect to close on the acquisition of a 100% pre-lease development site in Silicon Valley by the end of the year. We will build a 90,000 square foot office building for a tech tenant under a 10-year lease for a projected investment of approximately $45 million. Second, with respect to the Caltrain adjacent site in Redwood City that we were awarded last quarter, we are working with the City on the development agreement for a 300,000 square foot, $150 million office project. We are on schedule to acquire the land early next year. Now let me review our 2 new fully entitled development opportunities that we have added to our pipeline since our - since last quarter’s call. Both will be state-of-the-market product with unique benefits, have an attractive cost basis and be deliverable in this cycle. In Southern California, we announced earlier this month that we acquired Columbia Square, an historic media campus encompassing an entire city block located in the heart of Hollywood, two blocks from the corner of Sunset and Vine. The 4.7 acre site is fully entitled for the development of an office, retail and multifamily mixed-use project under a 15-year development agreement that includes 3 existing buildings, including the original home of the CBS network’s Los Angeles radio and television operations. KRC acquired this site in an off-market transaction for $65 million and we currently expect to invest an additional $250 million upon full development of all phases. Our plan is to create a mixed-use campus that preserves the historic character, while establishing an entirely new center of gravity for the region’s many entertainment and media companies. Working in phases, we’ll develop the 3 existing buildings, which total about 96,000 square feet, and develop approximately another 500,000 square feet of office, retail and residential space. We are big believers in the Hollywood market, which has received billions of dollars of investment in infrastructure and amenities over the past decade. It offers all the ingredients for the urban ‘live, work and play’ lifestyle with proximity to public transportation, significant rail amenities, retail amenities and housing options. Prospective tenants are telling us that they have a strong interest in the proposed project, given the paucity of alternatives in Hollywood. We expect to commence redevelopment of the historic buildings and initial construction of the office component in early to mid-2013, with completion of phase one targeted for 2015. The estimated investment in the project upon the build-out of all phases, including land, will total approximately $315 million. And in Northern California, just last week we announced the acquisition of 350 Mission Street, a 0.43 acre fully entitled development site located in the heart of San Francisco’s Mission Street Corridor, a premier location for both technology and media tenants as well as traditional users moving from North of Market Street. The site is at the corner of Mission and Fremont streets, in close proximity to BART and immediately adjacent to the new Transbay Transit Center. The property is scheduled to be LEED Platinum certified, the first ground-up development property in the city to receive this designation. We purchased the site for approximately $52 million and we expect to invest an additional $200 million developing a 400,000 square foot, 27-story office tower that adapts our open plan workspace concept to a high-rise office environment. Given that the building is fully approved and the plans are 85% complete, we can start next year and deliver the building in early 2015. This is a rare opportunity for KRC to create a cutting-edge office tower in one of the nation’s hottest office markets at a cost basis that is highly attractive relative to existing Class A properties that have recently sold for over $800 per square foot. And given the scarcity of large contiguous spaces available in this market today, we believe there are strong opportunities to pre-lease a substantial portion of the building. In fact, we are already having multiple discussions with several prospective tenants. The Skidmore Owings & Merrill design features a concrete and glass structure with open floor plates, high ceilings, abundant natural light and energy efficient operating systems. I point this out because these are the features that the high-density usage type tenants, knowledge based companies and collaborative work spaces require. The heightening impact of the building’s prominent location, we are creating a 50-foot open area entry lobby featuring a 40 foot by 75 foot electronic media display, the first of its kind in San Francisco. In summary, the 6 development projects I have just reviewed have the - have an aggregate total investment of approximately $1.1 billion, the estimated total investment per square foot in the mid-$500 range and the average projected stabilized cash returns in the 7% to 7.5% range are very attractive when compared to where market pricing for existing product is today. This is highly accretive to our earnings and creates a significant value for our franchise. We have the team in place, the development experience, and the operational controls of balance sheet to execute on this pipeline. But I also want to reiterate that we are approaching these opportunities with an abundance of caution. We’re developing in phases, as appropriate. We’re strongly biased to starting projects that are pre-leased or offer the potential successful pre-leasing and we’re choosing projects that fully leverage our original operating platforms, providing a return on investments, we’re making a talent in local market experience. Now, before we move on to Jeff’s market review, let me give you some color on the sale of our industrial portfolio. We are selling the portfolio in 2 tranches, are including our largely vacant Camarillo buildings in the sale. We expect both transactions to close by the end of the year, generating gross proceeds of approximately $355 million. Property dispositions and capital recycling remain important parts of our business strategy to create long-term value. As we have mentioned on previous calls, we expect significant additional sales in the next year or so. All in all, it remains a very exciting and active time for us at KRC. Our core real estate markets are for the most part experiencing steady economic improvement, positive year-over-year job creation, and growing demand for high-quality workspace. We’re seeing general improvements in rent levels, strong growth in the highest demand locations and an increasing willingness among large organizations to once again make long-term real estate commitments. These factors should help drive internal growth over the near-term, while our development activities will drive external growth over the medium to longer-term. Our visibility and credibility as a leader in West Coast commercial real estate is driving more opportunities into our path. We’ve built the organizational strength and capacity from Seattle to San Diego to take full advantage of attractive opportunities as they emerge. And we are approaching these opportunities with a financial discipline and focus on long-term value creation that have always defined our core business strategy. With that, Jeff will review our markets. Jeff?

