Kilroy Realty Corporation (KRC) Q3 2017 Earnings Report, Transcript and Summary

Good day, everyone, and welcome to the Q3 2017 Kilroy Realty Corporation Earnings Conference Call. [Operator Instructions] And please note that today's event is being recorded. I would now like to turn the conference over to Tyler Rose, Executive Vice President and Chief Financial Officer. Please go ahead, sir.

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 8 days, both by phone and over the Internet. Our earnings release and supplemental package have been filed on a Form 8-K with the SEC, and both are also available on our website. John will start the call with a review of the third quarter, Jeff will discuss conditions on our key markets, and I'll finish up with financial highlights and review of our updated earnings guidance. Then we'll be happy to take your questions. John?

Thank you, Tyler. Hello, everyone, and thank you for joining us today. We are happy to report that we have made significant progress across the platform since our last call. Our development program continues to exceed our underwriting. As we recently announced, we leased 100% of the office space at The Exchange to Dropbox. Combined with the 314,000 square foot lease we signed with Adobe at 100 Hooper in the last 11 months, we have now leased 100% of the 1.1 million square feet of speculative office space that we have under construction in San Francisco. At quarter-end, our stabilized portfolio was more than 96% leased with cash and GAAP rents up 10% and 20%, respectively, excluding two Orange County leases. We completed the sale of 10 suburban non-core properties and a small land parcel in San Diego for total proceeds of approximately $175 million. And we continue to build our pipeline of opportunities with the acquisition of a land site in the Little Italy neighborhood of San Diego for approximately $19 million. This provides us with the opportunity to build approximately 170,000 square feet of creative office space in one of San Diego's top urban neighborhoods. The outlook for our West Coast markets is also positive, as fundamentals for commercial real estate remain strong. Technology, entertainment and life science continue to be the primary drivers of demand. Seattle is on track to produce an annual record in net absorption, with South Lake Union and Bellevue accounting for 2/3 of the activity. There's currently 7.3 million square feet of demand and very limited unleased supply in the Seattle region, making it one of the strongest markets in the country. And in San Francisco, the market is equally tight. Of the 5.4 million square feet under construction that we'll deliver over the next few years, approximately 84% is now committed. The combination of the extraordinary demand for space, the lack of supply of new product and the impact of Prop M, which is solidly in play, we believe bodes extremely well for our Flower Mart development. To be more specific on the development front, we have four projects currently under construction, and our biggest news on those projects came earlier this month when we signed a 15-year lease with Dropbox for 100% of the office space at The Exchange on 16th, which is currently under construction in the Mission Bay submarket of San Francisco. Dropbox will take all 736,000 square feet of the office space, which makes it San Francisco's largest-ever commercial lease transaction. Under terms of the agreement, the Dropbox lease will commence in phases beginning in the fourth quarter of 2018 and extending through the fourth quarter of 2019. We're already in discussions with several prospects for the 14,000 square feet of food and beverage space, and expect the project to be fully leased upon completion. As I mentioned, we expect to beat our underwriting across all metrics, including cash return on cost, straight-line and IRR. Our second project in San Francisco is 100 Hooper, where we are also ahead of our underwriting. The office component of this $270 million development is 100% leased to Adobe. Construction continues on time and on budget, with a projected delivery date in the spring of 2018. We are now focused on leasing the 86,000 square feet of PDR space, which is likely to include a diverse group of tenants ranging from food services to specialized light manufacturing, such as artificial intelligence, robotics and medical devices. In Seattle, we began construction last quarter on 333 Dexter, our 650,000-square-foot state-of-the-art office project. As I mentioned, the Seattle market is arguably the strongest in the country with diverse demand, minimal vacancy and little new supply, especially in South Lake Union submarket, where 333 Dexter is located. Our total estimated investment is just under $400 million with a delivery date in late 2019. Finally, at One Paseo, our mixed-used development in the Del Mar submarket in San Diego, we are currently under construction with the project's overall infrastructure and site work, along with 237 residential units and 96,000 square feet of retail space. We have significant interest in the retail space, primarily with food and beverage tenants, and are in lease negotiations for more than 60% of the space. The space will be delivered in late 2018. And on the residential component of the project, we are seeing strong demand. Our market consultants indicate that our delivery timing will be optimal from a demand-supply perspective. To summarize, we have four state-of-the-art projects currently under construction that will be delivered over the next two years. They include just over 1.7 million square feet of office space, 62% of which is now leased, along with 86,000 square feet of PDR space, 96,000 square feet of retail space and 237 residential units. They represent a combined estimated investment of $1.4 billion and will generate over $100 million of cash NOI on a stabilized basis. Turning to our next round of likely development starts. First, in Hollywood, The Academy project is permit-ready. The estimated cost is between $425 million to $450 million. It's a mixed-use project, including office, food and beverage and residential components. The first space will consist of approximately 370,000 square feet of office and F&B space that is projected to have a total estimated investment of approximately $275 million, including the land. The incremental spend is approximately $225 million. The second phase will be a residential tower with approximately 200 units. Hollywood continues to attract a broad range of tenants. While entertainment, including content creation, continues to drive significant growth, we are also seeing other industries, such as marketing and fashion, expand in this market. Class A office vacancy is 8.8% with no significant blocks of modern space available. Our Sunset Media Center and Columbia Square projects are now fully leased. We're in the process of completing final refinements to our program for The Academy and will likely be under construction with the office and retail early next year. Second, given the strength of the Del Mar residential market, including very limited competing supply, we are preparing to commence construction on the balance of the residential units at our One Paseo project later this year. In total, there will be 608 units, with 237 units being delivered in the first quarter of 2019 and the remainder coming online in the second half of 2019. The incremental spend for the second phase of the residential is approximately $150 million. On the new opportunity front, we recently added to our pipeline with the acquisition of a 1.2 acre full city block located in the Little Italy neighborhood of San Diego. The site is zoned, and we are planning for the development of approximately 170,000 square feet of modern brick-and-timber low-rise project, comprising 155,000 square feet of creative office and 15,000 square feet of F&B. Consistent with the investment thesis we have adopted over the past years, the project encompasses all of the features that have led to our development successes. The Little Italy neighborhood, just north of downtown, is a top living destination at San Diego for millennials, and is within a quarter mile radius of more than 75 restaurants and 4,200 residential units. Vacancy in the downtown submarket dropped 320 basis points year-over-year with no new supply planned. The site is two blocks from the Harbor and within close proximity to public transportation and the San Diego Airport. We preliminary expect our total investment of the project to be roughly $100 million. We also have received inquiries regarding our interest in the Oyster Point area of South San Francisco. At this point, we can say that we are very interested in expanding our life science platform. The South San Francisco life science market is clearly one of the strongest in the country, and we are pursuing opportunities there. Having said that, it's probably the better part of a year away before any acquisition could materialize. So more to come. Moving to capital recycling. Dispositions remain a key aspect of our overall financial strategy, and we are right on target for the year. During the third quarter, we completed the disposition of 10 smaller suburban operating properties totaling approximately 675,000 square feet and a 5 acre undeveloped land parcel for gross proceeds of approximately $175 million. The non-core properties were all located in Sorrento Mesa and Mission City submarkets of San Diego. To sum up, our West Coast markets continue to demonstrate strong demand and a dwindling supply of high quality new construction. I want to take a moment to remind everyone on this call that we were early to identify trends in the San Francisco market back in 2009, 2010 and Seattle in 2010. San Francisco at that time was 17% vacant, and Seattle was 17.1% vacant. And the Hollywood market was in dismal shape with essentially no demand when we contracted to buy our first building, now known as Sunset Media Center, back in early 2011. The moves that we made in those markets early through strategic acquisitions, closely followed by securing and entitling key development sites, have proven to be very profitable for investors as we continue to drive NOI and NAV higher. With our $1.4 billion of development under way today and our future pipeline, we believe we are well positioned to continue to deliver significant shareholder value. 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. Let me begin with a review of our markets in San Francisco. The city is now on track to deliver another record-breaking year for leasing. Year-to-date, there have been 15 deals executed greater than 100,000 square feet. The prior record was 17 deals in 2014. Net absorption was positive, vacancy declined, rents were up and supply continues to decrease. With low vacancy and the new supply substantially leased, brokers are reporting a potential for substantial rent increases. Asset prices are also increasing, with 222 Second Street recently selling for $1,200 per square foot. Class A direct vacancy was 9.4% and 7% in San Francisco, SOMA and South Financial Districts and 3.6% in Mission Bay, and Silicon Valley Class A direct vacancy was 10.6%. We are currently 97.5% leased in the Bay Area, and our in-place rents for the region are approximately 28% below market. In Seattle, the story is much the same. Strong demand and limited supply is driving rents and net absorption levels to new records. Asset prices have also increased substantially. Bellevue recently recorded an all-time high office sales price of $887 per square foot, with the sale of Centre 425 and South Lake Union recently setting a record price of $925 per square foot for the sale of Urban Union. Class A direct vacancy in South Lake Union is 1.9%. In Bellevue, it is 4%. Our Seattle portfolio is currently 95.8% leased, and our in-place rents are approximately 8% below market. In San Diego, we continue to see steady improvement in rents and net absorption, with the strongest market centered in Del Mar and downtown. In Del Mar, Class A direct vacancy was 13.5%. Our San Diego portfolio is currently 97.1% leased, and our San Diego in-place rents were approximately 7% above market. Excluding the Bridgepoint lease, rents in this region are effectively flat to market. In Los Angeles, leasing activity remains concentrated in the West Side and Hollywood markets, with demand driven by the convergence of technology and media. We view Apple, Netflix, Facebook, Hulu and Snapchat's recent announcement that they plan to invest more than $10 billion to media and content creation as just the beginning and will bode well for our Los Angeles portfolio, including The Academy, which is fully entitled and ready for construction. Class A direct vacancy in West L.A. was 8.1%. West Hollywood is approximately 11.3%, and Hollywood was approximately 8.8%. Our Los Angeles portfolio is currently 94.4% leased, with in-place rents approximately 11% below market. Across our portfolio, our estimated average in-place rents are 15% below market. As we have discussed on prior calls, we have four expirations in 2018 of over 100,000 square feet. They total approximately 723,000 square feet expire throughout the year and are in three separate markets. This compares to our trailing 5-year average of about 1 million square feet of expirations. Over that period, we leased an average of 2 million square feet per year. So while the expirations are chunkier in 2018 than in prior years, the quality of the assets, the strength of our leasing team and our recent track record give us confidence that we will be able to successfully manage through this rollover. The Seattle and San Francisco expirations encompass just under 300,000 square feet, and rents are approximately 30% below market. We're making good progress on re-leasing of these two expirations. In San Diego, we have 2 leases totaling 424,000 square feet that expire in the second half of 2018. When taken together with the San Francisco and Seattle expiration, rents are flat on a stabilized basis. That's the snapshot of our markets. Now Tyler will cover our financial results in more detail. Tyler?

