Kilroy Realty Corporation (KRC) Q3 2016 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Third Quarter 2016 Kilroy Realty Corp Earnings Conference Call. My name is Derrick and I will be your operator for today. At this time, all participants are in a listen-only mode. And later we will facilitate a question-and-answer session towards the end of the conference. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your Mr. Tyler Rose, Executive Vice President and Chief Financial Officer. Please proceed.

Good morning, everyone. Thank you for joining us. On the call with me today are John Kilroy, Jeff Hawken, David Simon, Heidi Roth, Mike Sanford, Rob Paratte, Tracy Murphy and Michelle Ngo. At the outset, I need to say that some of the information we 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 eight days both by phone and over the Internet. Our earnings release and supplemental packages have been filed on a Form 8-K with the SEC and both are also available on our website. John will start the call with a review of the third quarter, Jeff will discuss conditions in our key markets. I'll finish up with financial highlights and review of our updated earnings guidance for 2016, then we'll be happy to take your questions. John.

Thank you, Tyler and hello everybody and thank you for joining us today. We’ve made substantial progress in all areas of the company since our last year. Here are the highlights. On the development front, as we reported last night, we saw a long term commitments with high quality, credit tenants for over 1 million square feet of space at our development projects. This includes commitments of both 100 Hooper and the Exchange which on a combined basis are now over 80% committed. We’ve said at the past that we wouldn’t start construction on 100 Hooper until we made leasing progress on either the Exchange or Hopper. Since we have now made substantial progress on both projects, we will begin construction later this quarter on 100 Hopper. As a reminder is the 4,000 square foot office in PDR project in the SOMA neighborhood of Showplace Square. The total estimated investment is approximately $270 million. Moving south the Hollywood, we signed leases at the recently completed office component of Columbia Square covering 71,000 square feet taking the project to 84% leased. This includes a 31,000 square foot expansion agreement with Viacom, increasing its total lease commitment to 210,000 square feet and a 40,000 square foot lease with a global apparel company. We are also seeing strong interest in our Columbia Square Residential Tower. We expect leasing to accelerate even more as we complete construction of the amenities for this space including the rooftop and ground level restaurants. We are now 44% leased up from 22% at the end of the third quarter. In San Diego, we signed a letter of intent at the recently completed officer project in Del Mar called The Heights for approximately 23,000 square feet taking the 75,000 square foot office building to 65% committed. In our stabilized portfolio, we signed new or renewing leases on 314,000 square feet of space at rents that were up 24% on a GAAP basis and 12% on a cash basis. We generated another quarter of strong same store of NOI growth with cash NOI up 13.5%. Our stabilized portfolio is now 97% occupied. We completed our venture with Norges and the closed the first tranche in August generating approximately $191 million. The second tranche is schedule to close later this quarter and will generate approximately $260 million. And finally, we completed the $250 million debt financing during the quarter with a delayed drawdown feature that allows us to defer the borrowing until February of next year. That brings us to our three remaining near term development projects. First that one of our sale in Del Mar, the overall project is entitled for approximately 1.1 million square feet including approximately 600 residential units, 96,000 square feet of retail and 280,000 square feet of office. The total estimated investment is approximately $650 million with construction and spending occurring in multiple phases. Approximately 200 has been incurred to date. Phase 1 to being later this year will include side work and related infrastructure for the entire project as well as approximately 237 residential units and 96,000 square feet of retail space. Our plan is to create world-class environment with vibrate retail and residential amenities that will enhance the demand for the later phases. We expect incremental spending for Phase 1 to be in the $150 million to $200 million range and the delivers will begin in late 2018. Second in Seattle South Lake Union submarket our 333 Dexter project is now fully entitled and ready to go. Our development plans go approximately 600 to 60,000 square feet of office and support retail and a total projected investment of approximately $385 million. The South Lake Union submarket remains extremely strong with Google, Facebook, Amazon and others all taking significant amounts of space. We are now very excited about the quality and character of the area with its terrific combination of high credit companies, retail businesses, housing options and public transportation. While Seattle is now typically a preleasing market, we are in discussions with several prospects and are evaluating a start for early next year. Third in Hollywood, we expect to have final entitlements for the academy, our 550,000 square foot mix use development project by year end. It has a total projected investment of $390 million with our nearby Colombia Square project nearly fully lease and Hollywood market demonstrating robust growth, we are also evaluating a first half of 2017 start day taking into consideration our other leasing success throughout the portfolio and overall market conditions. Now let me review our recently completed strategic venture. In August, we finalized terms with Norges Real Estate Management, the real estate investment arm of a government pension fund of Norway. The fund is making a 452 million contribution to the venture and assuming 55 million in secured debt and return for a 44% equity interest in the two companies that own 100 First Street and 303 Second Street, two of our existing San Francisco properties. The two class-A properties totaled approximately 1.2 million square feet of space and are currently 97.5% occupied. The fund’s investment represents a valuation of about $1.2 billion or $957 per square foot. We acquired the two assets in 2010 for an aggregate price including renovating costs of approximately $450 million. As we discussed last quarter, this deal established a valuable strategic relationship for us with a world-class investor that shares our interest in long term value creating and also generates capital to fund our near term development. During the quarter, we also completed the sale of two small office properties and a land parcel located in the Sorrento Mesa submarket of San Diego for approximately $45 million. Year-to-date, the Norges venture and our disposition program have now generated almost $800 million. Before wrapping up, let me comment on the acquisitions market. While over the last few years, we have found it very difficult to make the math work on high quality acquisition opportunities in our markets. We are now pursuing a few transactions that not may need our investment criteria. They have value creation elements and superior locations near transit and amenities, more to come on this. In summary, we think our company is extremely well position. Demand continues to be reasonably good to strong throughout our markets for the type of product we provide. California GDP is exceeding expectations and West Coast job growth easily outpaces the rest of the nation. Our stabilized portfolio is nearly 97% occupied and generating strong financial results. Our development choices have proved to be solid and well times and our program continues to add valuable new assets to the portfolio that is already one of the highest quality, youngest and more sustainable in the country. We have succeeded in refilling our development pipeline with a range of equally compelling new opportunities both near term and over the next several years and we are now entering 2017 with arguably the most attractive entitled development sites at Seattle, Hollywood, San Diego and San Francisco have the offer. We’ve used prudence and disciple in financing our enterprise both externally and through our own capital recycling program and we are now entering 2017 well position to fund a next phase of development starts at attractive returns while maintaining a strong and flexible balance sheet which we flex one of the lower debt-to-EBITDA ratios with our peer group. Finally and perhaps most importantly, we operate in markets that are among the most dynamic and resilient in the world. Big technology and like science companies are driving demand in both San Francisco and greater Seattle and they continue to expand. New age digital media and entertainment related companies have both rediscovered Hollywood, has as the fashion industry. In San Diego, life science, healthcare, defense and others have been slowly but steady pushing down vacancy rates and pushing up rents in the best market. That completes my remarks. I’ll turn the call over to Jeff for closer look at our markets. Jeff?

