Q3 2019 Earnings Call
Kilroy Realty Corporation earnings Conference call.
<unk> expense will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero.
After today's presentation, there will be an opportunity to ask questions to ask a question. He May press Star then one on your Touchtone phone to withdraw your question. Please press Star then too. Please note. This event is being recorded I would now like to turn the conference over to Tyler Rose Chief Financial Officer. Please go ahead.
Good morning, everyone. Thank you for joining us on the call with me today are John Kilroy. Several other members of our senior management team, we're all available for <unk>.
That said I need to say that somebody information will be discussing its forward looking in nature. Please refer to our supplemental package for statement regarding forward looking information in this call and in the supplemental.
Calls being televised live on our website and will be available for replay for the next day days, but by phone and over the Internet earnings releases supplemental package filed on form 8-K.
C C and both are also available on our website.
And we'll start the call it an update on our markets and our view of the third quarter I'll provide the financial highlights and it's got their up into 2019 earnings guidance, then we'll be happy to take your questions John .
Thank you dollar Hello, everyone. Thank you ever joining us today.
And with a quick overview.
Summary, our markets remained strong.
We've made significant leasing progress in both our stabilized and development portfolios. We were successful in acquiring two strategic value add properties.
Yeah, we improved our balance sheet.
San Diego to Seattle, the supply and demand fundamentals of every market we compete in.
Remain sound with low vacancy rate rates and increasing rents.
With these favorable conditions.
We signed approximately 1.3 million square feet of leases in our stabilized in development portfolio since the end of last quarter.
This includes 421000 square feet with stripe it Kilroy Oyster point that we announced this morning.
We're on track to have another great year on top of our record leasing last year. Our stabilized portfolio is nine now 97% leased we commenced construction on 2100, Kattner, a 140 million dollar office project and a little Italy neighborhood San Diego.
We completed two acquisitions totaling 226 million, both provide attractive future redevelopment upside.
We maintained a sharp focus on balance sheet, raising 616 million through the pending sale at one building in the issuance of public bond.
And we continue to build a world class sustainable enterprise.
There are ranked number one is the inability across all publicly traded real estate companies in the Americas by GE, our yes, b to the fifth consecutive year. The EPA has awarded US a highest honor of sustained excellence for the past six years and they write Navy is recognize us as a leader in the light for five years.
As running.
Further we are on track to be carbon neutral operations by year end 2020.
Now they can get into the detail first we kind of 550000 square feet of leases are stabilized portfolio. Since the end of last quarter cash rents on these leases were up 19% GAAP rents were up 40%.
One set of transaction provides a good example of how we are leveraging our existing assets and development skills in today's strong markets.
In del Mar, we signed two leases with existing tenants that both expanded to take approximately 300000 square feet in the aggregate, where the change in cash and GAAP rents averaged 20% and 50% respectively.
These properties are in close proximity to our new one per se or mixed use development and both have benefited from the amenities public spaces and cohesive character that the development of one Paseo has created a.
Across our development portfolio, we signed 710000 square feet of leases since the end of the last quarter.
This includes a lease were already 21000 square feet or that we announced earlier with strike for a term of 12 years with this transaction or $560 million phase. One is now fully leased just seven months after construction commencement and roughly 24 months earlier and schedule.
We have exceeded our initial underwriting on this project both on a cash on a GAAP basis.
Our strong leasing performance extends to one paseo as well the office component is now 70 per se.
86% leased all the bound to the spaces in negotiation and the retail component or want to say it was 100% leased.
We delivered 237 residential units that want to say in mid September more than a third of the rents are already leased [laughter]. We're also active negotiations that are 94 55 town center drive developing at San Diego and 160000 square foot project located in the U.T.C. somewhere.
<unk> is being developed to accommodate both life science and life excuse me, but life science and non life science users the strong location and highly Amenitized stated the our environment is attracting interest from a range of media Tech and life Science companies. We expect this to be well leased before show completion the index year.
Given our strong leasing success, we commenced construction on 2100 catheter, which is located two little it'll elite neighborhood to San Diego. This is a 1.2 acre pull city block and want to San Diego's most popular neighborhoods for young professionals is two blocks from the harbor surrounded by restaurants retail and other amenities and when it close block.
<unk> public transportation in the San Diego Airport, we're developing a 200000 square foot modern office in ground floor retail space.
Hey, <unk> in a brick and timber low rise design, our incremental investment is roughly $100 billion with core and shell completion schedule for the first quarter of 2021.
Excluding 2100 cat there where construction just started the office in life Science component of our 2.2 pit 2.2 billion dollar development program under construction is now 90% leased.
Upon stabilization over the next three years, the six projects under construction, which includes 2100 got or want to sale office and residential Netflix and living on line 333, Dexter and 94 55 Town Center drive and Phase one of Kilroy Oyster point are estimated to generate a total cash.
So why of approximately $150 million.
Approximately 85% of this in a while I will come from office in life Science, and 15% from the 564 residential units and phases, two and three up one per se living and one for say, a rather and living on bond.