Thanks, Jeff. FFO per share was $0.88 in the third quarter. That includes a $0.04 noncash charge from the write-off of original issuance cost related to our preferred stock redemption. Excluding that $0.04 and a $0.05 one-time payment during the same period last year, our FFO per share grew 6% year-over-year. As we forecast throughout the year, our same-store NOI growth moderated in the third quarter, with cash NOI up 0.8% and GAAP NOI up 2.4%. The moderation in same-store results was driven by lower occupancy as a result of the expected 90,000 square feet of move-outs. Half of these move-outs have been leased. In dispositions, as John mentioned, we closed the sale of 10 operating properties and an undeveloped land parcel during the quarter for gross proceeds of $174.5 million and a book gain of approximately $38 million. That brings our year-to-date dispositions to $187 million, close to the midpoint of our guidance for the year. As we previously reported in July, we completed the amendment of our unsecured credit facility and extended its term for another 5 years. Our revolver increased to $750 million, and our $150 million term loan was updated to include 2, 6-month delay draw options. We expect to draw $75 million on the term loan by year-end. In August, we redeemed all of our $100 million Series H preferred stock at par. We currently have $115 million outstanding on our unsecured revolver and approximately $179 million of restricted cash. Our debt-to-annualized EBITDA ratio at quarter-end was approximately 5.4 times and 4.8 times net of cash. While we will provide detailed 2018 earnings guidance on next quarter's call, the estimated impact of the Dropbox lease at The Exchange is as follows. Lease commencement is projected to occur in 3 phases: October 2018 for 360,000 square feet, April 2019 for 200,000 square feet and December 2019 for the remaining 176,000 square feet. From a cash rent perspective, phase 1 has 15 months of rent abatement and phases 2 and 3 each have three months of rent abatement. Finally, from a GAAP rent perspective, we are conservatively forecasting no FFO contribution until early 2019. As a reminder, the timing of GAAP revenue recognition is not entirely within our control and subject to tenant delays. We expect revenue recognition for about half the space to hit in early 2019 with full contribution in 2020. Now let's discuss our updated earnings guidance for 2017. To begin, let me remind you that we're approaching 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, tenant demand, construction costs and new office supply going forward could 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 occupancies. 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 $75 million. We have improved our outlook on our same-store NOI growth by roughly 25 basis points to 3%. We are maintaining our occupancy projection for the year-end 2017 to be in the 93.5% to 94% range. For our Columbia Square residential tower, we expect occupancy at year-end to be approximately 80%, with the unfurnished units stabilizing at 95%. In terms of capital recycling, we are working on one small disposition but are not forecasting a 2017 close at this point. Taking all of our revised expectations into account, we're increasing the midpoint of our guidance range to $3.42 for the year, with a range between $3.40 and $3.44 per share. The $0.02 increase from the prior quarter is largely driven by lower property taxes on one property and a few one-time income items during the quarter. That's the latest new from KRC. Now we'll be happy to take your questions. Operator?