Thanks, John. Hello everyone. As John pointed out, our West Coast real estate markets remained healthy with the ongoing expansion of technology playing a big part. California’s tech companies alone generate over half of all technology revenues in the country according to Bloomberg Data. This backdrop has translated into strong commercial real estate fundamentals. In San Francisco, net absorption was positive 220,000 square feet and rental rates increased above 1% over the prior quarter brining year-to-date rent growth to about 7.1% and 10.2% year-over-year. Year-to-date absorption totaled about 750,000 square feet. Class-A direct vacancy was 3.2% in San Francisco district 6.3% in the South Financial district and 3.4% in Mission Bay. In Silicon Valley, class-A direct vacancy was 6.5%. We are currently almost 100% leased in the Bay area and our in-placed rents for the region are approximately 32% below market. Seattle remains a major focus of big tech companies expanding their footprints in popular submarkets like Belleview and South Lake Union. Premium office space is a key differential for companies competing for local talent and despite the quality should continue. 2016 has become the fourth straight year the market has seen more than 2 million square feet of absorption a level not seen more than 20 years. Class-A direct vacancy rates in our primary Seattle submarket of Belleview and South Lake Union were 9.2% and 6.4% respectively. Our Seattle portfolio is currently 98.2% leased and our in place rents are approximately 7% below market. In San Diego, growth continues to be driven primarily by healthcare and life sciences. This steady growth translated to positive net absorption for the quarter of 202,000 square feet bringing the year-to-date total to 820,000 square feet, double the number compared to last - to the same time last year. In Del Mar, class-A direct vacancy was 12.4% in Sorrento Mesa two story corporate office vacancy was 5.8%. Our San Diego portfolio is currently at 96.1% leased and our San Diego in place rents were approximately 9% above market. Los Angeles continues to be propel by technology and media growth particularly in the west side and Hollywood markets where the rent premium is approximately 40% over the broader market. Class-A direct vacancy West LA was 12.1% and in Hollywood, it was 26% of excluding, of recent delivery, Hollywood was 7% vacant. Our Los Angeles portfolio was currently 96.5% leased and our in placed rents there are approximately 15% below market. Looking across our operating portfolio, we have current lease commitments and LOIs of approximately 314,000 square feet and the average in place rents on the portfolio are approximately 17% below market. That's a snapshot of our markets, now Tyler will cover our financial results in more detail. Tyler?

