Good day, ladies and gentlemen. And welcome to the Second 2013 Kilroy Realty Corporation Earnings Conference Call. My name is Alisha, and I will be your coordinator for today’s call. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions) As a reminder, this call 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.

Good morning, everyone. Thank you for joining us. On the call with me today are John Kilroy; Jeff Hawken; Eli Khouri; David Simon; Heidi Roth; and Michelle Ngo. John and Eli are working on some Bay area opportunities and are currently calling in from our San Francisco office. 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 our 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 seven 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 review the conditions in our key markets, and I’ll finish up with financial highlights and updated earnings guidance for 2013. Then we’ll be happy to take your questions. John?

Thank you, Tyler. Hello, everyone and thank you for joining us today. KRC had another strong and productive quarter as economic conditions and job growth continue to show steady improvement across our key West -- key West Coast markets. We delivered another solid quarter in leasing, signing new or renewing leases on 578,000 square feet of space at rents that were 12% higher on a cash basis and 17% higher on a GAAP basis than rents in the expiring leases. We also have approximately 400,000 square feet of in place letters of intent. This leasing including -- included early renewals with both Delta Dental in San Francisco and Microsoft in Seattle, thereby smoothing out near-term lease expirations. Overall, our stabilized portfolio is now 93.2% leased and 90.7% occupied. We also collected a $5.2 million cash payment during the quarter related to the settlement of a claim for property damage that occurred several years ago at San Diego property. We incurred the cost to repair the damage at the time and are just now being reimbursed to those costs. As Tyler will review in more detail later, we do expect to incur some additional legal costs related to this settlement and pursuing additional settlement claims. On the development front, construction remains on schedule and on budget at our four 100% pre-leased San Francisco Bay area projects. These developments total 1.4 million square feet, have a total projected investment of $810 million and an average projected initial yield in the low to mid 7% range. We expect the first delivery in the first -- in the fourth quarter. These amounts reflect a 27 storey project at 350 Mission Street, as we previously reported, we are making good progress with the city to increase the entitlements by three floors, which salesforce would lease.…

Thanks, John. Hello, everyone. As John noted, our key markets all exhibited economic growth and improving commercial real estate fundamentals last quarter. From Seattle South to San Diego, regional unemployment rates in our submarkets continue to decline, while job growth remained steady. Across California, unemployment has now dropped nearly 380 basis points over the last three years to 8.5%, and the state has added more than a quarter of a million new jobs over the last 12 months. Seattle continues to outperform and now has unemployment rate of 5.3%. Real estate fundamentals also continue to strengthen with Bay Area rating standout. In San Francisco, the office market absorbed over 175,000 square feet in the second quarter bringing the year-to-date total close to 500,000 square feet. Vacancy rates in SOMA declined for 12 consecutive quarter and Bay area median home prices rose 30% year-over-year. We executed 188,000 square early renewal with the Delta Dental at our 100 First Street building pushing out the expiration three years to 2018 and increasing our cash rents by 26%. We had a tenant move out at our 250 Brannan Street property during the quarter but already released that space for September 1 occupancy. Silicon Valley rents have now surpassed 2008 peak levels and are now the highest since 2001, primarily driven by the submarkets of Palo Alto, Mountain View and Sunnyvale where each has experienced market rent growth of more than 55% since 2010. We are currently 94% leased in the Bay Area. Greater Seattle continues to have one of the strongest demographic profiles in the country, adding about 37,000 jobs over the past 12 months. At this current pace, economists expect the region will return to pre-recession employment levels by year end. And our primary submarkets of Bellevue and Lake Union Class A vacancy…

Thanks, Jeff. FFO was $0.69 per share in the second quarter which included the receipt of $0.07 a share cash payment related to a property damage settlement that John mentioned. We ended the second quarter with stabilized occupancy at 90.7%, up from 90.3% at the end of the first quarter. As we discussed on prior calls, our occupancy has declined from year-end 2012 largely as a result of few large tenant move-outs. We have executed leases on approximately 60% of this space. At the end of the second quarter, our overall stabilized portfolio was 93.2% leased. Same-store NOI in the second quarter increased 3.7% and declined 1.3% on a GAAP basis after adjusting for the $0.07 of share cash payment. CapEx was higher in the quarter primarily related to leasing commission on the early renewals we discussed and other renewals and expansions in Los Angeles and San Francisco. We expect to be back to our $15 million run rate next quarter. On the capital front during the quarter, we raised approximately $19 million under our ATM program at an average gross price of $54.93. We estimate the remaining 2013 development spending on our four under construction projects, Columbia Square, 333 Brannan and Crossing/900 to be approximately $260 million. As of today, we have full availability on our bank line, approximately $60 million of unrestricted cash and no debt maturities until late 2014. We are now increasing our disposition target for the year to between $150 million to $300 million with an average closing date in the middle of the fourth quarter. Before reviewing updated 2013 guidance, I want to remind you that we approach our near-term performance forecasting with a high degree of caution, given all the uncertainty in today’s economy, our internal forecasting, guidance reflect information and market intelligence.…

(Operator Instructions) Your first question comes from the line of Craig Mailman with KeyBanc.

