Kilroy Realty Corporation (KRC) Q2 2017 Earnings Report, Transcript and Summary

Good day and welcome to the Kilroy Realty Corporation Second Quarter Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Tyler Rose, Executive Vice President and Chief Financial Officer. Please go ahead.

Good morning everyone. Thank you for joining us. On the call with me today are John Kilroy, Jeff Hawken, David Simon, Heidi Roth, Tracy Murphy, Rob Paratte, Steve Rosetta 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 by both phone and over the Internet. Our earnings release and supplemental package have been filed on a Form-8K with the SEC and both are also available on our website. John will start the call with a review of the second quarter. Jeff will discuss conditions in our key markets. I'll finish up with financial highlights and review of our updated earnings guidance and we'll be happy to take your questions. John?

Thank you, Tyler. Hello, everyone and thank you for joining us today. We continue to see healthy fundamentals across all of our West Coast markets. During the first six months of 2017, we executed leases on more than 1.1 million square feet in our stabilized portfolio. Rents on these leases were up 14% on a cash basis and 30% on a GAAP basis and the level of leasing was more than double the amount we leased in the first half of 2016. Looking back in time a bit, over the last 15 quarters our stabilized portfolio has never been less than 95% leased and our consistent leasing success has generated an average cash, same store growth in excess of 7%. In the second quarter, we signed new or renewing leases in our stabilized portfolio on just under 490,000 square feet of space that have rents that were 13% higher on a cash basis and 32% higher on a GAAP basis. This included a 141,000 square foot lease extension with Neurocrine, one of our San Diego based life science tenants. Neurocrine's lease was expiring in 2019 and our team did a terrific job working with the tenant to extend the lease for an additional ten years. At quarter end, the stabilized portfolio was 93.9% occupied and 96% leased. In following quarter end, we signed leases at Colombia Square that takes the office component of that project to 100% leased. We also made progress on our $1.4 billion in process development program. In June, we initiated construction at 333 Dexter, our first ground-up development project in Seattle. Market conditions in Seattle are among the strongest in the nation and the South Lake Union submarket where 333 Dexter is located, has strong demand, minimal vacancy and little new supply. Construction continues on time and on budget at 100 Hooper in San Francisco. The office portion is 100% leased to Adobe and we are beginning to see real interest in the 86,000 square feet of PDR space. Two are activity and request for proposals at the exchange, our state of the art office and life science facility in Mission Bay has accelerated as the buildings are now fully visible along the freeway. We continue to see strong interest and remain confident that it will be largely leased by completion next year. At One Paseo, our mixed use project in Del Mar, construction continues on overall site infrastructure, 237 residential units and 96,000 square feet of retail space. This work will be completed in phases beginning in the third quarter of 2018. We are making substantial leasing progress on the retail space where several key destination tenants, primarily food and beverage, have committed to the project and are driving increased demand from a variety of other experiential oriented retailers. In summary, over the next two years, we will deliver approximately $1.4 billion of new state-of-the-art projects that are diversified in terms of product type and market. Projected cash returns averaged 7% to 8% and given current market pricing for similar product, the value could be double our investment. On the financial front, we increased our quarterly dividend 13% to an annualized rate of $1.70 per share. And in July, we strengthened our overall access to capital by amending our credit facility to increase the size by 25% to $750 million, to extend term until 2022 and to lower pricing. Combined with our bank loan facility, our bank term loan facility rather, we now have a total borrowing capacity of up to $1.5 billion including the accordion feature. With regard to capital recycling, we are making progress on the sale of non-strategic assets that would put us in line with the midpoint of our disposition guidance range we provided for the year. Finally, I would like to introduce two very talented and experienced real estate professionals who have joined our management team. Steve Rosetta came aboard in June as our Chief Financial - or rather our Chief Investment Officer. He has been working with our team on several Bay area and San Diego transactions over the past year. Steve has extensive experience in both strategic and transactional aspects of office and life science real estate; most recently as Vice Chairman of Cushman & Wakefield. He will now be working with me to guide our strategic growth, uncover new opportunities and assist in large office and life science leases. Steve is a proven deal maker with a strong track record for executing complex transactions and we're delighted to welcome him to our team. Also joining our team in August is Eliott Trencher who many of you on this call know well. Eliott has extensive experience in the evaluation of both office and life science real estate at the project portfolio and enterprise level. He has spent the last nine years as an analyst, portfolio manager and member of the investment committee for Cohen & Steers. He will work closely with Steve to help us evaluate new opportunities, capital recycling projects and other strategic initiatives. As I've said on prior calls, I believe KRC has one of the deepest benches in our industry and the strongest platform on the West Coast. With Steve and Eliott joining us, our capabilities grow even stronger. Through the first half of 2017, our West Coast markets continue to exhibit healthy fundamentals with strong leasing and rising rental rates for top quality well-located properties. We are capitalizing on these conditions with highly efficient and sustainable work environments that appeal to the broad range of technology in the innovative driven industries and we are willing to make well considered prudent investments in emerging opportunities that we believe in. Our early cycle moves in both San Francisco and Seattle and our more recent focus on strengthening our life science capabilities are both examples of this. That completes my remarks, now I'll turn the call over to Jeff for a closer look at our markets. Jeff?