Thanks Jeff. FFO was $0.92 in the third quarter including $0.05 from a property damage settlement. Same-store NOI continued to trend upward growing 13.5% on a cash basis and 6.8% on a GAAP basis. The growth was driven by higher rental rates, higher average occupancy and higher camp revenues. As John noted, we completed several capital generating transactions during the quarter. We took advantage of lower rates and completed a $175 million private placement of ten year notes of 3.35% and $75 million placement of 12 year notes at 3.45%. The private placement has a six months delay draw feature allowing us to the later borrowing until February. We closed the first tranche of the Norges center in August and expect to closing the second part of the transaction providing us with addition $260 million later this quarter. And we are working ten year $170 million secured mortgage to refinance the maturing mortgage. We expect to complete this transaction later this quarter as well. These capital transactions will allow us to fund all our near term development including the Exchange, 100 Hooper, 333 Dexter and the Academy which all have an estimated spending about $500 million to the end of 2017, pay a special dividend of approximately $160 million related gains on disposition. Refinance our maturing 2016 and 2017 secured mortgages and redeem our $200 million of preferred stock in 2017 with almost full availability on our bank line and assuming no additional acquisitions or dispositions. Now, let’s discuss updated guidance for 2016. To being, let me remind you that we are approach our near-term performance forecasting, with a high degree of caution. Given all the uncertainties in today's economy, our current guidance reflects information of market intelligence as we know it today, any significant shifts in the economy, our markets tenants demand, construction costs and new office supply going forward could have a meaningful impact on our results in ways not currently reflected on our analysis. Projected revenue recognition dates are subject to several factors that we can't control, including the timing of tenant occupancies. With those caveats, our updated assumptions for 2016 are as follows; as always, we don't forecast any potential acquisitions or acquisition-related expenses. Last quarter, we increased our 2016 same-store cash NOI growth guidance to a range of 9% to 11% given continued strong results, we are again increasing our guidance and now we are in the 13% range for the year. We are making good progress in the residential tower in Hollywood and now 44% leased and expect to breakeven on an NOI basis in the first quarter of 2017. We are now projecting at 2016 FAD payout ratio of approximately 61%. The board will continue to evaluate the dividend regularly as we approach the potential for addition dividend increases in conjunction with meeting our minimum distribution requirements. In terms of occupancy, we expect to end the year at approximately 95%. The occupancy decline from the third quarter level of 97% will be driven by the addition of the Heights to the stabilized portfolio and a few move outs. So in terms of earnings guidance, last quarter, we provided a 2016 FFO range of $3.36 to $3.44 per share with a midpoint of $3.40 per share. With the recede of the $5 million property damage settlement, we are increasing our 2016 FFO per share guidance range to $3.43 to $3.47 per share for the midpoint of $3.45 per share. That’s the latest news from KRC. Now we’ll be happy to take your questions. Operator.

[Operator Instructions] And our first question will come from the line of Craig Mailman from KeyBanc.

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

That’s a big question, where do you want to start? Tyler, you want to take the first part about the?

Yeah, you know the way we just close it as we show on Colombia Square and the Heights given that they are in lease up the committed and leased percentages, so that we’ve given that number in the script and it’s in the supplemental.

Was anything incremental post quarter end?

The 1.1 million square feet, it sense effectively June 30 since our last call, so that’s incremental for the quarter.

Okay. Then where do the Exchange and 100 Hooper stand from a commitment standpoint?

84% roughly, 83%.

Alright and even completely fall?

I am not going to comment on that.