Thank you. We'll now begin the question-and-answer session. [Operator Instructions] And the first questioner today will be Blaine Heck with Wells Fargo. Please go ahead.

John, now that you're sitting on a pipeline that's 62% pre-leased and your only spec exposure is 333 Dexter, which, I guess, seems like it'll have strong activity, I guess, are you more likely to start The Academy on a spec basis than maybe you were before The Exchange lease? Or even maybe pushing a little harder to find an anchor lease at the Flower Mart? I guess, just how has that lease changed your thinking on the shadow pipeline?

Well, you're talking about two different time zones in two different markets with the Flower Mart and with The Academy. Let me first approach The Academy. The market is tight as a drum for quality space. There's quite a bit of demand. And we spend a lot of time with the tech companies, many of whom are headquartered up in the Bay Area here, with regard to what their demands are. And this quest for this ever-increasing need for content has translated, as Jeffrey made in his remarks, there's just with three or four companies commitment to spend $10 billion on content here over the next year or two. Beyond that, there's a wave of other companies that are also looking to increase content in streaming, television, movies, all that kind of stuff. And that translates, we think, into significant demand for Hollywood because that's where a lot of the content comes from. So I'm inclined to start The Academy spec. There hasn't been a lot of pre-lease stuff done in Hollywood. The demand that we see down there, because as David -- or rather, as Jeff mentioned, where Columbia Square and Sunset Media Center, we don't have any space. We have a lot of people who want space, we don't have any space available. So I think the 370,000 square feet down there, which is geared towards both big and little companies, it can go either way, is an appropriate thing to start. And as we mentioned, we'll probably start that sometime between -- within the next six months, maybe within the next three months. In regards to your comment about the Flower Mart, yes, I think we're going to have a substantial pre-lease. And I think the activity that we're seeing in and around the Flower Mart -- for the Flower Mart project, we just appointed the brokerage team. We haven't made any formal broker presentations to the tech community. But as I've commented on in the last couple of calls, we've had a lot of informal requests by major tech companies to understand the Flower Mart. And I'm convinced that we will end up with a very, very, very significant lease probably that will blow The Exchange numbers in terms of square footage away before we start that complex.

Interesting. That's helpful. And then, Jeff, I guess, can you talk a little bit more about maybe the progress you guys have been making on backfilling the 723,000 square feet of move-outs expected next year?

Yes. As I mentioned in my remarks, the expirations are first quarter or second quarter or third quarter and fourth quarter in three separate markets. And so we're obviously very focused on re-leasing. We've got great teams. We continue to see good activity up and down the coast. And beyond that, we really can't make any further comments. As I mentioned, before, we obviously have 1 million square feet of expirations per year. We've been doing about 2 million square feet of leases. So we feel very comfortable that we'll be able to successfully re-lease these expirations.

Maybe if I can push a little bit more on that. Should we assume I guess, it sounds like you've made some good progress in Seattle and San Diego. So I mean, should we assume that some of that space gets backfilled before the end of 2018 or assume that all of those spaces remain vacant throughout the year?

Well, again, some of the lease -- I think I mentioned San Francisco and Seattle, we're seeing good activity. So in San Diego, the expirations there are the third and fourth quarter of 2018. So I don't think we'll see much re-lease next year. But some of the other ones in the first and second quarter, it's too early to tell. But our hope is that we'll continue to see good activity and build to get some of that lease throughout the year.

And the next questioner today will be Craig Mailman with Keybanc Capital Markets. Please go ahead.

Maybe to follow up on Blaine's question about the expirations next year, is there any way you guys could give us kind of more exact timing and rent coming out throughout the year for the different pieces?

Yes. This is Tyler. I mean, let me try that one. Obviously, we're not going to provide timing at this point. We'll provide guidance on our overall numbers in the next quarter's call. So we can't predict what's going to happen next year. I think what we can say from a numbers perspective is those four spaces generate right now, on a stabilized basis -- for now an annualized stabilized basis, $28-or-some million. So that's for a whole year. So if those leases on average expire halfway through the year and we don't re-lease any of them, which we're not saying we're going to do, that would be roughly $14 million next year. So we don't -- that's sort of the worst case. But if that helps you understand it.

I guess, I was just trying to figure out, we know when Bridgepoint hits, but the other pieces in Seattle and San Francisco, just kind of the rents on those, so we can get the different pieces when they come out so we can get the trajectory right as we think about first half...

The rents on those two leases, the Seattle and San Francisco, are 30% below market. So a lot of upside on those leases.

Right. No, I get it. I'm just trying to figure out, as people are trying to tighten numbers ahead of your guidance, kind of the flow we should expect so that people are in the right ballpark, but I think we're okay there. And then just also, it is helpful on the Dropbox, the timing there. I guess, I'm just curious if you can give us some kind of -- not guidance, but help on how we think about the trajectory of capitalized interest next year and when The Exchange starts to burn off and the spend kind of ramps…

The $12 million-or-so that we have in the fourth -- the third quarter.

Yes. I mean, the capitalized interest run rate is roughly $14 million, $15 million right now. And we expect that number to increase slightly. It depends again on whether we start The Academy, when we start The Academy, the office and retail portion of that, and then on One Paseo as well. But we'll be spending more money on Dexter next year, the ramping up, the spending there. So again, we'll give guidance next quarter, but the capitalized interest rate should increase modestly next year.