Thanks John. Hello, everyone. I'll begin in San Francisco where despite modestly negative absorption in the quarter, leasing activity remained robust with 1.4 million square feet of leases signed. Three leases greater than 100,000 square feet were assigned during the quarter bringing the year-to-date total to 10. Brokers are expecting an even better performance in the second half of 2017, given continued low vacancy rates in a supply constrained market that is a result of Prop M limiting additional office entitlements. Subleasing availability hit its lowest level since 2014 and was down 30% from the 2016 peak. Only one sublease space greater than 50,000 square feet now remains available in the San Francisco market. Class A direct vacancy was 6.2% in San Francisco SOMA and South Financial Districts and 3.9% at Mission Bay. In Silicon Valley, Class A direct vacancy was 9.4%. We are currently 97.4% leased in the Bay Area and our in place rents for the region are approximately 31% below market. Moving to Seattle, fundamentals continue to be among the strongest in the nation and strong demand is driving rent growth as well as net absorption levels to new high watermarks. First half 2017 net absorption in the Seattle region was more than 1.5 million square feet higher than last year's first half and vacancy rates were down 110 basis points. Class A direct vacancy in South Lake Union is 1.9%, in Bellevue it is 6.5%. Our Seattle portfolio is currently 97.4% leased and our in-place rents are approximately 9% below market. San Diego continues to steadily improve across all metrics. Average asking rents increased among all classes, direct vacancy reached a post-recession low of 10% and net absorption was strong at 350,000 square feet. The strength in this region is focused on the urbanesque centers of Del Mar Heights and Downtown. In Del Mar, Class A direct vacancy was 14.1% in this [indiscernible] two-story corporate office vacancy was 5.8%. Our San Diego portfolio is currently 95.3% leased and our San Diego in-place rents were approximately 8% above market. Los Angeles activity continues to be focused on the markets of the West Side and Hollywood as a convergence of technology and media continues to create demand. Strong leasing activity has flown into the secondary market of Culver City as very little supply remains on the West Side and Hollywood. We think this positions us extremely well for Academy project which is fully approved and in title. Class A direct vacancy in West LA was 6.7%, West Hollywood was approximately 7.1% and Hollywood was approximately 8.1%. Our Los Angeles portfolio is currently 94% leased with in-place rents approximately 12% below market. Across our portfolio, estimated average in-place rents are 16% below market. Rents on the remaining 2017 expirations are approximately 15% below market. We have a few expirations remaining this year of the 567,000 square feet remaining, approximately half of the space has been re-leased including the 183,000 square foot group health space in Seattle. We continue to be laser focused on our 2018 expirations where we have four leases, totaling approximately 740,000 square feet expiring throughout next year. Two of the leases are in San Diego, one is in Seattle and one is in San Francisco. That's a snapshot of our markets and now Tyler will cover our financial results in more detail. Tyler?