Hey, Tyler. Just following up on the guidance piece, just want to clarify. So no increase to the range, it’s all due to this net benefit, nothing on the operations side?

Right. We’re maintaining our core guidance from last quarter.

Okay. Thanks. Then just on the development, it sounds like you guys have good traction, the few products that you may start later this year and into next year. Just curious on kind of the profile of the tenants you are talking to and whether it’s actual consolidations from other buildings or is this kind of new demand that we’re seeing?

Well, it’s combination of both. We talked a lot about on these kinds of calls and in NAREIT and so forth is that tenants are looking to increase their efficiency to respond more to their tenants requirements or rather their work force requirements for public transportation. So you have a range of significant increases and requirements throughout our markets as well as those that are moving from buildings that are no longer suiting them as well as they once did and want to be in more modern efficient buildings that have better public transportation. So we are seeing a range of both but overall we’re seeing expansion.

Okay. Then just lastly on the funding plans, you guys obviously bumped up the disposition target here. Tyler, just -- what you guys have left to spend and what you could start. Do you feel good that you just can kind of fund that with dispositions here or would you look to possibly do some type of equity ahead of time, just to have that funding in place?

I think what we’ve always said is we’re going to manage our balance sheet appropriately and so, lot of it’s going to be dispositions. We’ve used our ATM here a little bit in the first half of the year. We’ll probably continue to do that to some extent. We did a debt offering in January. So, as we go through the process will probably, the debt markets continue to do that. So, we’re going to use all of the options going forward.

Great. Thank you.

Your next question comes from the line of Gabe Hilmoe with UBS. You may proceed.

Hi. Thanks. I guess the question for Tyler, the new disposition guidance on the high end does that include basically all of what’s on the market in San Diego?

Well, we need to be careful about what we talk about in terms of the pricing of that portfolio because we’re in the market on it. So, we don’t specifically talk about the value of that portfolio. But -- Eli can comment more on the specifics but the portfolio in San Diego would be towards that higher end and then, could even be higher than that if we find attractive pricing on other assets as well. So, it’s in that range of 150 to 300, could be more or could be less. It depends as John said in his comments on pricing and our capital needs.

So, just Gabe on that, I want Eli to comment on that little bit further because while we’re giving guidance of 150 to 300 and as we said in our comments, it could be more. Let me just add a little color with regard to San Diego or elsewhere in the market, it totals more than 300.

Yeah. Yeah. I mean, if we pull the trigger on everything on everything that’s in the market, it would end up being more than 300 and we’re being very reserved and we’re very sensitive to the fact that right now on San Diego. We’re just most actively in the market. And we don’t want to say anything that indicates any expectations other than letting the market drive that thing as hard and far as it will go. And we’re getting very, very strong interest on it.

Okay. I don’t know if you can answer this or not, but, in terms of the assets that are kind of on the market being discussed, does that include the Bridgepoint assets and maybe can you remind us when that lease actually rolls?

This is John. No, it does not include the Bridgepoint assets. And Jeff, I’d have to defer to you, with regard to when that Bridgepoint lease rolls.

Yeah. The Bridgepoint lease rolls in 2019.

Okay. Thank you.

Your next question comes from line of Josh Attie with Citi.

Thank you. Why did the costs go up by $10 million at 333 Brannan? Was it just a change in the scope of the project and also, if you could remind us what the net rents you’re underwriting are. And if there is also corresponding increase in rents you are forecasting?

We haven’t -- we got pretty conservative with regard to the rents, what’s driven the cost increases is that we have made a strategic decision to go with the building that is kind of the upper ends of platinum or trying to go above platinum. I am not sure, I have the terminology correct here, but think of something that’s’ as close to zero carbon emission as one can possibly get and what’s driven that is that -- and that adds quite a bit of cost. But what has really caused us to go to that -- try to go to that far extreme is that in the discussions we are having with a number of tenants, they value that very, very highly. So we think it translates into a much greater market receptivity for the property. And it should translate into higher rents but at this point I am reluctant to forecast higher rents until we really get in greater discussions with those who we are now working with.