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

Well, it’s been very high, we don’t - we wouldn’t be talking about LOIs, if we didn’t take, it could be a very high percentage. We are in very detailed leases with construction exhibits and all the rest. I mean you couldn’t ask for things that are much more detail. With the life science, the nature of these transactions are extremely complex, so you’ve got to get all the construction exhibits and all the rest completely understood that it’s an elongate process if you will compared to normal office lease. But I don’t see anything that would interrupt these transactions.

Okay, and then just lastly relative to pro forma, where our rents coming in on Exchange and 100 Hooper?

Let’s just say we’re going to meet or beat both performance.

Great. Thank you, guys.

Your next question will be from the line of Nick Yulico, UBS.

Thanks. So just a follow-up on the leasing news, what the - you talked that I guess high probability these getting turned into leases the LOIs but any short of time when you can give us on how actually get firm leases for the commitments?

Well, where we have leases are done, where we have LOIs, it’s generally with office it can take three or four months with life science, it can take a little bit longer, but I would think that we are looking at sometime in the first quarter for the buyers [ph].

Okay, that’s helpful John. And I guess the other question was you know if you guys talk about what the latest is on - I know you talked before about the sort of overall demand in San Francisco types, how much sort of square footage is tends in the market right now sort of looking for space?

Yeah, go ahead, Rob, you want to talk that?

Hi, Nick, sorry. We’re looking at demand in San Francisco currently - third quarter, it’s approximately 8.7 million and we see that continuing to track going forward. And I think it’s interesting, tech continues to lead the market but it’s significant also that there is about close to 650,000 feet of fire category tenants that are in various stages of documentation. So we are comfortable on what we are tracking that fourth quarter will show some significant executed transactions.

Okay and just one last question on Hollywood, it sounds like there is a lot of demand in that market right now from streaming content companies like Verizon, PlayStation looking at the market, you talked the Academy maybe starting in beginning in next year, how do you think about starting the project in Spec based on the level of demand you think is in the market right now.

Well, as we always say we tend to be pretty prudent here and we - just like we said we are going to start in the same market 100 Hooper without substantial leasing either there or at the exchange and that’s we’ve announced here. And with regard to Hollywood, we’re going to take a look at where we are across the entire portfolio, well how we feel about the markets, how we feel about Hollywood. You know the Hollywood is not generally a preleasing marking in North Seattle, North San Diego and we have three way projects we’ve announced for going ahead with one for sale on the retail and the [indiscernible]. We are just going to make a call but not below the sale of live stuff that we have announced and more to come but we are not going to do anything crazy.

Alright, thanks John.

Your next question will be from online of Blaine Heck, Wells Fargo.

Thanks, good morning. John you’ve been pretty transparent that you are pursuing a couple of different options at the Exchange, can you now tell us whether it’s the single RGs or multiple small tenants? And then can you also talk about the profile of kind of the whole pool of perspective tenants you are negotiating with the predominately life science and medical or was there kind of similar demand from tech?

Well there were significant demand from tech, you know I’ve made clear and over the last year that we needed to make a decision and what we finally decided was that we ended up with some very big transactions. I am not going to get into the breakdown. I just have to tell you and I have mentioned this many times before we have confidentiality agreements and confidentiality concerns regarding most of these deals even the ones that are leases. Tenants want to make the announcement and we can’t interrupt them. So I think you’ll see a lot of good news over the next could of quarters from Kilroy on some pretty significant transactions involve both life science and involve technology up and down the platform but there - just to put in connection with demand, you are also you of all have heard me at various conference calls or at the NAREITs or other conferences that are held talk about the kind of product that the users of the market want. And I may have a few little smaller ones that I've left out, but if we in San Francisco the city of San Francisco breakdown into two categories, one is high rise product, and the other is sort of the lower - low to mid rise larger floor plate product, and you just think of those two products. And if you look at the high rise product there are four high rises under construction or one that's recently been completed the total 3.2 million square feet that have had announced leasing on an aggregate of 31% that's 3.2 million square feet, 31%. If you look at the other category which is a lower rise bigger floor plate that we specialized in that's what the exchanges that's what100 Hooper is, that's what the Flower Mart will be if you look at that there is 2.2 million square feet either underway or about ready to start that is 92% committed. The only reason I point that out is there needs to be an understanding of what people want and what's underway, and it's not all fungible. So we have a lot of tech and a lot of life science there scrambling for product. Life science and Mission Bay Tracy is what percentage vacant?