Okay, that's helpful. And then, John, just curious. On The Exchange, when you guys kind of changed the path that you're were going down to lease it, you raised the cost of the building, partly to also account for the 50,000 square feet of extra space. But now that you've kind of leased it to a traditional office tenant, I'm just curious why we haven't seen the cost of that come back, and we actually saw it jump a little bit relative to 2Q.

The latter part of your question, I didn't understand. Why we didn't see what?

The overall cost of the project come down now that you're not your multi-tenanting it, you're not doing lab-space tenants. It's just traditional office tenant?

Yes. Craig, this is Tracy Murphy. I think as you heard from John, we beat pro forma on the projects. But as it speaks to sort of the infrastructure commitments we made, we pretty deliberately designed it to both support sort of the modern office user that's more density-related. So some of the structural MEP upgrades we made were running versatile. And I think The Dropbox lease is a testament to that versatility and attractiveness to both office and life science.

Said a different way, Craig, the improvements, the generation -- the generators, the added HVAC all became a super asset to Dropbox because, think about it. In The Exchange, if they wanted to, they could occupy up to 10 people per 1,000 square feet because we have the mechanical systems, we have the ingress, egress, meaning stairs and elevators, and so forth. And the toilets, we have 2x what most buildings have for a similar square footage. If they went into a high-rise that was 750,000 square feet, it couldn't have accommodated their needs nearly as well. So what we have was an asset to them. And what I particularly like is I always think long-term. So this lease is 15 years. Do they stay? I can't tell you. If they don't stay, it can be life science or it can be office technology. It doesn't have to be just one or the other. I like a horse that can play both in both tracks. And the fact is our yields ended up being higher than what we've communicated to the market before. So I think all is good.

And the next questioner will be Manny Korchman with Citi.

John, I appreciate that you mentioned Oyster Point and talked about sort of that happening into next year. Could you give us some color as to why that deal is sort of so far out? Is it a matter of giving yourself time to find tenants? Or is it a matter of restructuring? Or if there's something else going on that it wouldn't be sort of a more normal announcement of you buying land or optioning land and just going from there?

The seller has quite a bit of responsibility with regard to putting in place all the infrastructure and other things as a condition of sale. And until that's done, it's not a guaranteed transaction. But they are proceeding, and we'll make further announcements as it becomes appropriate to do so.

Tyler, the one-time income items, could you give us some more color as to what they were? And on the real estate taxes, is that recurring? Or is that something that was sort of one-time in nature as well?

Yes, that was one-time. So there was -- on one property, we had lower property taxes, which was the bulk of it. We also had a small gain on the sale of a land that we sold in San Diego. And there were some other small one-time items, some other income that was built into that. Some of that was offset by higher bad debt expense, we -- higher than forecasted bad debt expense. We had a couple of tenants, small tenants in San Francisco and Los Angeles that failed. And so we had to book some bad debt expense from that. So it was a lot of little things, but the biggest was the property tax and the gain on the sale of the land.

And the next questioner will be Nick Yulico with UBS.

For Dropbox, what are their intentions at 333 Brannan? Is that a sub-lease situation? Are you willing to take that space back directly? Or they're not even going to give it up?

Nick, this is Rob Paratte. 333 Brannan is a really strategic asset for Dropbox, both short-term and long-term. And so we know based on conversations with them, they intend to use the space. And then when they take The Exchange, they'll make a decision at that point what they intend to do.

Okay. And then I'm hoping to get a little bit more detail on the 2 Orange County leases that brought your growth in cash rents down in the quarter, the mark-to-market.

Yes. This is Jeff. Those leases were long-term leases 10 years ago when the building was built. So 2006, 2007. So they were strong rents. They were growing with escalators every year. So when we renewed one tenant and we re-leased the other one, we brought them to market. And so that was the dip there.

Okay. And then, I guess, just lastly, I was hoping to get the cap rate on the San Diego dispositions in the quarter.

Yes. This is Steve. The cap rate adjusted to market was in the mid- to high-6s on the overall portfolio.

Sorry, you said adjusted to market. What do you mean by that?

We had some above-market rents that are going to be resetting. So if you look at it on a mark-to-market basis, it's in the mid- to high-6s.

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

John, as a technology and media-centric office owner and developer, would the Amazon HQ2 decision impact your geographic footprint at all?

Maybe. I mean, I'm not going to get into any discussions we have with anybody on where that could take us and so forth. We're so tied up in NDAs with everybody, it's ridiculous. I will tell you that, as I think the market knows when we made an announcement, that when we brought in Eliott Trencher, who's a great addition to the company, here's an individual that followed all of the office -- public office companies and the public life science companies for Cohen & Steers, knows the markets, knows the companies, knows the -- I think he probably knows every single asset in those markets, knowing Eliott. And obviously, we have a lot of technology-related companies that are expanding. We saw it early to Seattle, and we played that card, I think, rightly. We're looking at what that might mean to other areas in the country. We have no ever -- I want to make it clear, we're not making a move on any new geographic area at this moment. But we are evaluating, just as we evaluated back in 2009 and '10 San Francisco and 2009 and '10 Seattle. We also are looking at where things might be going over time. And Eliott's charged with that from a strategic standpoint. So more to come. Nothing specific in any way, shape or form to announce at this point.

That's interesting. Given your bullish commentary on Flower Mart and your leasing success at The Exchange, is there any ability to expand the site as you did last year?

To expand the Flower Mart site?

Yes.

Well, we have. Just remember, we have 8 acres. We have the largest -- what will be the largest office development other than the Embarcadero Center, which was done, what, 40-or-so years ago. And in the city's history, it's right where the new transportation is. It's -- I can't think of a better location at a better time. While I am not in favor of the Prop M as a policy, given -- to restricting things, it is a reality. And I think we're going to be extraordinarily well positioned there to capture with exactly the kind of product. The Flower Mart product is much like The Exchange. It has the super floors. It has, instead of the traditional 8.5-, 9-foot-tall ceiling heights, it has a minimum of 12 foot clear up to 17 feet on other floors and 37 feet on the ground floors. I think we have exactly the right product in exactly the right market. I can't think of a better thing to have in the history of my career than that. Now obviously, the market's got to stay. But if it doesn't, if we end up with this cycle ending, and we have to wait until the next cycle, our cost basis in the land is so ridiculously low that we're comfortable if we have to carry it.