Can you just remind us what comparable rents would be at nearby building, I think and this goes…

Yeah. The rents that we are doing at 250 Brannan which is a 100-year-old building that we redid, we’re about $50 triple net with 3% bumps.

And that building didn’t have this…

No. That building was originally the Gallo Sausage manufacturing plant that was converted into a three-storey office building. So it’s a terrific classic, brick and timber building. With this building at 333 Brannan will be a building capable of accommodating, I think it’s 13 people per 1000 square feet, with all the exiting and all of the floor loading and all of the mechanic and all of the things, the restrooms, et cetera that those kind of folks, those high density folks whether will be occupied to that high level of density can’t say. It has a number of features that no other building in San Francisco or for that matter, most buildings, I don’t think of many buildings in the country that will have what this building has. So, we think that the incremental investment of $5 plus million is something that’s going to make this building instantly more valuable over time.

Okay. Thanks. At NAREIT and also on the last call you, kind of, talked about this new kind of building shadow pipeline of build-to-suit projects. I know you mentioned a couple of them in the prepared remarks. But maybe just -- how are things kind of moving along in the last few months? Are there any deals that are coming closer to fruition?

Well, we have some very serious negotiations going on and I am a little reluctant to comment on these calls because I could tell you that the brokerage community, the tenant community and the competitor community whether they are private or public all listen to or read the transcripts on these calls. So I have -- I am not trying to be cute, Josh, I just find it very difficult because we’ve recently lost the deal because of something that people just got off our last conference call….

Okay.

…when we made this silly deals. So I just -- it’s a very competitive environment out there. We think we’re going to see some additional build-to-suit opportunities but until they happen it is pretty hard to get too specifics on these kinds of exchanges.

Okay. Totally understand. If I can just ask a separate question, on -- this past quarter a lot of the big real estate brokerage firms and research houses, when they talked about San Francisco a lot of them kind of noted that the CBD had plateaued in that the market and the CBD at least was flat. What’s your view of the San Francisco market and how are things trending in your particular sub markets?

Well, if you -- one of our big objectives in San Francisco that we -- and frankly throughout the company as, we had that spike in 2015 expirations. And so Delta Dental was one of our key objectives and in leasing that space. And we did a good job on that here at 100 first. They are giving back a floor. We are going to be able to lease it at a much higher rate than the deals we did with them, we believe. With regard to 360 -- we have very little vacant space available in the market right now, and everything we’ve had available in the market we’ve been able to lease up. We are seeing very strong activities still at 363rd. We just did another deal over there. Its smaller tenants, sort of the 15,000 to 30,000 range that I would say has the most activity. There are a number of buildings -- requirements that are out there for 100,000 square feet but as we said on last several calls, not seeing many requirements in the 500,000 square foot range in the city. So, I think that it has taken a little bit of a breather compared to where it was in its robust leasing for the last few years. But there is still quite a bit of activity and on our buildings particularly, we feel that we are very well positioned. We are feeling very strong with regard to the Redwood Towers Building down -- rather the Crossing/900 as we now call it down at Redwood City. We have got strong interest from legal firms as well as technology firms. And with regard to 333 Brannan, we think that’s going to be such a terrific building, a brick and timber type building is more sought after by the technology type tenants than the vertical type buildings. So I am still feeling very strong about the city. I think if you’ve got weaker product that’s not as desirable, you’re down in the food chain.

It sounds like you are happy with what’s going on in your portfolio. I guess, would you agree with the characterization that the overall market is flattening out or do you have a different view?

I don’t think we’ve had enough quarters to make that call yet, but we have not seen as many as a big, big users in the market. So that’s obviously a change and that’s been something that’s been talked about now for two or three -- I guess, at least a couple of quarters. But if you look at the list of deals, they are still a huge amount of square footage that people are looking for. And I think you have heard me say before, that if you have kind of your father’s office building, it’s not well suited to what people are now wanting. I think that you have problems. So there is combination in terms of the growth, has it slowed from where it was, yeah. But again, over a very small measuring period and I think what’s extremely important is that you have buildings that the tenants really want not only locationally with all the benefits, but the physicality, that kind of things I mentioned that we’re going to in almost the extreme at 333 Brannan. That’s what we’ve really focused on in our portfolio is to make sure that we have the location and the physicality that this trend, which I think only increases in all our markets is telling us it’s the way to go. And if you violate that I think you get into trouble over time.

And John, I would just add that if you think about last year, there were a couple of times where there was a lot of activity in QX and in QY. It dropped off and then in QZ it picked up again. So John’s comment with respect to the short period of time that’s been typical. It’s not uniform quarter-after-quarter and as you’ve mentioned the pipeline is very robust. And so, I would not draw a conclusion of momentum slowing at this point. It’s very -- it’s solid.