It’s like sub five, there's nothing.

Sub 5% what is that South San Francisco?

3%.

3%, so you can see where this is all going and why we are focused on the kind of product we are, we all come and to have made choices in the connection with the though one million plus square feet that we announced up and down the platform. The weighted average lease term is in excess of 17 years. In the case of 100 Hooper and the exchange it’s greater than that.

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

We deal with a lot of folks who are so tied up in NDA is that I can't really comment other than a big general statement that we have not begun marketing of the Flower Mart were still getting our entire nuts, we haven't selected a broker or brokerage firm, and yet we have had a number of inquiries from big tech that's located in California and they are not located in California that have major inquiries with regard to the Flower Mart, because it represents the kind of product that they want at the kinds of locations they want. So I would have to say that there will be some big users coming into the market over the next several years, I would guess. I can't speak to other people's projects, because I only know about ours.

Great. Thanks a lot.

Your next question will be from a line of Manny Korchman with Citi.

Hi everyone. John honey acquisitions you mentioned earlier in the call. What has changed that of sudden your sort of interested in acquisitions is that they've come to market and they've just interested you have you broaden your underwriting standards which them alone or in JVs maybe give us some just ideas of how you thinking about acquisitions?

Well we're not thinking of buying core product that’s leased and buttoned up because the cap rates are not compelling to us, the things that we're looking at our products where they're drastically under market in their rents and so we think there's some big up side and or they're screwed up. Think up 60 to 55 which we call Sunset media center in Hollywood. It was totally messed up, and now it's become a terrific asset, because we had the imagination and then they capital and whatnot the straight it out. So it's kind of a combination of those things. Manny you're not going to see us by coupons.

Great. And then Tyler can you remind us what the move outs are coming to your ends?

Yeah there's a few move outs in San Francisco and Seattle through second project and up in our Fremont project in Seattle. Good news there as the rent of our 50% below market. So when nice pop and rents when we lease those spaces. And then when you add in the heights to the occupancy that's why the overall occupancy will drop about 150 basis points.

And maybe one more for John, I just some clearly you said Seattle's not typically a prelease market when lead sort up there a few weeks ago. You made it sound like you're waiting for preleased to go with 330 to three decks or which one is it or can it be either?

It well and it could be either, I mean I don't know what was communicated to you up there by us or others, but I think you saw that there was a project that was done a year and a half ago or so and pace for came Facebook came along and took it, Google has just signed a lease for a build a suit by Vulcan for 600,000 square feet that Rob, I think is expandable to 800,000 Peter so. We couldn't play because we didn't have the ability to grow into a second phase. So there has been some just in time leasing or preleasing, but historically has not been a preleased market, it's historically been a market where you're under construction and you may - make the lease while you're at or under construction or your completion, in fact if you look at the market right now, there are a couple of buildings that are 300,000 feet each in the Denny regrade, which is between downtown and South Lake Union, that are both those been leased now to run.

They're committed one is not at least, but in LOI other.

And if you look at Bellevue is example there's three buildings a million and half square feet there now, big announcement on was an Amazon going out there announcement sales force and so forth. So there's looks like that market with a million and half square feet Bellevue what expect just a few quarters ago looks like there's maybe 400 - 300 and 400,000 square feet that's not committed in that market. South Lake Union Rob there's been what roughly a quarter of a million square feet of positive absorption here today. There's another quarter of a million or more that’s been leased negotiation right now, it's tight as a drum. So we'll see - we have a hope to pulled the trigger yet.

Thanks.

Your next question will be from the line of Thomas Catherwood, BTIG

Yes, good morning out there guys. Quick question John, you partially answered this through your answer to the acquisition question, but thinking it from the sales side, we've heard of a bifurcation in the sales market with core well located assets with term still going at low cap rates, and yet deals that have a little more value added component spreads widening there. Are you seeing this in your in your primary markets and can you give us a sense if you are kind of what level of widening you're seeing in that pricing?