Thanks, Jeff. FFO per share was $0.87 in the second quarter. This included about a penny and a half of one-time income and about a penny and a half non-cash charge related to the San Diego lease renewal John mentioned. Consistent with our forecast, cash same-store NOI came in lower this quarter at 1.9% reflecting lower average occupancy largely related to a 115,000 square feet of move outs in Los Angeles and San Francisco. GAAP NOI was flat. As John mentioned, we closed the amendment of our unsecured credit facility earlier this week. We expanded the revolver to $750 million and maintained the size of our $150 million term loan. Both the revolver and the term loan have a new five-year term. We paid down the $150 million term loan and now it's two six-month delay draw options and plan to redraw the proceeds at the end of the year. We also paid off a $39 million term loan. We have no outstandings on the credit line and approximately $120 million of cash on hand. At the end of the second quarter, our debt to annualized EBITDA ratio stood at approximately 5.8 times and 4.9 times net of cash. Earlier this month, we announced our intention to redeem the 4 million shares of our 6.375% Series H preferred stock on August 15. The stock will be redeemed at par for an estimated $100 million in cash. The transaction will also generate a $0.04 non-cash charge to FFO in the third quarter, representing the write-off of original issuance cost. We expect to finance the redemption from cash on hand. Now, let's discuss our updated guidance for 2017. To begin, let me remind you that we approach our near-term performance forecasting with a high degree of caution, given all the uncertainties in today's economy. Our current guidance reflects information in market intelligence as we know it today. Any significant shifts in the economy, our market [indiscernible] construction cost and new office supply going forward, but have a meaningful impact on our results in ways not currently reflected in our analysis. Projected revenue recognition dates are subject to several factors that we can't control, including the timing of tenant occupancy. With those caveats, our updated assumptions for 2017 are as follows. As always, we don't forecast potential acquisitions. We anticipate remaining 2017 development spending on our projects under construction to be approximately $150 million to $200 million. We project same-store cash NOI growth to be between 2.5% and 3% for the year. We project occupancy for year-end 2017 to be in the 93.5% to 94% range. For our Colombia Square residential tower, we expect occupancy at year-end to be approximately 80% with the unfurnished units stabilizing at 95%. We expect G&A to be up about $0.01 from our prior forecast related primarily to our new hires. In terms of capital recycling as John discussed, we are working on the sale of non-strategic assets that could be completed in the third quarter that would bring our year-to-date disposition proceeds close to $200 million; the mid-point of our guidance range for the year. The potential timing would be about a half quarter earlier than we had originally forecasted which would result in about $0.01 of dilution compared to our prior guidance. Taking all of our revised expectations into account, we are adjusting our guidance range from $3.38 to $3.54 per share with a mid-point of $3.46 per share to a new range of $3.35 to $3.45 per share with a midpoint of $3.40 per share. The adjusted range reflects $0.04 related to the preferred redemption, $0.01 related to the earlier than forecasted disposition and about $0.01 from higher G&A. That's the latest news from KRC. Now, we'll be happy to take your questions. Operator?

[Operator Instructions] Our first question comes from Manny Korchman of Citi. Please go ahead.

So just in terms of the exchange in your leasing pipeline there, can you give us some more color as to how it's leaning in terms of tech tenants versus life science tenants and if that change has - if that mix has changed either recently or sort of since we last spoke about you having some LOIs there?

Yes, Rob, do you want to cover that?

Sure. I think it's been going on for the past year where we've had a pretty equal balance between the technology tenants that are looking at the exchange and Life Science especially in the last three months there's been, as John mentioned earlier in his remarks, there's been a real uptick in tour activity from quite sizable tenants as well as some in the 100,000 foot range and, again, kind of equal mix between life science and technology.

And then John in your opening remarks, you talked about life science. Certain thing like that you spoke about, San Francisco being there sort of earlier than most and Seattle in the same way, is that how you're viewing life science? Is it going to become a significant platform for the company? And also do you see others sort of going that same direction and how do you compete with sort of a larger life science arena if that's the way it's going?

Yes. I don't see it becoming a huge portion of the business, Manny, but it's a natural extension. We've already done about, I don't know what Tracy, 2 million, 3 million square feet of it? We're in three of the top four markets in the country. We have all the skillsets and whatnot. We're not going to become a life science company by any stretch of the imagination, but it's a natural extension of our capabilities and we have strong demand in those markets particularly in the Bay area so we're going to continue to, at the margin, increase that portfolio.