Thanks, John. Hello, everyone. We continue to see improvement across all of our West Coast real estate markets, with San Francisco and Seattle clearly leading the pack. Over the past 12 months, California has added nearly 300,000 net new jobs, a 2.1% growth rate that is significantly better than the nation as a whole. Technology and entertainment capture the headlines, but the state’s economy, economic improvement and job growth also are being driven by additional industry sectors, including professional services, trade, tourism, education and healthcare, and more recently construction. All of our core markets in the state have now experienced positive job creation for 13 consecutive months. Let’s take a look at our activity in each region starting with San Diego. San Diego experienced another quarter of positive absorption in improving fundamentals. Job growth continues at a steady pace, as the unemployment rate at 8.4% decreased 140 basis points over the prior year. We also continue to see declines in availability of large continuous blocks of Class A space in select submarkets like Del Mar and Sorrento Mesa where our portfolio is almost 95% leased. We are making strong leasing progress on the former HP space in Del Mar where we have now signed leases for about 90% of the space. Additionally, 2 weeks ago, TD Ameritrade took occupancy of 5010 Wateridge Drive, a property that’s been in our redevelop portfolio. The stabilized cash NOI from this property is approximately $3 million per year. Finally, our 282,000 square foot Mission City campus is now 94% committed, up from 80% leased a year ago. We are now 88% occupied and 90% leased in San Diego. Orange County office market also experienced significant positive absorption during the third quarter. The region’s 7.1% unemployment rate is now one of the lowest in the state. Our Orange County office portfolio is currently 96% leased. Moving north to the greater LA Metro area, West Los Angeles continues to improve with strong post absorption driven by an expanding entertainment industry. We are seeing modest rent growth in this market. Our South Bay markets, El Segundo and Long Beach, both had positive net absorption in the quarter. We are now 96% leased on a combined basis in these 2 markets. Along the 101 Corridor, we are 88% leased in our Calabasas properties and 91% leased in our Thousand Oaks property. In Hollywood, we are seeing a significant amount of interest in our Sunset Media Center and Columbia Square projects. There is about 1.5 million square feet of competitive product in this market, and it currently has a direct vacancy of 6.6%. Sunset Media is 87% leased. San Francisco remains the standout market performer, both regionally and across the country. The unemployment rate is one of the lowest in the nation at 6.5% and exhibits one of the strongest job growth rates, about 3.1% from the prior year period. Against the backdrop of a strong 2011 absorption year, which saw technology tenants absorbing more than 1 million square feet year-to-date activity, is a healthy pace, with more than 700,000 square feet absorbed by technology tenants. According to Jones Lang LaSalle, there are more than 85 technology and media tenants representing 2.5 million square feet of current demand in the market. Our San Francisco Bay area portfolio now represents approximately 32% of our pro forma NOI, including the development we discussed. Overall, our stabilized San Francisco properties are 95% leased and our Menlo Park property is 80% leased and 84% committed. We see similar activity in Seattle, which has an unemployment rate of 7% and has outpaced the nation in terms of job growth at 3.4%. We continue to see knowledge based tenants aggregate in both Bellevue and Greater South Lake Union, which offer significant amenities and transportation options. The strong demand has driven direct vacancy rates down to 10.9% in Bellevue and 5.6% in Lake Union in the third quarter. Our overall Seattle portfolio is 94% leased, and including the Concur lease we signed last quarter, we are 97% committed. Sale generates approximately 11% of our NOI on a pro forma basis. That’s an update on our markets. Now I will pass the call to Tyler who will cover our financial results in more detail. Tyler?