I just recalled that you expanded it last year through an adjacent site acquisition, and I'm just wondering if there was any other ability to do that or...

Yes, I'm not going to really comment on that. I think the negotiations we might have in the future or have under way are probably not best aired on the telephone, no offense.

Sure, none taken. El Segundo, can we get your updated views on this market? It seems like it's getting a lot of momentum as Silicon Beach spills over.

Jeff, you want to talk about that?

Sure, sure, yes. I mean, the Class A space in El Segundo was just under 8 million square feet with about 11.1% current vacancy, and absorption's been good. And so I think you're right. We are seeing a lot more uptick with even some biotech coming into El Segundo, which wasn't historically there. We've obviously had a lot of gaming. So West L.A. is very tight. Even Playa Vista's tight. So I think the benefit of that has been experienced in El Segundo. So that's definitely a good market, and we're seeing more expansion in rent growth.

And the next questioner will be Vincent Chao with Deutsche Bank. Please go ahead.

Just a question on the same-store NOI increase, the 25 basis points, was that just largely the real estate tax benefit? Or was there other drivers of that? I think last quarter, you said that the disposition was already contemplated in the range, but I just want to confirm that as well.

Yes. No, you're right. It's mainly the one-time events during the third quarter that impacted that change.

Okay, okay. And then just maybe a question on the balance sheet. There's a mortgage coming due in February. I'm just curious if you have any initial thoughts on what the plan is there.

Yes, that is a mortgage on 303 Second Street, which we own in a venture with Norges, and we are paying that off actually in November because we have a three month, we can pay it off three months early. So it's a combined payoff between the two venture partners, and we will be paying that off.

Okay. And then last question for me, just in terms of the leased commenced spread, it's widened here. Some occupancy has been lost, but you've been re-leasing it. I'm just curious, should we expect the current 200 basis point spread to sort of moderate back down to the more normalized 100 basis points over the course of '18? Or will it take longer for that to happen?

I'm not sure I exactly follow your question. You're saying the difference between the leased and occupied?

Yes, yes, the leased occupied spread has kind of widened out here as some move-outs have happened. But you've already re-leased a fair amount of it. I guess, most of the re-leasing, is that expected to take place by mid-'18?

Well, one of the big differences in that spread right now is the Amazon space in Seattle, where they're going to be taking occupancy in the first quarter. So that probably will decrease the spread in early next year. But it does bounce around, so it's hard to predict exactly. But in the first quarter, we anticipate that spread will come down.

And the next questioner is Rob Simone with Evercore ISI. Please go ahead.

At Columbia Square, I just noticed that the occupancy and the lease rate dropped quarter-over-quarter. I'm just wondering if that was normal seasonality or that asset or whether or not the asset's still on plan. And then I have a quick follow-up question on the other side.

Yes. Rob, Dave Simon here. We had a piece of space, a small piece of space above the restaurant in what we call the Business Building. And it was a part of original NeueHouse space. And we took it, and we leased it to a new tenant because it was never occupied. It was re-leased, but it wasn't fully occupied. So I think that's what you're referring to.

Got it, okay. And then, Tyler, sorry, not to keep harping on the one-time property tax impact, but is that truly one-time? Or did you guys kind of get the property tax bill, and then you're going to begin expensing that one property at the same rate, so that effectively it impacts Q4 in the same way?

No, it's truly one-time.

And the next questioner will be Jamie Feldman with Bank of America Merrill Lynch. Please go ahead.

Great. John, so I think twice now in this call now you've talked about how well you timed some of your market entries this cycle and definitely did. Your CBD San Diego development site is particularly interesting. Are you in any way suggesting that San Diego may be ripe for the turn here, especially downtown?

Steve, you want to cover that one?

We definitely like the fundamentals in downtown for nontraditional office space. We've seen trends in Downtown San Diego with millennials living down there. The occupancy of the residential units and the population of Downtown's really grown. So it's certainly a market we're continuing to evaluate, but they'll be unique opportunities if we pursue anything down there.

But to give you a little further color on that, the -- I think -- I can't say this, for sure, and we're not going to underwrite it as a foregone conclusion, but San Diego is being talked about more with some of the tech companies than it has been just because it has great universities, great living, great schools. It doesn't have the public transportation system that some of the areas have that -- like Seattle and San Francisco and certain parts of L.A. But it does have a lot of merits to its geography and its population base. And it could be that we see more and more increased activity. We're not underwriting that into our assumptions at this point, but it makes sense. It's frankly stumped us a little bit that we haven't seen more of that accelerate over the last few years. We're seeing it, but we're not seeing it to the level -- the amplitude that we've seen it elsewhere.

So should we expect you'll continue to shrink in the suburbs and potentially grow downtown?

I think it's a fair assumption. And Downtown, well, shrink in the suburbs, that's a fair assumption. Grow in Downtown, yes, because we just bought a site for our first project in Downtown, but it's only a $100 million project. It's right where everybody wants to be. It's the cool, hip neighborhood. It literally has all the terrific restaurants in San Diego or most of them within a quarter to half mile walking distance. It's where all the apartments are and are going up. Not all of them, but a lot of them. So it's really terrific from that standpoint. Will you see us be building a 1 million-square-foot complex in Downtown San Diego? Very doubtful, unless we see a lot more signs that that's the right thing to do.

All right. And then as you had mentioned before, the potential market expansion. Do you have any distance limitations when you think about potential markets? Like could you end up on the East Coast? Or is that -- you're particularly a West Coast player?

I don't see us -- why would New York need Kilroy, right? Why would they need us? I'm never going to say never, but why would New York us? Washington D.C. scares the living hell out of me. And Boston, why would they need us for office? Could life science drive us to a couple of places? Potentially over time. But we're very focused on the West Coast. And personally, I kind of like being able to fly to a meeting and fly back and have -- see my kids.

Okay. So it's still more of a West Coast regional play, it's just whether there's additional markets that make sense.

Yes.

Okay. And Tyler, you had mentioned a couple of tenant failures. Can you talk more about those? And maybe should we expect to see more? Or what's the story?

No. There was -- I think one was a restaurant in one of our San Diego down -- ground floor spaces and a couple of tiny tenants down in Los Angeles. So we don't see that as an indicator of changing credit in the economy, more one-off things. And it wasn't, as you know -- it wasn't -- go ahead, sorry.

No, it's okay. Are you seeing anything from tech or media along those lines?