And the last one for me; turning to Seattle with 333 Dexter, how do you think about the design of that building from a single or multi-tenant use perspective and getting the design right given the speculative nature of that development?

I think it's going to be the killer building in South Lake Union. It has more bells and whistles. It is, I think, extremely appealing to both large tenants and to smaller tenants. It was designed as such. It's very efficient and of course the market couldn't be any better. So I think we're going to do extremely well with that facility. I think the design will knock the socks off of most of the tenants in the area.

Our next question comes from Craig Mailman of KeyBanc Capital Markets. Please go ahead.

Tyler, real quick on the same store guidance, what brought it down 0.5% at the high end?

It's partly related to the disposition we're working on and partly related to property taxes. There's a few little things there that we would - we brought it down half a point.

And then separately on future development starts, just curious, on the Academy specifically kind of how are you guys thinking about timing there with one of your peers kind of probably coming out of the ground pretty soon on a building nearby, kind of what's your viewpoint there?

Yes. I think we have a superior location and product but there's plenty of room for both projects. We're, as you might remember, a multi-use project with both resi and a lot of F&B type retail as well as office space that has, I think, all of the bells and whistles that everybody wants and having had such great success at Colombia Square, we think we know what kind of product is the most in demand in the market.

What's the updated thought on timing?

I beg your pardon.

Timing of the start, what's the kind of -

Oh well, as I said before, I want to see some progress at either the exchanged and committed leases or at 333 Dexter before pulling the trigger there and I think - so I think it's probably sometime in the next six months I guess, market being good and all of that.

And then just the last one on the four big lease expirations in 2018, can we get a sense of timing of when those expire throughout the year?

Yes, this is Jeff. Basically one per quarter, so first, second, third, fourth sort of back-loaded to the third and fourth quarter of the year.

Our next question comes from Nick Yulico of UBS. Please go ahead.

Thanks. Just turning to the releasing spreads, on a cash basis for commenced deals, they were about 4% in the second quarter, lower than in prior quarters. What drove that?

Yes, that was - we did a fair amount of those deals in San Diego this quarter, so I don't think it's a trend. Our portfolio is still 16% under market but that number was driven by more San Diego leasing than previously.

Okay, that's helpful. And then on the Theranos building at Page Mill, it looks like they may have put up some sublease space. I mean, what is your plan for that, are you looking to take back space directly or how does that, how and when might that play out?

Tracy, do you want to cover that one?

Yes, sure. I think it's the same sort of message we gave you Nick when we acquired the building, we were obviously comfortable with Theranos' tenancy. They have put them - the space on the market for sublease, but the market remains healthy and they're a tenant in good standing. So no change as of now.

Okay, thanks.

Our next question comes from Jamie Feldman of Bank of America Merrill Lynch. Please go ahead.

So John you've beefed up the executive team this quarter, can you just and you made the comment that Kilroy now has the largest platform or the best platform on the West Coast. Can you just give us your latest thoughts on the future of the company, how big you think this company can be and what we should read into so much growth in people who are looking at deals?

Well, Jamie, I don't think there's a size that we're trying to be. I've never thought that bigger is better, I think better is better and if you look at it, over the course of the last seven years with what we've done in the various markets that we historically were in in terms of new projects or dispositions, whatever, as well as entering in the Bay area and Seattle and now expanding our platform in the life science area and of course we have some residential votes in Hollywood, down in San Diego, the company has grown substantially. We have, as you know, a very robust development pipeline which will cause the company to grow. There are going to be a number of opportunities that come up over the next few years and I want to make sure that we have the manpower to assess those opportunities well in advance. What allowed us to be successful in moving into the Bay area and thereafter to Seattle ahead of many others is that we've spent a couple of years when we were really in the down and dirty dumps of the recession determining which projects, which markets, what were the fundamentals, what were the things that we looked for to be able to act upon in the future and I think that served us very well, served our shareholders very well. I want to make sure that we're doing that as we go forward. Now we're much clearer to the top of a cycle now then we were back then but there's still other opportunities. I want to make sure we have the manpower to really make good assessments of opportunities as they arise and I think both Steve and Eliott will help us there. Steve also has been probably the most successful broker maybe in the world in life science over the last several years and I like having both he and Tracy be able to work together. Life science has not been my background, as you know, so I think we have some skillsets and people that are going to serve us very well and create a lot of future value. I don't have any thought about the question as to what size we should be. I don't think that bigger is necessarily better.