Thanks, Jeff. FFO was $0.57 per share in the third quarter. This includes a one-time non-cash charge of $2.1 million or $0.03 a share for the redemption of our Series A preferred units and approximately 1 penny of acquisition-related expenses. As John mentioned, we have contracts in place to sell our entire Orange County industrial portfolio and the Camarillo buildings. These assets are now accounted for as held for sale properties and you will see that in our financials and supplemental. Our reported occupancy and same-store results exclude those properties. We ended the third quarter with stabilized occupancy at 91.1%; that’s up from 90% at the end of the second quarter. As of today, our operating portfolio is 92% leased. Same-store NOI for the third quarter was down 0.9% on a GAAP basis and up 2.2% on a cash basis. This is a bit lower than prior quarters due to tax refunds we received in the third quarter of 2011 and higher operating expenses in the third quarter of 2012 related to some property damage that I discussed on last quarter’s call. As a remainder, for next quarter, in the fourth quarter of 2011, we received one-time income of $3.8 million related to legal settlements and lease terminations. This will cause us to have negative fourth quarter 2012 same store results. But excluding that one-time income in 2011, we estimate that fourth quarter’s CAS same store growth will be approximately 4%. As John mentioned, we closed one acquisition since our last call. Earlier this month, we acquired Tribeca West for $73 million, including the assumption of approximately $41 million of existing mortgage debt at an interest rate of 5.57%. As of today, we have approximately $115 million drawn against a bank loan. We estimate that upon completion of our pending transactions, the sale of our industrial portfolio, and the payoff of one debt maturity, we will have no borrowings on our line in January, assuming no additional transactions. In terms of developments, upon full build out of all phases, our active development pipeline will have a total projected investment of about $1.1 billion. We have spent over 20% of that amount to-date. Projected development spending in 2013, if leasing and market conditions warrant starting each project outlined above, is estimated to be about $300 million. We have plenty of capacity in our line to fund the entire amount, but we’ll more likely - but more likely, we will use a combination of dispositions, bank and bond debt, and our ACM. Page 25 of our supplemental lays out our active and future development pipeline in detail. We also completed several capital transactions during the quarter. In August we sold 4 million shares of preferred stock at a rate of 6.38%, generating net proceeds of approximately $96 million. We used about $75 million of the proceeds to redeem all of our outstanding 7.45% Series A preferred units and applied the remainder to the balance on our credit line. Also in August, we completed a public offering of 5.75 million shares of our common stock at $46.10 per share for total net proceeds of about $254 million. We used the proceeds to pay down the balance on our credit facility and fund acquisitions. We did not use our ATM during the quarter. Now let’s discuss updated guidance for 2012. To begin, let me remind you that we continue to approach our near-term performance forecasting with a high degree of caution, given all the uncertainties in today’s economy. Our internal forecasting and guidance reflect information and market intelligence as we know it today. Any significant shifts in the economy or markets going forward should have a meaningful impact on results in ways not currently reflected in our analysis. With those caveats, our assumptions are as follows: Based on our most recent acquisitions and the sale of our industrial portfolio, we are projecting an occupancy rate at year-end in the mid-92% range, subject to the impact of any additional acquisitions and dispositions. Our guidance midpoint on last quarter’s call was $2.26 per share. There are lots of ins and outs in our numbers, including the equity offering, the exact timing of the industrial portfolio sale, better operating performance, and the timing of our acquisitions. These all effectively offset each other. We did have this $0.03 non-cash impact from a preferred offering; that adjustment brings the midpoint to $2.23 per share. We are tightening our range a bit; we are providing updated 2012 FFO guidance of $2.21 to $2.25 per share. That’s the latest news from KRC. Now we'll be happy to take your questions. Operator?