If things go up and down, look at San Diego right now, we’re seeing great momentum and we’ve always seen 15 quarters or so of positive absorption in San Diego. We haven’t the momentum, we’re seeing there in house. So, yeah, these things kind of come and go to different markets and I am quite pleased with the way we are positioned at this point.

Okay. Thank you very much.

Your next question comes from the line of Jamie Feldman with Merrill Lynch. You may proceed.

Great. Thank you. I think you guys had commented that your mark-to-market for the portfolio versus market rent is flat. But can you talk about what you’re expecting for the rest of the year and maybe into 2014? And I’m just trying to figure out where that number is coming from, is it your total portfolio or is it what you are seeing in the next couple of quarters or years?

Tyler, why don’t you take the way we are looking it now, I will deal with how I think we are going to see it trend.

Okay. I think the flat comment is that the overall portfolio for all the years. So over the next couple of years, in our calculations that we are slightly under market. Then some years out in the future, where we’re over market on some leases but the flat comment relates to the overall portfolio not in the next couple of years where we are in the market.

What we are seeing, Jamie, as you can imagine with now when we are building buildings we are obviously, one could argue that’s market is leased for that kind of space that people want to move into. And with what we see is the momentum that is in our various markets, I would expect to see that, that we are going to be under market and maybe pretty substantially over the next couple of years that remains to be seen as a lot of macro forces at work. But replacement costs have gone up substantially and those as the markets tighten, those rents are going to drive the underlying existing core portfolio.

So I guess, what are you guys assuming your guidance for the back half of the year in terms of leasing spreads?

Tyler?

You mean, in terms of rent growth on our portfolio?

Yeah. I mean is it sustainable of what you have done year-to-date or is something shifting?

Well, the -- we don’t have that many expirations remaining for the remainder of the year. And obviously the -- but yeah, I think the answer is yes, in general we expect to continue, the rents have been up 10% to 17%, I think we just reported in terms of the numbers and for the explorations for this year just the one we have to accomplish, as I mentioned a few minutes ago, we’re slightly under market, maybe 3% to 5% for that. But, overall, we think we can continue to generate over the next couple years, the 10% growth on our rent. Obviously, as we sign leases which are under market, those now go to market and that’s why that number sort of trails along.

Great. Okay. And then, can you talk about any change you’ve seen in the investment market after the moving rates, just any impact on evaluation or different kinds of buyers looking at assets and maybe opportunities that might open up for you guys?

Yeah. This is Eli. What I would say is, there’ve been two phenomena moving in slightly different directions. Everybody has noted the choppiness in the debt markets, but I would say everything I am looking at right now says that stabilized in the debt market are working well both in the life company, the bank and the CMBS. And offsetting and compensating for that choppiness is the fact that the amount of capital, the equity capital is increasing, particularly from foreign capital sources along with the traditional capital sources of the pension, the private equity and some REITs. And you add on top of that the fact that there still is relatively very little product for sale relative to the appetite to purchase and overall investment asset allocation demand for real estate. So pricing has stayed very strong and I would say it’s increasing and we are seeing some migration from investors going to either secondary product or to secondary markets just due to that tough competition in that limited amount of product out there overall. As people will note on the fixed market because of the treasury, the net effect is fix for that core stuff is probably 90 bps up, but that has not affected overall core pricing. Frankly, there has been a move down in the core from it was probably mid-6s to a 6 flat on unlevered core targets. So that’s a quick overview of where it sits right now. I noted that there may be more product to kind of release some of that pressure in Q4, but that remains to be seen how much comps and how much pressure there is on that and where the debt market goes at that time.

And then how do you think the market changes its underwriting outlook for rent growth?

It’s very solid in all of our markets, Seattle and San Francisco, people are still very positive on where that’s going to go. They’re still writing substantial increases. They’ve increased their increases in San Diego from what they had been doing historically at this point, as well as in Los Angeles both of which had been growing slowly and now seemed to be getting a little bit of momentum.

Okay. Great. Thank you.

Your next question comes from the line of Van Edelson with Morgan Stanley. You may proceed.

Hi. Thanks. The additional legal fees do you expect to incur post-settlement that you just received? Does that mean you’re not satisfied and you’re going back for more or is it that you expect after defend the settlement against the counterparty is going to appeal?

It’s --we settled with some parties and we didn’t settle with other parties.

Okay. So still more work to be done. And can you remind us what it would take to make a hole on that, you have $5 million so far, what would be the total amount you’re aiming for?

I don’t really…

I don’t…

I don’t know if we disclose that. We’re in the midst of a legal thing. So I don’t want to get in too much -- I don’t want to go down this road given the fact that it is legal in nature.