No, these were not tech or media tenants.

Okay. And then finally, just do you have an early read on like the drag on cash same-store next year from the expirations? I assume even if you get some of these leases signed, they probably wouldn't be contributing. How should we think about that?

Yes. I mean, again, we will provide guidance on all of that next quarter, and we'll have a lot more color in terms of where we are on the expirations. So we're not providing same-store guidance. But as I was saying before, sort of a worst case, if we didn't do any re-leasing next year, I believe the impact would be about 3 points on same-store, but that's assuming no re-leasing.

But I guess, even if you re-lease, would you get cash rent?

Well, it depends on when we re-lease and when they move into the space and when revenue starts. So both on a cash perspective and on a GAAP perspective. So we're not going to give a forecast on that at this point.

Okay. I guess, the better way to ask is, what are free-rent periods like right now in Seattle and San Francisco?

Free-rent periods? Free-rent periods really haven't changed much, Jamie. I mean, again, lease terms are getting longer than these larger transactions. So there's a corresponding uptick to free rent, but it's not a -- I wouldn't do it as a concession as it is in softer markets, where you're really trying to engineer lease transactions.

So is there like a standard per year -- per lease year?

It varies by market and by deal and by tenant desire and our desire as well.

And the next questioner will be Dave Rodgers with Baird.

John, maybe on The Exchange and with your negotiations with Dropbox. I think over the summer, you'd talked about some progressing negotiations with a life science tenant. Can you kind of just talk about how those wrapped up? And was the demand just not coming along fast enough for when Dropbox came along? And then, John, a second part to that, I think pro forma Dropbox ends up being 12%, 15% of revenues overall, just rough numbers. Does that start to worry you, just any tenant that size? And will you start to address that here in the near term?

Well, we don't see it as the 12% to 15% that you do. But we always take a look at the level or the percentage that tenants are. And I think the thing about that particular building is it's being improved, not only with our dollars, but with their dollars. It is such -- is a building that has such utility to both life science and the technology. And the improvements that are going in, while they'd be different for life science with labs and so forth, I just think it's a killer location. It's irreplaceable. So whether we, to use your "address that sometime in the future", we'll see. It's a valid point to make. With regard to the dynamics between the leasing, we were about ready to sign deals up. I'm not going to use the LOI term, but we had a significant number for a great -- vast majority of the space in life science, and we could have gone that route. We ended up with a deal that we like very much with Dropbox. They're an existing tenant. We think we made a killer deal. I know in Tracy's case, she worked really had to have that thing leased up with life science. Those people are -- they understand the decision we made. They're disappointed. Mission Bay has no -- really no availability for either office or for life science now. It's basically spoken for. And it's one of the reasons we're so focused down in expanding our life science activities in South San Francisco and possibly elsewhere again in the region, because there really is a shortage of space at a time when all these companies are needing a lot more space. So Tracy could speak more to what's going on with life science, but we really could have gone either way. I wish we had two identical projects side-by-side.

For Tyler, maybe on one of Craig's question earlier. It sounds like when you give 2018 guidance, you will not include any revenue from Dropbox, at least that's the way I read your comments. I could be wrong. But will you also continue to capitalize interest on that particular project until each of the components of lease-up are complete?

Well, it depends on how long it goes. We have -- there's a certain -- under GAAP, you have a certain period of time where you can continue to capitalize. If you -- once you stop working on the project, you basically have a year of capitalization. So if we -- if something gets delayed, and we're actually not working on it, then you only have a year from that point. But the way it's phasing out at this point, yes, we would capitalize through the full phasing of it. And yes, we're not -- at this point, we wouldn't be assuming any GAAP revenue in 2019 -- 2018, sorry.

And then lastly, I know it's early, but you mentioned Dexter is obviously under way. Any early discussions there? Has interest started to pique a little bit now that you're under way?

Dave, it's Rob. Again, as John said in his comments, we just started the project last quarter, so we have a significant hole in the ground right now. But based on the condition of the site, we're pretty excited about the activity we have from a variety of tenants. The building complex can accommodate multi-tenant as well as single-tenant. And we're seeing a pretty diverse range of technology interest, and also actually some non-tech companies as well. So we're pretty excited this early into the development.

And the next questioner will be Jed Reagan with Green Street Advisors. Please go ahead.

It looks like off-season job growth's been slowing pretty significantly in San Francisco recently, and I'm just curious if you're feeling that on the ground at all and maybe how you reconcile that with the large companies that are still out there with the big leasing requirements.

Yes, Jed. We're not seeing it, and that's corroborated by the activity and conversations we're having with prospects as well as with the brokers we're seeing. I think the problem with job numbers are they're backward-looking, they're not forward reality. And so if you look at various companies, with the job openings they have throughout our portfolio in the West Coast, five companies have over 25,000 job openings right now seeking candidates. And one of the problems in San Francisco is that there are a lot of job openings and a lot of people that are employed. So it's harder for companies to fill those positions. But it's not unique to San Francisco. I think you'd find the same thing in any tech-centric market, whether it be Austin or Seattle or what have you.

And I guess, kind of staying with San Francisco, with supply getting tight, as you guys referenced, I mean, are you seeing -- are you expecting to see an uptick in speculative leasing in that market in terms of companies banking space? I mean, are we kind of looking at potentially sort of a space race here in the next year or two?

Well, I think the problem with banking space is there's so little supply. That's going to be really be a challenge. I mean, what's left is Park Tower, which is a high-rise and, frankly, probably more of a F.I.R.E. category tenant-type project. So it's going to be very interesting in the next six to eight months, what happens to asking rates as well as existing product and leasing. So I don't -- I think tenants, one thing that's very different this cycle is that all the tech companies we're talking to and deal with are not doing the kind of large land banking that was done in the last cycle, which was actually detrimental. So they're actually planning ahead. They're phasing their occupancies. They're being smart about it.

Is there an element of that with Dropbox? Or do you feel like, does it seem like they've got the employees to kind of fill that space at The Exchange when they move in?

They definitely have the employees. I mean, I don't want to speak for them, but if you check around, they've got several hundred job openings right now. So they're definitely on a growth spurt.

Okay, that's helpful. I guess, just back to the -- someone asked earlier about the Amazon decision. In terms of what you think that means for your positioning in that market, I mean, they're diversifying away from Seattle. Does it impact your appetite to grow in that market over time?