[Operator Instructions] Your first question comes from the line of Chris Caton with Morgan Stanley.

Tyler, just wanted to follow-up on that - on the balance sheet strategy as you ramp development expenditures. Will you look to fund things kind of on a just-in-time basis or might we see you take actions ahead of expected development expenditures? And so will we see you keep the line as low as possible, or how can we expect the timing of some of these sources of capital?

Yes, I mean it’s a combination. I think some of it will be funded over time. Obviously the ATM can be used effectively for that, but if we’re going to do a bond deal, usually you need to do a minimum of $250 million and make it index eligible. So we might do a bigger transaction earlier on, basically pre-fund a bit of it. Some of it depends on the market; some depends on when we start these projects. $300 million I mentioned again assumes that everything gets started. So that’s - the timing of that is unclear. And then as I mentioned, the dispositions will fund hopefully a significant portion of that as well. And that always takes time to get closed, but that could be later on in the process, later on next year. But - so I know I am not definitively answering your question, but it’s a combination of all those things.

Thanks. And then maybe just for John on development, driving down the 101 and then 280, you see a good amount of development in not just office, but you see football stadiums, you see some owners building their own facilities. What’s happening to construction cost as some of the trades and other resources in the Bay area are getting used out. Do you see cost moving higher? And then the second question is, based on some of the rents that you talked about in San Francisco, you might already be looking at a mid-7’s kind of return on cost with 350 Mission. Would you be willing to kind of take some spec risk there or you really - would you really like to get to land a big tenant before you start there.

Now those are the exact kind of questions we ask ourselves. With - first, with regard to construction costs, construction costs have escalated in some areas, they’ve come down in some other areas, metals has gone up. But we - when we do our development, we get GMP prices, guaranteed max prices from very responsible contractors. We also put in quite a bit of contingency. So we feel very comfortable with our development numbers. But costs have escalated, and particularly in the Bay area where we see more cranes than probably we see most places in the country just because of the Apple’s building their big campus, Facebook’s building their big campus. Google keeps adding to their campus. And of course we’re building some campuses for others and we think we’re going to be building more based upon negotiations we have in way - underway. What’s clear is that there is a real flight to quality. And what has gone on, whether it’s in San Francisco, whether it’s in Seattle, whether it’s here down in Southern California in various markets, whether it’s in the Peninsula or the Valley, is that people are really looking at how they attract and retain the valuable labor they need and facilities in the campuses and the amenities in the transportation, all the rest that goes in - pardon me, I’m losing my voice - to a corporate campus or a corporate facility if it’s in a city, are very much focused on right now. And so much of the product - I would say, Eli, you probably know this better than I, but I would say a good 70% of the square footage you see in Silicon Valley is really antiquated to the point where it’s really obsolete and we wouldn’t buy it. So that’s why you see folks reaching out to build new campuses, and this plays right to our strength, Chris, because we’re having a number of negotiations on deals like the Synopsis deal we announced earlier this year, the $200 million dollar deal in - at 690 Middlefield. To your second question, 350 Mission which is - Mission and Fremont as you know, that’s the old bird in hand versus 2 in a bush and I don’t mind taking some spec risks on that project. But I can tell you that in the - I have been to San Francisco 2 times - 3 times in the last week since we announced this deal and I’m going again tomorrow and most of the meetings I’m having are with major users from a diversity of businesses, not just technology, that are very interested in that building; it seems to be the exact right kind of size for people. And most of those discussions are for the full building and I’m very bullish on how we’re going to do on that building. There is one side of me that says wait and build into a market that I think is going to increase. On the other hand, I think we can build that thing and be pretty much in the mid-7s on a return on cost basis on a - in a pre-leased nature. And if we could do that then I am probably predisposed to doing a pre-lease. More to come.