Yeah. No problem. And then regarding the slower pace of acquisitions at least this quarter and combined with the increase in the disposition target, sounds like this is mainly a matter of discipline and then perhaps a lack of candidates? But does it suggest at all that you see this as a time to take your foot off the gas in a bigger sense the way you did in the mid-2000s and maybe just capture the rent growth for now?

Well, we talk a lot about location and physicality, and tenant demand, as well as yields and so forth. And if we see products that we think is terrific product to the long-term that meets the needs of the modern tenant or that we can modify them to meet the needs and so forth, and that we can underwrite and our fairly conservative way of underwriting things to produce the kinds of yields we like, then given everything else being equal, we’ll continue to be acquirers. We’ll see some of that. But I wouldn’t say that we have our foot on the gas at all. We have our eyes very clearly on the road ahead in making sure that we’re very discriminating in what we buy. I have been wrong many times in the past right but people were crazy paying for the kinds of assets they were buying, the amount they were paying and I found out that they bought really good deals. We tend to be a little bit more conservative. So I don’t know that we’re going to see anywhere near the level of deals that we’ve seen over the last three years, this year, but we’re only halfway through the year. We’re just very disciplined and we’re very mindful of the balance sheet and we think this is a time where you can -- I’m one of the older guys, I guess, in probably the office space and I’ve seen many times in my career where people said, hey, everybody else is buying we’ve got to buy too that is a recipe for disaster. So I don’t think we have our foot on the gas. I think we are very -- just very disciplined. We’re very opportunistic. If there is a wrinkle in the market that allows us to buy something that we really like and fits all our criteria, then you’ll see us buy.

Okay. Sounds like you’ve got the right approach. Thanks.

Welcome.

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

Great. Thanks guys. John, any update on One Paseo your plans there and the potential built-to-suite in San Diego?

Well, One Paseo, I’m cautiously optimistic. There has been a big rang down in San Diego resulting from the new mayor and is kind of kicked over the hornets nest and there are people that are trying to throw him out and what not, that’s kind of delay things little bit, but I’m optimistic that’s going to get sorted. And assuming it does then we’ll pursue with that project, again subject to all the macro things. But we’ve very strong leasing interest on all the food groups there. What was the second part besides One Paseo, pardon me?

Yeah. The potential built-to-suite in San Diego?

The big one I really can’t comment much more. There are big companies. They’ve been focusing on some other needs they have outside of San Diego and according to their broker and more to come. We think we’re very well-positioned if they move forward and that’s our hope.

All right. Thanks. And Tyler, just on the occupancy guidance sort of the year end target of the high 93% range? Is that, just to clarify that’s on the current portfolio or that includes the effective of the acquisitions and the dispositions?

Well, it includes the overall portfolio. So, yeah, I mean, the dispositions are not included in that number, sorry.

Okay. And any color on the narrowing of the lease to occupied spread this quarter, was that just some leases that may have been targeted for the second quarter that got pushed out or because it seemed like being 93% leased by quarter end sort of stepped back a bit from last quarter?

Well, not, I mean, I think we’re basically on track. I mean we were a little bit ahead of where we were last quarter on occupancy, right. And you’re commenting on the lease percentage came down a few basis points. But our overall occupancy number for the year is the same. I think for the third quarter we’re expecting sort of mid-91% occupancy, but that lease percentage, hopefully, we can drive that higher. But I mean at some point you get to the 94% or 95% lease percentage you can, you’re not going to get much higher than that. So I don’t think there is anything driving that particularly.

Okay. Thank you.

Your next question comes from the line of Brendan Maiorana with Wells Fargo. You may proceed.

Thanks. Good morning out there. John or Eli, just is there any more color that you guys can provide on the plan to acquisition in San Diego? I heard your comments, but I think you guys have been pretty clear that you’re going to be measured in terms of acquisitions given where pricing is. So what kind of made this one attractive from a return perspective where it seems like a lot of deals in the market that’s pretty low near-term returns?

Well, let’s just say that the property without getting too specific is, there’re outstanding buildings, lease outstanding tenants that it has a development component and we’re very comfortable with the range of yields we’re going to get on that which gooses the overall project return substantially. It also happens to be adjacent to another major property that we own and it has some benefits that are specific to us with regard to that larger asset that we think gives extra strategic meaning to us. And I don’t really want to go much further because I’m not supposed to disclose what the asset is until its close because of a conflict. So we’re getting what -- if you think about San Diego we’re selling non-strategic assets they’re little bit on the fringe at least in our view, couple of exceptions there. And we are going to reinvest from time to time in San Diego, when we see an opportunity to -- get a terrific asset at a great price or good price where we think we can move the yields up substantially that has extra strategic meaning for us. So we’re not looking at buying in bulk in San Diego but whether it’s San Diego or San Francisco, or Seattle or Los Angeles, Hollywood et cetera, we’re going to be opportunistic about buying those things that we think we can drive our shareholder value, or where we can drive shareholder value and that’s what we think this opportunity is in San Diego.