No, not from what we've seen or from what we've heard. I'm not going to quote anything that we might know that has been told to us confidentially. But from what we understand, HQ2 is for different needs and expansion, not a reduction in demand or needs in Seattle. But I can't speak for that company. That's just what we've heard and that they've been pretty forthright about.

Okay, makes sense. And maybe just last one for me. Do you guys have a specific target or ceiling where you'd want to cap the land bank as a percent of assets? And then maybe same thing for the active development pipeline, is there kind of a ceiling for that?

Yes, that's always a good question. And the fact is that in San Francisco, there are some people besides us, obviously, that want to seek entitlements, but there's very, very little land that's going to be available to develop. It's going to be very restricted with Prop M over the immediate future. But as long as I can see at this point, unless all of a sudden there's a correction and there's an accumulation in the bucket, like there was from 2000 to 2010, I don't see that on the horizon. Seattle, very, very little land available in Downtown Seattle and South Lake Union. There are a few more opportunities in Bellevue. In the markets that we're acquiring land or have acquired land, there is such a strong barrier to entry that I think it's more a case of having something that others need, and that your competition has a real time replicating. So I like that. The question about developing, a lot of development wants, to me, to your point about a ceiling, I think it depends on how we're feeling about leasing. As you've seen, with The Exchange and with Hooper and the way we played 333 Dexter and so forth, I don't think we're getting over our skis. We've maintained one of the two or if not the most conservative balance sheet. I'll put our balance sheet against any of our major competitors in the public arena. And we're not going to get out of whack on our balance sheet. We're not going to get out of whack on developing spec space. I know there was a lot of questions and maybe some concern about Kilroy with regard to The Exchange. And all along, I've said, "We'll have this leased at a pro forma or above before it is delivered." It's not going to be delivered. It's not going to be delivered now for, what, another six or eight months, whatever it is. Tyler can give you the specific date. And we're going to do what we think is in the best interest of our shareholders. Obviously, if our shareholders think we're crazy to be accumulating land or are crazy to be developing, then that's going to be reflected in the way we conduct the company. But we also have something that most of our competitors don't have, and that is we have the capability to develop world-class assets, to assemble difficult sites, to get entitlements when few others succeed, as we do, and deliver on time and on cost at terrific, superior yields. So that, to me, is a strength that Kilroy has, and we want to play to that strength, but we're not going to get crazy. We're very, very disciplined. So I'm reluctant to give you hard numbers or hard ceilings.

And the next questioner will be John Guinee with Stifel. Please go ahead.

John Guinee. A couple of questions. First, very, maybe complicated and maybe simple. If you look at The Flower Mart, by the time you get all your entitlements done, do the demolition and are ready to have essentially a pad-ready site, how many square feet -- how many buildable square feet will you have? And what will be your basis per square foot?

Yes. It is -- well, our basis per square foot right now on an FAR basis is around $72 per square foot on the 2.2 million square feet that can -- that will be developed between Phase I and Phase II. Phase I is 1.7 million square feet of office space, 100,000 square feet of Flower Mart and 100,000 square feet of market hall, so that's retail, restaurant and so forth. In that $72 number, when we acquired the site that took us from sort of the last site that was may be 1.2, 1.4 acres, that was a higher-priced site. So that raised the FAR from something like $56 to $72. But when we bought it, it lowered our cost of all the substructure stuff by something like $15 a square foot. So in our mind, we're sort of in the late $50's per square foot as an FAR cost, in a market that is trading at probably the better part of 5 or 6x that.

Got you, okay. Then second, I was sort of surprised that Sorrento Mesa sold at $250 a square -- it looks like $250 a square foot. It seemed like a pretty low price per pound. What do you think replacement cost is for that? And then the tangential question is that, regarding your Bridgepoint vacancy, as Eliott Trencher well knows, the strategy du jour is to essentially sell the asset vacant and get the rent roll-down and all those issues off the books. Can you address the per pound on Sorrento Mesa and the likelihood of the Bridgepoint asset just being sold in '18?

Well, a likelihood of the Bridgepoint asset being sold in '18 is remote. We've made the decision to modernize it and to -- and we have a plan for that, and that's being conducted. We think it's a great asset, meaning there's a lot of money to be made there. With regard to Sorrento Mesa, a lot of that product we bought low cost. You could look at it and say, "Is the price per pound to replace?" That is the metric, John. That is definitely important. So I don't know if you could replace it for $250 a foot, but I probably don't think -- we're not sure if it goes anywhere. And when we take a look at it, we have an appetite and a plan for our development. And as you've seen with our office, we've been producing roughly 8% going in, returns on cost and unleveraged. And so what I take a look at is the trade between what we're selling and what we're using the money for.

Okay. And then lastly, on that sources and uses, my guess is you're down around 10 years left on your 10-year lease term for DIRECTV. What's the plan for that asset?

I don't want to get into that. We have a lot of things going on. I'm not going to tell the market. I'm not going to tell tenants what our plans or strategy might be. I just can't do that.

If you whisper maybe no one will hear.

Yes, well, that's true. As Jeff pointed out to the question that somebody asked earlier, we're seeing it's El Segundo really come into its own because Sorrento -- or the Silicon Beach and Playa Vista and Culver City are basically in West L.A., are basically done and so expensive. We think that bodes well for that market. The rents are in place with DIRECTV are probably, Jeff, 40%, 50% below market. So we think we're in a good position. Whether that's a long-term hold or not, we'll make a decision on probably within the next couple of years.

And the next questioner will be Tom Catherwood with BTIG.

Excellent. Just a few clean-up questions here. Tyler, back to guidance. The $3.42 midpoint implies roughly $0.86 in 4Q. I know there's a couple of one-time items that you obviously talked about. But that's still a pretty substantial roll-down, especially if it looks like occupancy is going to be either flat or just down slightly, and margins are usually a little bit better in the fourth quarter. Are there any other items that we should expect from the fourth quarter that will kind of account for that roll-down?

Yes. I mean, those numbers aren't exactly our numbers. But big change in the fourth quarter, Group Health is moving out of a couple of hundred thousand square feet in Seattle that Amazon has re-leased but won't move into until the first quarter of next year. So that's really the big change in the fourth quarter.

Got it. Then, John, jumping over to the developments. I just want to clean these up. You mentioned potentially starting I think it was the second part of One Paseo I think you said later this year. Was that correct?