Your next question comes from the line of Josh Attie with Citigroup.

Can you talk about where you want your leverage to be kind of longer term? I know historically you’ve targeted kind of 35% to 40%. As development becomes a bigger part of the business, do you still feel comfortable with that range?

Yes, Josh, our leverage historically was in the high 30% to 40% and over the last couple of years we’ve brought that down into the mid-30s and even the low-30s. And I think we have made some comments would even drive - like to drive that lower. I think that’s more of a longer-term goal. I mean, given our development activities, we would like to keep leverage on the lower end. But we’re comfortable where we are now and we've run our numbers on a leverage-neutral basis, assuming - in the mid-30% leverage. So it’s somewhere in the mid-30s and may be lower over the longer run, but we don’t have any immediate desire to get down into the 20% range, for example.

Okay. And dividend coverage got better this quarter, but it had been pretty tight. As you look out the next couple of quarters, where do you see dividend coverage and this CapEx start to moderate to the point where it’s in the low-80s?

Yes, in the third quarter we have actually fairly low recurring capital expenditures, and so we covered fairly easily. In the fourth quarter, our - we expect our CapEx to pop up a little bit with some of the TIs that we are putting in place and with some of our leasing. So, we’re going to be right on the edge of covering in the fourth quarter. We think we’ll still cover. But then as - we’ve talked about this on calls over the last year or so. We’re getting to the point now where we should be covering consistently in the next year. So that’s our goal and that’s what we’re seeing in our numbers.

And just my last question, you talked about asset sales next year to help fund some of the development spend. I know the industrial portfolio you have been looking to sell for a while, but what type of assets in the portfolio are you looking to sell? Is it certain markets that you are looking to exit or are there certain types of assets that are non-core to you?

Well, we have a very - this is John, Josh. We have a very disciplined approach to looking at all of our assets literally quarterly, and we have a list. I don’t want to get into specifics, but I can tell you that there is some areas where - in Southern California, where we have some assets, particularly Orange County where we have round numbers, 600,000, 650,000 square feet of office, we have exited the industrial there. I don’t see us building any office there. We may or may not dispose of some or all of those buildings over time. It’s not a condemnation in any way, shape or form of Orange County. It’s just that we’re not a meaningful player there and you’ve got the big Bs, called the airline company that I’ve always respected and have great respect for, but also recognize they have the catbird seat. Down in San Diego, we will develop more product over time, and I’ve mentioned in the past couple of years that I don’t see our portfolio in San Diego growing hugely over time. I see it going up by successful development and I see it then moderating by the disposition of various assets there. I really like the Del Mar area. I really like the Sorrento Mesa area. We’ve got some big development projects that will come on-stream in due course in those areas. The I-15, Mission City, those areas, they may or may not be in the long-term history of the company, so - or future of the company. And then in LA we look at everything. So I think the likelihood is that dispositions will come from Southern California more than Northern California or Seattle at this point. There is still so much rental upside in those points north that we need to focus on rolling our rents up where the opportunity permits itself.

Your next question comes from the line of John Guinee with Stifel.

John Guinee here. In the old days, in San Francisco, they had some very restrictive development, 0.5 million, 1 million - 1 million square feet a year. Is that still in place and is all the product being built going to get done, given those restrictions, if they still exist?