We track just about everything, but we don't really pay attention to anything is not in the markets we like nor we pay attention so they did not fit in the physical characteristics we like, so there's probably better source is to ask than our team about that. But what we are seeing is that there are I don't know I just live it leave it at that, we're focused on what we do we haven't seen cap rates back up in any of our markets, if anything we've seen added cap rate compression, because of what's going on now there are good number of assets that are being bought by companies that are poor and there aren't real estate companies, because they in their host countries they can borrow at 1% and then get a 3.5% coupon on the lease transaction or the sale transactions that they buy and that's a massive spread. So if anything for great stuff, I think cap rates could compress further, but I don't know about the tertiary stuff I just don't follow it.

That's a very fair point, I was thinking more in lines of if you had to change strategy at all with any of your sales just in as far as what you were seeing in the market?

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

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

Jeff.

Yes, this is Jeff, so as you pointed out, we have 8.3% of the portfolio rolling next year 1.1%, the mark-to-market for 2017 is up 22% under market. Yes, there's one large lease it’s over 100,00 square feet up in Seattle, that’s the good news is we have at LOY on that space they'll be moving out, the current and we moving up at the end of September the new tenant we’re moving in through the middle of the first quarter of 2018. So we're feeling pretty good about the role this point there's spread throughout the rest of the portfolio. But the largest transactions one that we think we have wind up at this point.

Got it, appreciated. And one more one from me, just any early read through or impressions from the draft Central SOMA plan that came out in August?

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

Got it, that’s it from me. Thanks guys.

Thank you.

The next question will be from a line of Steve Sakwa of Evercorecore.

Thanks, good morning. John my understanding is on the 100 Hooper site when you bought it. There was another parcel that had some PDR requirements, and I guess there were some significant of occupancy needs on that site as it relates to your site, are there any as that been cleared up, are there any kind of things that could cause any delays or issues with your site?

Yes Steve, it’s Mike again. So yes, you're right we on our project it's both developing a 400,000 square foot office in PDR building and then at 50,000 square foot sort of nonprofit PDR building. And we've been working very closely with as of made which is the main nonprofit that works with all the manufacturing companies in San Francisco, and we've construction relationship with them to move forward on that building. We don't anticipate any delays related to that given the leasing activity there at the project.

Okay thanks.

Your next question will be from a line of Jed Reagan with Green Street Advisors.

Hey good morning guys. Can you just remind us what you had underwritten exchange and 100 Hooper in terms of stabilize yields?

Approximately 8%.

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

But I'm not sure we're going to go that way in Dexter, but to the first question is the reason that Tracy Murphy came to board as Executive Vice President of Life Science in her background was with Bio Med in her West Coast portfolio both on their develop and major transactions. And as we said, I think in earlier call or maybe it was at NAREIT that if you look at the four big clusters of Life Science, the biggest is Cambridge the next biggest was the Bay Area that after that it's Seattle - San Diego then Seattle, where in three of four of those markets about 15% of Kilroy's revenue comes from a combination of Life Science and Healthcare. We’re were in those markets, we've done developed a bunch of the stuff, so yeah I would say that we are going to be very judicious, but it's an appropriate and a very kind of easy add on for us.

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

Don't have a preleasing hurdle it's more about how we feel about what's going on in the rest of portfolio in the world. We'll see what happens after November. We’ll comment on the caliber of people that are going to be in are our new leaders, but it will take all that stuff into consideration obviously we love preleasing. Yes you comment about Dexter it all those stuff or designing is designed to go multi-tenant, we don't want to do something it's just designed for a single tenet. So we have the flexibility to go big tenant, couple of big tenants where the flexibility to go multi-tenant we did in Dexter what we did in the exchange and what we're doing, we'll be doing in the Flower Mart is we have in that case Dexter two buildings, but they are inter connected on three floor so that the buildings that have a 25,000 square foot floor plate that are typical to reach. We can have 55,000 foot floor plates on the on the super floors, so we then we've got developed a pretty good mousetrap where we can have people to give them scalability vertically or horizontally so we'll see Jed somebody comes on once a lease for 15 to 20 years with great credit on a basis that we like it then we’ll do that if we need to break it up or to fill it is better to break it up into two or three or four tenants then will do that.

Okay, great thanks for the color.

Your next question from a line of John Guinee with Stifel.

I believe our question has been answered. Thank you.

Next question would be from a Jamie Feldman with Kilroy.

Great thanks. I guess you guys hired me.

Jamie Feldman Kilroy that's gotten I think to Jamie.

It sounds very good.

I'll send you a bottle of a case again as in a bottle of Jamie has been come March 17.