Yes. Look, we have two phases of residential that -- beyond the 237 units we have under way right now. And our plan is to start the second phase by the end of the year and the third phase roughly 6 months thereafter, the third and final phase. So basically, what happens is the retail comes on stream, all the apartments are buttoned up, we think we'll be leased out on the first phase, leasing in the second phase, finishing the internal improvements on the third phase, leasing that up, having the entire site complete. And so then we can start the office buildings or start the office buildings before for pre-lease. But that's the plan, to have it all tightened up. And the demand for the resi in that market and for our product, we think, is extraordinary. We've gone through this at great length with our consultants and with the leasing people and so forth. I might point out that the Carmel Valley/Del Mar area, that ZIP code has the highest median income in San Diego. It has 70-some percent of its retail dollars currently being spent outside of the region, and that's why we're so enthused about the retail. It has two of the best school public school systems or schools in all of California, and that is a material benefit to people with families that require residences. So kind of all of the metrics are looking pretty terrific for us.

And then just a quick one for Jeff. Your commentary about San Francisco is great. You mentioned potential for a significant rent growth just given out how tight the market is right now. But If I look at your expiration schedule, it looks like '17 and '18, obviously not in '17, but '18 is relatively light in San Francisco. It looks like it's really '19 and '20 where you have some material roll at low rents. What's the opportunity as far as kind of pulling those forward? Or anything else you can do to really take advantage of rising rents in that market?

Yes. Well, our comment, just for -- quickly, our comment about the potential, what brokers view, that rents could rise substantially, wasn't directed necessarily at some significant upside, given the paucity of space we have coming available in our buildings. It was directed more at the market, and we think that's an encouraging thing for, ultimately, as space becomes available, we think it's an encouraging thing as we reposition, for example, the Delta Dental space and as we think about the Flower Mart in due course. Jeff, do you want to expand on that?

Yes. I guess, I would just say we're focused in San Francisco over the next couple of years. Our rents are pretty significantly under market and even better than 30% that we have for total. So I think we're in the 30% to 35%, '18 and '19 and '20. So obviously, there's an opportunity to pull those rents up, and we continue to talk with tenants fairly early in the process. But more to come as we think through those expirations.

Is it the kind of market where tenants are coming to you early to renew just because they're concerned about rising rents like we're seeing in other markets? Or is it really kind of a tenant-by-tenant specific?

It's really tenant-by-tenant specific. Some tenants are obviously looking for expansion. We continue to have dialogue with tenants all the time, so we're not waiting for a year out. We're talking to tenants two and three years out to understand what their needs and requirements are. So it really is a tenant-by-tenant focus.

And the next questioner will be Michael Carroll with RBC Capital Markets. Please go ahead.

I've just got one for you, guys. Can you talk a little bit about The Academy project? And given the strong demand trends in Hollywood that you highlighted in your prepared remarks, why not start that project this year, as you previously expected? Why push out to 2018?

Well, I didn't say that. I said that we thought we'd start it within the next six months and possibly by the end of the year. And so I just -- we have a fully entitled project. We're doing a few little tweaks within the program, and we have ordered some stuff that we need to start construction. So we're not delaying.

And the next questioner will be Anthony Paolone with JP Morgan. Please go ahead.

Yes. A question about the Flower Mart. I just want to try to understand. If I look at the Prop M bank, I guess, after the October annual allocation, it stands at 2,032,000 feet in San Francisco. And if I look at your filing for Flower Mart, it's at 2,030,000 feet. So does that mean if you guys get the approval for that, you'll wipe out the bank? Or do you get a partial approval for it? Just trying to understand how you go forward with that.

Yes, we think we get approval in two phases. The first -- we don't require -- there's no -- Prop M doesn't relate to the retail food market hall. It doesn't relate to the Flower Mart, Flower Mart meaning the operation of the Flower Mart. It relates only to the office space. And we think our total office space is a little over 2 million square feet and roughly 1.7 million feet in Phase I. The balance is in the freestanding buildings that will be at 6th and Brannan, and that will be entitled later.

Okay. So then even if you get your first phase allocated, it's going to -- I mean, it pretty substantially wipes out the bank, I guess, or leaves really only a few hundred thousand square feet left. Is that fair to think about it that way?

Yes.

And when do you think that decision is made?

Well, first of all, I can't give any Prop M regarding that area until the EIR is certified in connection with the central SOMA, which I believe was the thing that delayed about six months. And that's supposed to happen...

Mid-2018, spring.

Yes, call it the end of the second half spring or summer of next year. And so I think we're in position sometime within the next six or so months to receive our entitlements. And I know there are people saying, well, we're going to get it. It's not going to be the Flower Mart, it's going to be pro rata. That will be a decision, obviously, the city makes. And the city takes a look at these things with regard to the merits of what is being provided by any particular project. As you know, a multibillion-dollar subway system that's under construction right now that connects BART and connects Caltrain, and then it goes off north to Chinatown, and then goes south through Mission Bay as above grade, which is already there, that's an integral part of the development ultimately of that central SOMA area in which the Flower Mart is located. We're preserving the Flower Mart, which is a 110 year historic operation within the city that's very important to the fabric of the community. The city very much wants to preserve PDR jobs, which is what the Flower Mart is, not just have it all be tech and -- rich tech and rich real estate people. And so we also are providing the amenity package, if you will, that really transforms that area with the market hall. So everything we believe we're confident that we're going to be a favored project.

And if you were to get just like -- pick a number, half of the 1.7 million that you want, just queueing your conversations on sort of leasing, you mentioned these very, very, very large potential pre-leases. Like would that...

Yes. Anthony, I don't really want to get into all of that. It's far more detailed than I'm prepared to get into. As I've mentioned before in these calls, most of the brokers, some of the tenants and every competitor listens to everything that we say, and I just don't want to get into stuff that could prejudice our shareholders' ability to reap the benefits of our efforts.

Got it. And then just other question on -- I know you're not giving 2018 guidance, but just think about potential source of capital. Do you think we should expect asset sales the same order magnitude that you've been doing the last couple of years again next year?

Yes, on average -- yes, we've averaged $400 million a year for the last six years. So I think you can anticipate that -- in that range is going to be the funding going forward. On -- as John said earlier in his comments, the incremental spend on The Academy, the first phase of The Academy and the next phase of One Paseo is roughly $400 million. So it's manageable, but we're going to continue to sell properties as we've been doing them.

This will conclude the question-and-answer session. I would now like to turn the conference back over to Tyler Rose for his closing remarks.

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

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