And John on the deal making side of that, because it has a development piece and it was a core on the other side, it didn’t quite fit neatly into anybody’s box where the competition was less and we think the value that we’re able to buy there was very, very solid compared to something that was all of one thing or all of another thing. And so that was an opportunity for us to step in. And obviously, we’ve got kind of the best treatment to us from our credibility in the market there. So those were kind of deals we like to make when we’re going to make a deal.

Sure. Yeah and that’s helpful. And then on the disposition side, in Seattle, I know you guys have a new portfolio there. But there is a large portfolio deal with Spear Street this quarter and does this kind of pricing in Seattle make you think maybe a little bit more about potentially monetizing some of your assets there given what pricing seems to have done in Seattle over the past few quarters?

Well, I recall when -- a couple of years ago when we started to invest in Seattle and there were some folks that thought we maybe have paid up to much or whatever. It turns out, we made very good buys and we’re now seeing some really inferior assets trade much higher costs per square foot or much lower cap rates. We think there’s still more room to go in assets that we have there. So we might sell an asset or two that’s smaller. But we’re pretty pleased with the buys. We bought some outstanding assets that we’ve been able to move the rents stuff on. We think we’re going to be able to move more rents up. We have quite a bit of leasing activity and renewal activity going on in those assets right now. Eli, do you want to comment any further on that?

No. I mean I just think, yeah that feel that was done up there, more than validates, the assets that we bought, the prices we paid, the focus on the investment world on the value of that market and the fundamentals, the people see coming and exist -- currently existing and further coming in that market.

Okay. Great. Thank you.

Your next question comes from line of Michael Knott with Green Street Advisors. You may proceed.

Hey guys. Tyler, just curious on the borrowing front where you’d think you’d be able to borrow today but secured and unsecured and maybe how much that’s change in the last couple of months?

Yeah. Well 10 years about 250, 255 doesn’t look today where it is. But so I would say roughly we’re 450-ish probably on a 10-year deal on an unsecured basis. We haven’t been that active in the secured market recently. But it’s probably little tighter than that I would guess. That market’s pretty -- still remain tighter than the unsecured market but is less flexible. But -- so I don’t know if that’s four but I am sort of guessing at that.

I think it’s 410 from when I heard, 410 maybe.

And then on the -- how that’s changed we did our 10-year deal in January at 390. So it’s up 60 basis points from there obviously in between now and then the market, the treasury went down and now it’s back up so. The hardest time we probably were in the 370 range and then we did the deal at 390 and now it’s probably 450-ish.

Yeah. And then when you look ahead to 2014, your lease role is pretty manageable about 9% of revenue, I think. Is there anything in there that’s stands out as something that you’re particularly focused on?

Mike, this is Jeff. Yeah, if you look at our 2014, we’ve got about 10% of those square footage rolling. We’ve already, renew the Microsoft and Westlake Terry in Seattle. We’ve got two transactions that are 100,000 square feet or more that we’re going to get back in the first quarter but we’ve already got great activity on those two assets. So other than it’s a pretty smooth roll next year.

Okay. And then just given all the acquisition activity that Kilroy has undertaken in the past few years. I just want to check in on the Menlo Park acquisition, curious it looks like it still under 85% leased, just curious how that one is something relative to your underwriting?

Yeah. Well, this is John, I would say that has been a disappointment for us based upon our initial underwriting although we are seeing some activity. We’ve recently changed the brokerage group. It is an area that we’re very focused on. And frankly I have been very personally unhappy and I have let some people here know that I am very unhappy. So hopefully we are going to -- I would like them to make me and you and all our investors happier on that asset and that is a very important asset for us to improve upon. We may end up selling that asset.

Yeah. Thanks for the candid color on that. Then last question for me would be -- I assume that Orange County is not in -- Orange County office is not in the disposition plans if the upper end of your range is $300 million and if you sold -- it sounds like San Diego alone could be a little more than that. So just curious where Orange County sits today?

Yeah. I’m going to ask Eli to comment on that but just a quick one here. As we did mention, we’ve got more than 300 in the market right now. And as we did mention that the number, the 150 to 300 we started the year with 150 in guidance. We said it could be 150 to 300 or more depending upon what our acquisition and development funding requirements are. We’re not in the market on the Michelson building. We are in the market -- will be in the market in a couple of the little buildings there that are non-strategic to us. Eli, you -- any more color on that?