Perfect. So I guess you’ve obviously announce lot of progress during development pipeline. Has anything changed in terms the tenant tend to made decision making like is there an inflection point that we fit here in your markets?

I don't know, Jamie materially is there always interesting to read and hindsight becomes 2020 I would say that people are concerned about the availability of space and they need to make decisions. So that's been a driver for some. The race is on, I mean if you think about it Amazon is the huge user in South Lake Union now they've moved to Bellevue. They're also recently bought a company in San Francisco. They're talking about taken over the film industry. You've got to the Facebooks and the Googles that are expanding throughout the country in the world everybody is got there their various expansion plans and what not, and then you have other companies the Ciscos and Adobes I think all other rest that have been IBMs have been reinventing themselves and needing to by companies in South. I think there's just a lot of that momentum that sometimes is in fit some starts and in the case of San Francisco there's prop them people are really worried about their ability to expand in the city because there's a restriction on supply and then there's whatever there is in the in the pipeline now and it's not very much. We're not seeing the level of small startups and so forth that we were - we're still seeing that, but we're not seeing at the level we were. There's been comments that many people have talked about or written about them say you know VC funding is down. Well let me just tell you that VC funding year-to-date of $16 billion untracked for $21 billion which would be the third highest year ever in the Bay Area. So we're feeling pretty good about what we're seeing. I do believe that there was a lot of stuff in the market by you and by others rightfully so asking is tackling to pay a peak is it going to go into Quine is it is it going off a cliff or whatever you know going south. We're not seeing that in fact what we're seeing is the big tech, the big finance big balance sheet tech making big plays and I just hope to continue.

Okay that’s helpful. The acquisition potential acquisition which you talked about can you frame the size and how you guys would finance?

Well until we sort of speculative talk until we accomplish something. But most of the stuff that we've bought over the last number of years have been in $100 million or $200 million or more. So I don't see as buying a bunch of stuff in the $50 million range that just doesn't seem to be real good use of management time. In terms of financing it I’ll let Tyler address that.

Yeah I mean we obviously have options, right. We have a lot of capital that we've raised for our development and we did an acquisition we could use some of the capital now we couldn’t and not redeem our preferred next year and that you know $200 million that we could use for acquisitions or and we could raise debt at that point to do that. So we have a lot of capital currently and obviously a lot of the sources of capital for the future.

Would you left up to value add or which bringing the partner.

We certainly have the ability to bring in a partner with regard to levering up everything we underwrite as is correctly if I’m wrong on this tighter is everything we underwrite is - is leverage neutral.

Right.

I don’t think now’s the time to be leveraging up.

Right. So you think stabilized leverage neutral or even going in?

Stabilized.

Stabilized, okay. And it sounds like you think about multiple transactions, I thought you maybe just say states for it.

Well, I think we get a we always have things that we’re looking at and that they get too price here or something changes in the underwriting then we drop like a stone and so I’m not signaling anything that imminent. But we’ve got we always have our on the water.

Is anything change the market it just seems to be more interesting now or was maybe deals coming back.

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

Okay. And just to clarify the million square feet you put out. Can I hear correctly that could be a square in height the information in the third quarter supplemental is up to date meaning the rest of that activity is really coming and so for an exchange or do I hear that wrong?

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

Okay.

That that answer your question.

I will take another look. If I have a question, I’ll call you guys.

Okay.

Thank you.

Your next question will be from the line of John Kim, BMO Capital Markets.

Hi, just clarify the leasing announcement you made today, I know lot of people talked about it, but is it 1.1 million square feet that’s committed and also the 83% committed that was for the exchange and 100 Hooper standalone. Is that correct?

If it was 283.

Yeah, it happened to be 82, 83 for both. Hooper and Exchange on their own and also for the four on their - on their own as well that number has happen to be the same.

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

This is David, John. It’s about 50-50 there is little less furnished plus or minus 95 units and about 105 unfurnished. And as John noted we got more than doubled where we were at the end the quarter were pushing fast 44% on it.

And what’s the typical lease term for the fully furnished?

It ranges, it could go anywhere we have some fully furnished a year or some later six months later or three months so. It ranges but plus or minus a couple of months.

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

Yeah for the fourth quarter to be roughly the same of the third quarter and then next year it’ll pick up a little bit as Viacom tech occupancy, will give guidance on 2017 next year but for the fourth quarter it’s about the same.