Well, they do have caps with regard to annually and they do have caps with regard to the total amount. I’d have to get you, and I’m happy to send out to you, I’m happy even post on our website if we want to do that what those caps are and how they are - and update them. I don’t have that - just right on the top of my head, John, forgive me. But the - what has been announced and what’s going on right now in San Francisco is you have Foundry III which Tishman Speyer along with J.P. Morgan Asset Management are building, that’s about 280,000 square foot building. On the south side of what will be the TransBay - center there, you have our 350 Mission at - on the other side. That will go forward. We will build our 333 Brannan Street which will start at the end of the year, but that’s geared towards the brick and timber crowd, that’s a 6 story building. And then you have entitled the building that BXP and Hines have joint ventured on, which is the Big Beast. And then you have also entitled, 535 Mission Street which is just west and immediately adjacent to our 100 First Street, which is 100 First & Mission Building. That’s a 27-storied building that is a smaller floor plate, sort of 10,000 square feet, plus or minus floor plates. I don’t know when that gets built. And then you also have entitled - and I don’t know what state of entitlement it is, is 222 Second Street, which is also owned by Tishman Speyer. Other than that I don’t see anything of substance that is scheduled to be built. There are a lot of folks talking about things way downstream that would come on-stream 5,6,7,8, years from now, both mixed-use. Now, when I am talking about office, there will be some condo and apartment things you could build and some retail things that will get built in a city. I am not worried about overbuilding in San Francisco, but with regard specifically to your question on the cap, what I’d like to do is send you that information and if other people want, we’re happy to put it on our website.

Your next question comes from the line of Michael Knott with Green Street Advisors.

John or Jeff, just curious, the mark-to-market now overall is flat. Can you give us a rough ballpark sense of how that would be, Southern California versus everything else? I assume one is negative and one is very positive.

Yes, I can - the - Mike - Michael, I can take a shot at that. I think you are right. San Francisco is up maybe 26%, Washington over 10%; San Diego is down 14%. So that’s where the negative is. LA is roughly flat and Orange County really isn’t that meaningful anymore. So it’s - you are right. Southern California - although LA is flat now, it used to be negative, but San Diego is where we are having the rolldown.

Okay. Thanks. That’s helpful. And then John, can you - or maybe even Eli, I am not sure, can you just talk about maybe any space usage per employee trends that are worth noting in terms of how you are thinking about designing your $1.1 billion of developments compared to maybe what you would have done in the past or where that’s heading.

Well, I think we’ve been way ahead on this trend. And what you’re talking about obviously is densification of space and we’re seeing that across the board. We are seeing density - the greatest density we’ve seen so far is 13 people per 1,000 square feet. That’s roughly 70 feet per person. When I started this business, the rule of thumb was 250 square feet per person or 4 per 1,000. Then it kind of got to 5 per 1,000, and then we began to see 6 or whatever. We as a company, because we work so much with the technology companies, starting with the aerospace companies, and then as they morphed into a lot of the companies you see today have been very focused on providing facilities that accommodate these high densities. And that takes the form of floor loading. It takes the form of the type of height between floors that permit the dense uses, it relates to the amount of window and the penetration of light. It certainly relates to mechanical systems and the capacity to provide air and so forth, obviously power, wattage per square foot. It relates to exiting with your stairways and it relates to your elevators and so forth. It relates to your parking or your public transportation. It’s one of the reasons why we are so focused on building facilities or buying facilities around public transportation because you’ve got - with these densities, it’s very difficult to park them. You need to be able to have access to public transportation. So everything we build is that way. I might add that - I think Kilroy now is, of the public companies, has the highest level of lead in ENERGY STAR certified buildings of any of our peers. In everything we build, in everything we buy with exception of a couple of the brick and timber buildings on Brannan Street in San Francisco, is gold - silver gold, or now we are building to platinum. And that’s another big feature that the technology-based and high density-based companies are very geared towards. So as we have acquired assets and as we have developed assets, we’ve been very focused on the things like transportation and the other things I mentioned. But also, I call it that - we call it here the physicality of buildings, and that embraces all the things I just mentioned. And I think that if you don’t embrace that, if you don’t have own assets that have the kind of physical characteristics and the transportative-related characteristics that the modern workforce wants - and it’s not just technology companies, it’s the typical - it’s the more traditional fire category as well, then I think you may very well find yourself with a wasting asset. Specifically to the financial district users, they have gotten with it. And the way I liken is to, for those of you who ski, you have seen your ski outfits look lot more like snowboarders because snowboarders are cool. Now what’s happened is, office space has become more cool; it’s become more collaborative. And with that it’s greater density, greater breakout areas and all the rest. And what we see, take San Francisco as an example, a lot of the space that’s in the traditional North of Market are for the - was built for the traditional banks, financial institutions, the so-called fire category. Those people, at least when we talk with the top brokers in San Francisco, they say most of those folks are going to end up - and we're already negotiating with some of them on 350 Mission - that they are going to end up reducing by 20% or 30%. Put it this way, they are going to indensify their usage so that it’s 25% of 30% denser, which if it - they hold constant on their employee count, that translates in round numbers to 25% less square footage. If they increase their employee count, they are going to use 25% less square footage per employee. And if you think about it, as rents go up, the - one of the ways to deal with your cost per employee, your - sort of your building or your - your real estate cost per employee and get it in balance is to densify. So we see that as a trend, and we think if you own buildings that are not well-equipped to deal with that trend, you got a problem.