Yeah That’s exactly right. We’re working very actively on every non-Michelson asset in Orange County and have some LOIs on some and are marketing others and expect to probably deal with the smaller assets over the next 6 to 12 months at the latest. And Michelson, we don’t have in the market, we think that continues to hold plenty of solid value and if and when we need to or want to pull the trigger for some reason on that, we expect it to be there, so.

Okay. So it would make sense to continue holding just one building in this market here?

Well, it’s easy for us to manage it between with our activities in South LA county as well as north San Diego County. And we have people on the ground, at the building and so forth. I’ve never been enamored with -- you’ve heard me all say this before -- probably before you or even in that real estate side of the business, Michael, is when we went public 17 years ago. We said Orange County office is something you’ve got to be careful to have exactly the right product and you’ve got to be a timer because of that big B’s call airline company. So I don’t see us being big acquires there. We’ll be opportunistic for sure if there is a great buy. I don’t see any great buys right now. But from a management standpoint, it’s not problem for us. So if it was on Portland or something, we have one asset and I am not going to Portland. But that would be a different thing but we have the talent and the quality of the talent for that building.

Understood. Thanks.

Your next question comes from line of John Stifel with Stifel. You may proceed.

Hi. John Guinee here, sorry about that. Eli, what you guys have done over the last few years is buy and sell from all quadrants, some of your better product with longer term leases as well as some of your non-strategic. Just sort of an educational question, is if you have a single tenant building, decent credit, let’s say it’s 100,000, 200,000 square foot, $30 net. On a cap rate basis, where does a trade if you’ve got a 10-year lease versus a -- I’m sorry, a 15-year lease versus a 10-year lease versus a five-year lease, to get people a sense to where the break point is and cap rates relative to lease term?

Yeah. Well, I will try to do that with -- these will be general. I will give you order of magnitude. But falling below 10, you fall off very quickly, it’s more like a cliff than it is a continuum. Between 10 and 15, it’s really more of a slope. And so I would say the difference between and 10 and 15 is somewhere in a 100, the difference between five and 10 that’s same five years is 250 or 200 just in rough order of magnitude. Now that it can all be -- there are so many things that can be found at if the five year lease is under market and somebody really likes it, they could of course pay way up for that and pay more than the long term lease because they think, they can do it. It’s also depending on where those prices in those leases end up with respect to replacement costs. If you have 15-year under market lease that results in a price that’s well below replacement costs you might see somebody paying a 4 cap for that where the general market if that was -- if that price were at replacement cost maybe that’s 5 cap. So there is lots of, it also depends on how strategically located the product is and so if it’s something in a great area and you know you are going to release it in all of that kind of stuff then there is just many moving pieces around that. But there is kind of a nice slope between 10 and 15, and kind of a quick drop off less than 10 is the general phenomenon that happens with those. If you pulled everything else equal in terms of different moving pieces that I just described and there are other moving pieces that I didn’t describe.

So sort of taking that to the next level, if you got -- if you just signed a new 15-year lease, the interest in selling it lot -- there is obviously a lot of issues, but the interest in selling it is minor from 15 down to 10 years on the term and then it becomes significant, particularly if the income buyers are very, very active?

I won’t say minor between 15 and 10, it can be quite notable. I think 15 and 10 is, 15 is much better, but it’s the five years between, everything else been equal, the five years between 5 and 10 or that going down from 10 to 5 hurts you a lot more than 15 to 10.

Got it. Thank you very much.

It’s just really hard to talk theoretically here, so.

Yeah. I got it. All right. Thanks.

Yeah.

Your next question comes from line of Vincent Chao with Deutsche Bank. You may proceed.

Hey, guys. Most of my questions here have been answered. But just curious on the spread there between or the drop off under 10 years, I guess if people are underwriting rent growth, wouldn’t they be inclined to want a little bit more exposure to the earlier lease rules?

Yeah. The risk buyers are, absolutely, the core buyers, the guys who bought, there is a different buyer pool for long-term net lease and somebody is trying to buy some risk, obviously it’s more the private equity for the latter and for the former its core or very conservative set of buyers who are going to put very modest leverage on it, fixed leverage, the five year thing that has some upside, they’re going to put floating rate leverage on that, they are going to lever at a higher number, they’re going to seek different returns, but they’re going to be, it’s going to be very, there is going to be a lot more assumptions that the five-year lease term buyer who thinks there’s a lot of upside is going to have to put in that to achieve the kind of returns that they ultimately want to receive. That’s why there’s no way to really, I mean, you just have to go through this from 16 different ways between replacement costs, rents, location, value, how much demand there is for the product, under market, over market, all of those kinds of things to get it exactly right, so.