Okay, that's helpful. I appreciate the color. Can you guys talk a little bit more about Silicon Valley fundamentals and what you'd expect to see there given the large delivery and the potential for some sublease space coming back? Just kind of -

Yes, Rob?

Just kind of in the next year or two?

Sure Rob, do you want to cover that one?

Sure. Good morning Jamie. As you know, there was 515,000 square feet of negative absorption in the Valley in the quarter but again, as we've been saying on the calls pretty consistently, if you peel the layer of the onion back the key micro-markets such as Palo Alto, Cupertino, Mountain View and Redwood City continue to see strong demand and tenants in those markets actually are competing for space and most recently San Jose has now come onto the radar screen with a lot of conversation about large tenants moving into downtown and, again, the same story that they can get off work get Caltrain and go back to San Francisco which is a much more pleasant way to commute than riding on a large bus. So and the last thing I would say is the Valley does ebb and flow. You have companies like Intel that are reconfiguring themselves going into a different type of business so they adjust the manpower, they adjust the space they use and we've remained pretty bullish on the entire Valley.

Okay, it sounds like you would put fresh capital to work there in the right submarket?

Well yes but let's look at something Jamie, we haven't put any capital really to work there other than buying a covered land play which was $50 million or $60 million last year. We haven't done much in the last couple of years other than build out Redwood City and some of the other buildings that we did. I think we've been very prudent in wanting to watch what's going on. I've said before that I think a lot of the older product in the Valley is going to get hammered over time simply - or it's going to require huge CapEx to bring it up to speed or scrape and build something else out. There's a lot of that kind of stuff going on. You haven't seen us make a significant play in the Valley in what, Tyler, two, three, four years?

Right.

Okay, and then just to clarify, Jeff the four leases you mentioned, can you just handicap - I mean, are those known move outs or those are still - you're still working through those four?

Yes, at this point our information's are all move outs.

Okay, and you said none are backfilled at this point?

That's correct.

Okay, all right. Thank you.

Our next question comes from Blaine Heck of Wells Fargo. Please go ahead.

Thanks good morning out there. Can you talk a little bit more about the dispositions that you guys have done around $70 million thus far this year. You mentioned some properties on the market that could get you to $200 million but given where pricing is in most of your markets today, does it make sense to accelerate dispositions beyond that and can you give any granularity on what it is that you're exactly looking to sell?

Yes, Steve, do you want to cover that one?

Yes, this is Tyler, let me just in initially. We've - my recollection is we've only done one small transaction of $12 million so far this year and so what we said in the opening comments was we're working on some transactions that could take that to $200 million but in terms of the specific transaction, I mean Steve can talk about it, but we're really not going to get into details on the transaction because it hasn't closed yet.

Yes, right now we're subject to confidentiality agreement so we're not going to comment on the disposition.

Can you talk about any sort of markets you might be targeting for sales or not even that?

Well, we've said before that we thought it would likely be San Diego area and that continues to be the case.

Okay, fair enough. And then Jeff, it's been a while since I think we talked about Bridgepoint but they're still a pretty meaningful tenant of yours. Is that one of the 2018 expiries and are we still looking at a significant roll-down there?

Yes, that's one of the tenants, that's the end of the third quarter of next year so they would be vacating.

Okay and then sorry if I missed this but can you talk about the reason for the $35 million increase in the expected spend at Academy?

Yes, David, do you want to go over that?

Yes, this is David. You know, as you've moved through these projects they evolved, scope changes with respect to additional square footage that we were able to fit in on the site. You know, final planning of the residential town and the retail. It has mostly to do with some additional square footage that we're going to be able to squeeze in under the current entitlements.

It also relates to construction cost. You know, we've been forecasting fairly significant increases and that's exactly what we've seen throughout the platform.

Does that have a meaningful impact on the yield that you guys are expecting on that project?