Thanks a lot. That’s really helpful. I guess I’ve been surprised the stock has been somewhat weaker relative over the last month or 2 and it seems like it’s maybe due to a sense among a lot of folks that tech is slowing down or maybe too much risk on development. Can you - it sounds like tech is not slowing down. In fact, it sounds like it picked up on the leasing side. So can you just sort of address that? And then maybe with - in particular on the Hollywood deal, that’s pretty large, can you just try to convince us that that’s going to be a home run for you guys?

Okay. Well, let’s deal with first the tech. In talking with folks, whether they are analysts, whether they’re investors, whether they are - it’s the communication you see regularly that’s published by a lot of different folks, there is this question, is tech slowing? And I am not going to say that - first of all, technology is an extremely broad category. It’s like talking about manufacturing. Just as you have manufacturing of complicated technology products, you also manufacturing of beer cans, I mean it’s - technology is a massively giant category, and within that you have everything from the social media people to the people who make very sophisticated hardware and software and everything in between. We are focused on the companies that have balance sheets, that have - that are making - that make money and that have discipline. And I might point out that we did a little analysis, and it’s a month old or so, but if you take a look at IPO and DC activity back at 2000 versus today, BC activity is about 1/5 and IPO activity is about 1/5. So basically you have lot less money fueling this, although there is still money out there. And secondly, the trend is that you’re not seeing people back in - back in 2000, people had this idea that if some is good, more is better, and too much is just about right. In other words, if our business plan is to do this and it’s going to produce $10 million of profit, let’s do 10 times that much; let’s lease space for 10 times that many employees. And what we’re not seeing now is people lease tremendous amounts of space for future growth. What we are seeing is much greater discipline with people having options or rofos [ph] or that sort of thing in order to deal with growth. In fact, one of the advantages that we’re seeing right now with the number of assets, the 6 or 7 buildings and plus some development in San Francisco is people are feeling very comfortable that we’ll be able to accommodate their growth, if not in the building they are in, then in some future building or some other building that we have. So there is discipline there. And then with regard to growth, what we are seeing is, there has been a lot of talk about the big twitter leases and the Zynga leases and the others, Macy’s, all these things that were several hundred thousand square feet. We are not seeing as many deals that are in the mega category in Downtown, San Francisco as we saw a year or 2 ago. What we are seeing - still seeing several in the above 200,000, more that are wanting product in a couple of years. And I can tell you by the success of our 363rd - Jeff mentioned that we gone from 37% to now 80%, 85% on that 410,000 foot building. We have people standing in the aisle so to speak that are going through that building and touring that building, that need 50, 75, 100, and it’s - a lot of it’s who is who. So we are seeing increased demand. And I think there is been a lot of reports perhaps comparing, is this the bubble of the '80s or is this something new. I am - been doing this business probably longer than most people in the REIT world, not necessary as a REIT, but in real estate, and I can tell you I do not believe that trees grow to the sky, but I have never seen so much visible demand from such a diverse group of people as I’ve seen in San Francisco and the Bay area right now. And speaking of Silicon Valley and the Peninsula in the better markets there, it’s really a tale of have and have nots, of sort of 2 valleys. If you look at San Jose