If you look at three years ago when people -- when debt was not as attractive as it has been recently and when the market had been constipated because of the great recession, people were more focused on our core assets and sort of that method of valuation. Now, what we’re seeing is, with increases in rental rate, with markets that have improved significantly and with regard to vacancy and with increased momentum of tenants in the market and so forth. The value guys are out there in full force. So, to the questions that John Guinee was asking, that’s more of a core kind of evaluation, but you’re quite right that sometimes, and I know in our own case, sometimes when we look at deals, we say that, there’s no value we really can add to that thing. We can’t be competitive. Whereas if there is roll, when you think the market rents are going to continue to increase and the tenant demand is going to go up, there’s great value in that profile. So, you’re quite right, that’s the other side of the sort of the equation you’re bringing up.

Yeah. And the last thing I’ll add to the whole thing that is, the longer that the in-place lease term is the more willing people are to pay a price that looks to be above replacement costs for two reasons. One is because the effect of the residual price on the overall return is pushed out in time, so it’s less effective. And number two is they expect replacement cost to increase overtime, so the more time they have to compensate for those two factors the easier it makes them to pay up for a good -- a big price per foot on those long-term lease deals.

Okay. Thank you. That’s very helpful. And just one last question, just on final question on disposition guidance increase. I mean, how much of that really was, obviously you have the acquisition that you now are hoping to close here in the fourth quarter? How much of it was just to pay for that versus maybe just the general conditions in San Diego and some of the buyers you mentioned that are still in the market looking for assets?

Yeah. We gave guidance at the beginning of the year of $150 million because we knew, but we set it’s time, it could be substantially more, now we said it’s going to be $150 million to $300 million, it could be substantially more. We didn’t increase our guidance there because we’re buying this asset. I think we’ve been pretty consistent that we’re going to sell into the market. We’ve obviously increased our development activity and we’ve always said that we want to maintain a very solid balance sheet. So, the short answer is, we didn’t increase it in order to pay for the acquisition in San Diego. If we had more stuff that we would like to buy, we probably have more stuff that we’d like to sell though.

Okay. Thanks guys.

Your next question comes from line of Dave Rodgers with Robert W. Baird. You may proceed.

Hey, John. At the beginning of your comments I think you mentioned a 400,000 something square feet of LOIs. Can you kind of re-quote that number for me, as well as the new and renewal breakdown?

Jeff, I’m in San Francisco, so I don’t have the same papers in front of me that Jeff does. Do you want to go through that Jeff?

Sure. The 400,000 square feet of LOIs new is 39%, renewal is 61%.

Any hopefuls for 2013 or is it going to be all 2014 starts from the new perspective?

Say, again, Dave.

I guess when you look at the new percentage of that, of the new leases that you are working on there, any hopefulness that those will get into 2013 or those going to be ‘14 deals in terms of new enhancement?

Yeah. I think the 400,000 feet was at the end of June and we’ve already made progress converting some of those since the end of June. So, our guess it’s hard to know exactly, maybe 100,000 feet of that or a bit more might be hitting this year versus next year.

Yeah. That’s helpful. That’s what I was asking. Thank you. And then, Tyler, I guess when you talk to the rating agencies, if you were to sit down with them today and you looked at two different components, I guess, of income that is coming in the future. One, the difference in the lease versus occupied percentage today and then two, the development NOI projected over the next couple of years? What percentage of credit for that NOI are you getting, is there a direct formula, do you have good clarity and kind of how much of that counting for you today as you look to deploy more money and manage those leverage metrics?

Yeah. It’s a really good question because we have that conversation with the rating agencies all the time. It’s a struggle to be honest because on the development front, we have a lot of EBITDA coming down the road here and the first delivery of this year then linked in next year and salesforce and synopsis are in ‘15. So there is no formula that they have that says we are going to give you 15% credit or 75% credit. Obviously all those buildings are fully pre-leased. So from our perspective they should be giving us 100% credit but they are really not. And they basically have told us more of it needs to come on line before they are going to give us full credit. But again there is no magic number. I think on the lease where it is occupied I think they are more willing to give you the credit because its -- you have contractual lease and it’s just more certain their view of development always is more risky even if it’s pre-leased, maybe it’s the construction risk or whatever. But it’s an ongoing conversation and ongoing battle to be honest to get them to understand the value of our development pipeline.

Okay. Great. Thank you.

There are no further questions in the queue at this time. I would now like to turn the call over to Tyler Rose for closing remarks.

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

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Have a great day.