No because as David said, we ended up increasing the square footage. We pretty well covered the expected increase in construction costs and related soft costs within the initial budget but as David said, we did increase the square footage. So yield wise we think we're going to be right about in the range we've forecasted.

Great, thanks a lot.

Our next question comes from Rob Simone of Evercore ISI. Please go ahead.

Hey guys, thanks for taking the question. On 333 Dexter I think you guys are just kind of getting out of the ground now but with the Q3 2019 delivery, when is kind of that point when investors should start asking you about - or at least raising the question about leasing? It's obviously really early but just kind of like thinking about when, you know - in relation to what's happening with exchanges right now, when does that question become appropriate?

Well, I think whenever they want to ask it. If I think it's realistic, you know, we always forecast that we're going to have a period of time subsequent to completion of the warm shell and what not to lease the building up. You know, generally we beat it very substantially but I think once the building tops out it's appropriate to say, you know, how are things going? People can ask whenever they like but most of these markets are not preleasing markets. Seattle has not been a prelease market although it has seen a couple of projects that have been preleased, one being the very significant 800,000 square feet or so for Google being done by Vulcan, Paul Allen's company and the other Facebook, I think it's around 400,000 feet also being done in South Lake Union by Paul Allen. Generally buildings are up and nearing warm shell completion in Seattle before they're released and it seems true in Hollywood and San Diego and most of the markets we're in although we've seen exceptions to that obviously particularly in San Francisco a few years ago.

Would it be possible to share when you guys think the warm shell will be completed?

Sure, I don't know that I have that in my head. Does anybody on the Kilroy team? We don't have our construction development people in the room so - Do you have that Rob or Tyler?

I'm thinking it's 3Q 2018 but we can double check that.

Okay, great. I'll follow-up offline, thanks guys.

Our next question comes from Judd Reagan of Green Street Advisors. Please go ahead.

Good morning guys. I guess along the same lines as the Academy question a bit ago. It looks like the planned square footage at Dexter is lower than last quarter and then you also pushed out the completion timing at One Paseo a bit. Wondering if you can comment a little bit about what changed at those and if yield expectations are impacted in either case?

Yes, Tyler, do you want to deal with the San Diego?

I think David can cover One Paseo.

Yes, so Judd how are you. On One Paseo on the front end it's all about pulling permits and getting through the city so we had a little bit of a delay on just getting through the city and the permit volume. That's primarily the schedule. We're working hard to make a lot of that up so - but that was the cause of it.

Thanks. Just with regards to Dexter?

Can you repeat the question because I didn't follow -

Yes, no problem. Just it looked like the planned square footage at 333 Dexter is lower than what was reported last quarter and just curious talking about what was driving that?

I'll defer to Tyler in terms of what was reported but we haven't decreased the square footage.

I think as we started construction we locked in the new number. So it's 650 at this point.

Okay, it was 700 in the last supplemental. Okay, and Tyler, maybe -

Sorry, I know the answer to that. Sorry, there are a couple of parcels that are near 333 Dexter when we bought the site that had square footage related to them as well and so the difference between the 650 and the 700 is related to those parcels that were across the street.

Which could be future development opportunities?

Yes, it's basically now in our shadow pipeline, we've taken them off the development page and they are potential development for shadow pipeline.

Okay, that's helpful. Thanks and maybe sticking with you Tyler, same store operating expenses are up 11% year-to-date and another 8% in the second quarter. Just hoping you can give a little color on the drivers of the increase and whether we should expect that kind of trend line to continue in the back half of the year?

Yes, no some of that is related to property taxes. A lot of that is you can see tenant reimbursement is up so a lot of that was passed through so it didn't really impact, you know, the bottom line. I think for the remainder of the year we obviously had strong same store growth in the first quarter, 2% in the second quarter, we anticipate sort of flat same store for the remainder of the year to end up in that 2.5% to 3% range. But, you know, it's utilities, it's OpEx, it's property taxes but, again, if you look at our reimbursement line most of that is pass through.

Okay, that's helpful and maybe just last one if I can. Just curious if you can give any color on maybe the depth of the leasing pipeline for larger block requirements in San Francisco and Seattle and has that changed at all year-to-date?