Okay, and the timing of the remainder of the joint venture sale?

While we were working to close out of what we said this quarter at this point probably late the mid of late November.

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

Well, start date is going to be next month.

And then on time is like twelve months or so?

I think it’s longer than where that Mike? Like 2016.

Great. Thank you.

Welcome.

The next question will be when I’m a Vincent Chao, Deutsche Bank.

Hey, good morning, everyone. I think most of my questions one answer but maybe just to clarify one in terms of the guidance on the FFO, you talked about the settlement there saying that also raised the same store guides or just curious how much of that was also just driven by the settlement?

That number was not in the guidance in that sense or result so that 13.5% excluded to settlement.

Okay, thanks for that. And then just maybe one on LA is some of the commentary there is remain pretty positive Westall [ph] in Hollywood just looking at the BLS data though it does look like just in some slowdown in job growth. In the greater LA area just curious if you had any thoughts on Madden and maybe some commentary and you know if you’re seeing any changes in the demand profile.

Yes, this is David. we’ve only talked that way so fragmented market continue to do well on that side Hollywood was asked banks you know have really how can you have great growth in the product quality within those markets are seeing the most demand. So I don’t know if you might be in times in different markets around LA but the ones that were in the ones that we’re traveling been pretty steady the growth around increases over the last year and our expectations are that going to continue going forward.

Okay, thank you. Thanks a lot.

Your final question is from the line of Jed Reagan of Green Street Advisors.

Hey, guys you know I know it’s early. You’re not giving seventeen guidance yet but you know how should we think about 17 disposition there where you think that it’s fair to say look similar to this year in order to fund your development spending assuming you do start all of the near term projects. You know kind of on your radar?

More to come, Jed. We’re - we’re going we’ve been really proud of our management team and I think you can see there’s been a lot of progress made throughout the year it was quarter and we’re you know we’re running pretty fast. We were going through the process right now of the annual budgets and you know our strategy and. A part is part and parcel to that. We go through various plans based upon start, was that relate a way to with it disposition et cetera, et cetera, so it’s a little premature but I think I can say that I will say that if you take a look at our track record of dispositions and development they’ve had it’s kind of been the right and left hand and we kind of continue to see that is a very important part of our funding strategy and we’re not going to get out over our skis. I’m too old to be doing that.

Okay.

Jed object take anybody on the snowboard skis going down that, I’ll gladly. Challenge anybody but. We’re going to be prudent. We’re just going to be prudent keep doing what we do well executing on our development building. You know first class products that people want continuing to be a leader and to stay in ability continue to have a strong balance sheet continue to be conservative.

Okay, that’s helpful. And I guess just sort of hypothetically speaking on a decision. I mean do you see your non-core sales or more near JV as of stabilize assets as being kind of the preferred way to go if you look at it.

Where we’re kind of agnostic. We somebody once said don’t get to have a mother fixation about your assets and we don’t. You know we give birth to these things we love them to us there. They’re all in is to. Our means to an end and we’ll. I just don’t want to get specific because I don’t want people run off and say Kilroy that they’re going to do this and do that we don’t we don’t have that plan in place. We obviously look at a lot of different asked that we go through the portfolio every year. Nothing is a sacred cow we look at things on the basis of hope for that. But our reasons and all the raft and we’re just going to give us a couple of months to go through that process

Okay. Turned off and then I guess last one is sort of a jump for you guys if you if you had to rank leasing the man in your markets based on how things you’ll currently kind of going up and down the coast in your core markets, how would you rank order those?

You mean which markets are the strongest and which markets are the least strong?

Yes, yes.

It’s are we talking about office or we’re talking about raise, are we talking about Life Science.

Let’s talk about office - let’s talk office and Life Science together let’s say.

Sure Jed, you take office and Tracy can take Life Science of that.

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

Hey guys this is Tracy Murphy I'll just jump on Rob's comment, that I generally speaking share the same sentiment that San Francisco and Seattle continue to be very strong. San Diego tends or has trended in terms of demand kind of outpacing in terms of Life Science demand, but tend to seem to just be generally more proactive in Life Science based on limited supply, so very healthy across all three Life Science market.

Okay, great. Thanks again.

And this time I’m showing no further questions in queue. I would like to turn the call back over to Mr. Tyler Rose for any closing remarks.

Thank you for joining us today. We're appreciating your interest in KRC. Bye.

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