area, North San Jose, just a nightmare. I mean, just an absolute nightmare. If you look at Sunnyvale, on fire. If you look at Mountain View, on fire. If you look Palo Alto, on fire. Cupertino, I read yesterday by one broker’s report that in Class A office, the vacancy rate is less than 0.5 of 1% - less than half of 1% rather. So we are seeing very strong demand. And I can tell you that we’re having multiple discussions with people about new campuses that are very creditworthy people down in those areas. So I am not seeing it as half full at this point, I’m seeing - I mean, it’s half empty. I’m definitely seeing it as half full. Now, we are very cautious with regard to the point of pre-leasing versus spec. We have never been wanting to build big spec projects particularly in the same market. I mentioned to Chris Caton earlier at Morgan Stanley with regard to 350, I think we’ll get that building pre-leased based upon the discussions we’re having right now with a variety of users. With 333 Brannan I have no problem starting a property without a tenant, but we’re also talking to people right now that want that. With regard to the property down at Redwood City, we won’t get that thing documented with the City until the end of the year or first quarter. We won’t come on-stream with that until probably late 2015, and I think we will have that pre-leased before we start it. And then going down to the Hollywood asset that you mentioned, which is about $315 million upon full buildout, let’s break it down. The first phase is roughly 96,000 square feet, a couple of historic buildings that we’re going to go forward immediately and were already in design and total restoration, historic restoration, they will be better than they ever were to begin with, won’t they David?

Yes.

And we are already dealing with a multitude of tenants that want that space. With regard to the balance of the project, David, it’s what, 300,000 square feet in 3 additional phases, low rise office. We already have multiple tenants that we are dealing with for some or all of that space that we haven’t even - we don’t even - we haven’t selected our brokerage team yet. And then with regard to the retail component, we think that gets done just because there is demand in the market. And with regard to the 200-plus or minus units of multifamily, we have got quite a few people that have talked to us that want to buy that. We’ll probably do some kind of a venture with somebody. But the point is, with regard to Hollywood it is as many as 5 phases or it could be accelerated depending upon pre-leasing activity and so forth. But we intend to take a very disciplined approach to that and we think that will be an absolute home run.

Your next question comes from the line of George Auerbach with ISI Group.

John, you mentioned in your comments that you thought the portfolio mark-to-market was about flat now. Any comments or thoughts on 2013 rollovers?

Yes, George, it’s Tyler. We have 1.3 million in rolling in 2013. Jeff, I don’t know if you want to comment on-?

Yes, the 1.3 million square feet, we have about 40% of that that is either in advanced negotiations to be signed or in LOI. So we felt really good about our activity so far in 2013. Like I mentioned in last quarter, we have one large lease, 130,000 square feet that we’ve already - have an LOI for that space and then we have one other property that have a fair amount of activity. And then I think I also mentioned that we did a large transaction in Seattle with Concur for 122,000 square feet. So, feel very good about our position and activity so far in our 2013 expirations.

Any comments on prospective lease spreads on those 1.3 million?

For 2013 guidance, we’ll give all the details on that in the next quarter’s call as we normally do.

At this time we have no additional questions. I would now like to turn the conference back over to Mr. Tyler Rose for closing remarks.

Thank you for joining us today. We appreciate your interest in KRC. Have a good day.

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