Rob, do you want to cover that one?

Sure, I'll start with San Francisco. You know, as Jeff mentioned the quarter had marginal 136,000 feet of negative absorption but what that doesn't show are the pending deals that are happening, one of which has already happened that will be reflected in Q3. Year to date there have been over ten deals of over 100,000 feet. Going down below that there have been 29 deals of 20,000 feet or greater so activity remains really strong and this is - a lot of it is net growth from companies that have already have facilities in San Francisco that are looking to expand and we continue to see interest from tenants that aren't in San Francisco yet but touring. So San Francisco I think is on record for a really strong second half of the year and brokers themselves are also very optimistic. So we're very pleased with what we see. Switching to Seattle and specially Bellevue, we're - as John said, the building we've got can suite single tenant, multi-tenant, two twin towers connected by super floors has all of the bells and whistles, great retail on the ground [plain] and there's nothing in the development horizon right now that will deliver when we deliver. So we've got a window until extremely pleased with what we see going on and you've seen kind of stepping out of South Lake Union, just Seattle in general, the amount of activity and leasing that's happened year-to-date has put it in the top rank of the country in terms of office markets. So it's not just - it's not just South Lake Union it's also Bellevue and even Downtown Seattle has seen some significant leasing.

Okay, great thanks Rob, appreciate it.

Our next question comes from David Rodgers of Baird. Please go ahead.

Hey guys just a couple of follow-up's here. I guess one on dispositions maybe for John or Steve. It sounds like the activity this year will be more maybe non-core or non-strategic but do you still have an appetite to pursue strategic deals in the long run and is that opportunity still available for you guys or are you still actively kind of in that market?

You're talking about just positions?

Yes.

Yes, well we kind of - we get together every year, we figure out which buildings we think are going to perform very well for the future and which buildings may not or which buildings maybe have tapped out and we concentrate on the latter two. I wasn't quite sure about what you were talking about in terms of opportunities. You know, we could sell everything if we wanted to. The market is extremely robust with regard to buyer activity and we will continue as we have over the past, I guess, better part of 20 years we've been a public company we'll continue to do select dispositions to recycle capital or take advantage of other opportunities. So, I think you'll just see more of the same.

Okay, thanks John and maybe for Jeff, just going back to San Diego, the rent roll next year is $45.00, $46.00 a foot. That's kind of the highest you have. Once you go through that number I guess what's the anticipated roll down and does that really eliminate the negative market to market in San Diego after 2018?

Right now, as I mentioned you know, San Diego in Total is 8% above market so that's going to hit next year so that will take a big chunk of that away.

Okay, and any sense on what that roll down should be, plus or minus?

John do you want to -

25% to 30%.

Okay, fair enough. Thanks, and John maybe just last bigger picture question. With regard to the Central SOMA plan, what's the timing and your thoughts on kind of what that means for Kilroy and Flower Mart?

Yes, what it - what was the latest update from [indiscernible] guys?

We believe spring of 2018 the Central SOMA Plan will be approved and approximately six months after that the Prop M allocation for Flower Mart.

Okay great. Thanks.

Our next question comes from John Guinee of Stifel. Please go ahead.

Yes, Erin Aslakson here actually. Quick question for you on the velocity of leasing amongst the younger kind of VC funded companies in San Francisco and Silicon Valley area. How is that looking? I mean you mentioned some of the smaller deals with the 20,000 square foot range were getting done but how does it look overall in terms of their ability to continue to grow and so forth?

Well, you've got to really look at VC funding and if you take a look at the VC funding in San Francisco, the second quarter was $7.7 billion, the first quarter was $6.2 billion. It's on track. They've raised more money than I think they've ever raised and as we understand it, it's on track to - so about $14 billion in the first half. That contrasts with - you know, in 2010 it was $10 billion, $12 billion in 2011, $11 billion in 2012, $12 billion in 2013 and then we dropped, then we pumped, up to $25 billion in 2014 and $27 billion in 2015, $21 billion in 2016 last year. We're on track to see a lot more VC funding this year than all but maybe 2014 of the last seven years and I think that bodes well for our continued growth of these companies and that generally translates to continued growth in demand for space.

Thank you.

You're welcome.

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

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