Now for a few comments about our development pipeline Kilroy extra point, we recently submitted the precise plan.
Ah two city of South San Francisco for the second third and fourth phases of the project totaling approximately 2 million square feet. This process takes about a year. We currently estimate we could start any one of these phases in 12 to 15 months subject to the REIT market conditions.
And at the Flower Mart, we're happy to report that the for CECO lawsuits affecting the entire central Soma area are now resolved, we're close to executing the development agreement.
Which would position us to commence construction as early as 2021.
And looking to the future we've added to redevelopment projects to our future pipeline that will provide significant earnings and value growth over time.
Excuse me. The first is the fully leased blackwelder Creative office project can Culver City Submarket of Los Angeles, we paid up $186 million for 158000 square feet a fully leased office buildings situated on a 6.9 acre land sites.
The campus. Currently consists of 19 wanted two storey buildings leased to create tenants with average in place a lease term of 39 months in place rents are approximately 35% below market.
We have the optionality to significantly increase the project square footage through redevelopment overtime.
The project is terrific locational advantages first is transit.
Blackwelder offers multiple transportation options.
That drove Expo line is about a five minute walk from Blackwelder and provides a 20 minute ride to Santa Monica and 25 minute ride to downtown Los Angeles.
Three way an airport access is also excellent second blackwelder is in close proximity to the Hayden track in downtown Culver City, which offers that have been arrange new commercial retail and residential amenities.
And immediately adjacent to Blackwelder is the cumulative project, which is under construction and is scheduled to deliver 2021.
The cumulative.
Encompasses 1200 residential units, including a 30 storey residential tower 100000 square feet of retail space, which is 40% leased the whole foods and a one eight your public park.
We're very excited about our entrance into Culver city much like Hollywood, it's become a magnet for L.A.'s young creative professionals in the company's for whom they work.
Major Mehdi media content producers in the area now include Amazon, Apple H.P.O. and Sony Pictures.
Happens on an Apple alone are expected to occupy a footprint of approximately 1.5 million square feet in Culver city in the near future.
Creative class a office space. They can see in the market is 2% all new development projects in the area roughly 1.6 million square feet of office have been substantially leased prior to construction completion.
The second future development redevelopment project that we acquired is located in the East village Submarket of downtown San Diego East village has become one of the most vibrant and sought after neighborhoods in coastal San Diego is increasingly attractive to the city's large and growing millennial population, we paid $40 million.
For a 2.3 acre fully entitled mixed use site.
The prior owner will be leasing back three existing building thought through mid 2021. During this time will we be we will be evaluating the appropriate next abuses for this site, we envision a project reflective of the neighborhoods urban mixed use character, including rooftop decks and balconies street level retail.
Ill and ground level open space.
What are the things that attracted us to the east village is the availability of housing.
Over the past five years.
4500, do residential units have been delivered to this area with another 3000 under construction and another 2500 units in planning review retail and cultural institutions, including Petco Park home to the properties baseball team the new San Diego separate library.
University of California, San Diego's New extension campus have quickly Paulo employers attracted by the young well educated workforce or boosting demand from our office space in this market.
These beliefs reminds us of what Somo looked like 10 years ago as a similar bobbing character a big difference is that the east village has significantly greater availability.
Residential and it's far more affordable, let me close with some summary thoughts market conditions remain strong and highlight the value of our stabilized portfolio, which has monetizing market strength in the form a significantly higher rents.
Element continues to be a major value creator for PRC, we believe that our patient discipline, a creative approach to new development as a meaningful premium in the returns we can achieve our projects has varied as one Paseo 333, Dexter Kilroy stir point and a flower Mart to mention just a few not all.
We are we achieving greater returns, but we are creating the most advanced work environments in the country.
And with all this activity we're doing it so two way that continues to place balance sheet strength and financial flexibility at the core of our business strategy that completes my remarks.
I'll turn it over to your Tyler.
Thanks, John F. AFFO was a dollar and one fad per share in the third quarter driven by strong core resolve three cents of onetime items and the impact from our disposition and recent bond offering.
Same store cash NOI grew 3.6% and GAAP NOI increased 8.3%.
Same store NOI growth was primarily driven by the burn off a free ran at a few San Francisco and Seattle properties.
Increasing GAAP same store NOI was driven by commencement of new leases also largely in San Francisco in Seattle at the end of the third quarter or thereby portfolio at 92.1% occupied and 97.3% leased.
With our strong leasing activity through the first 10 months of the year, we've effectively addressed all 2019 lease expirations logistics to 4000 square feet remaining and have a manageable 2020 expiration profile of 774000 square feet or just 6.4% of the portfolio.
I only have one exploration greater than 100000 square feet in 2020.
We estimate that our portfolio wide weighted average in place rents remain above 21% below market.
By region in place rents for San Francisco are approximately 33% Bull market, Los Angeles, and Seattle is our 10% below market and San Diego, there about 9% Bull market. Our 2020 lease expirations are estimated to be 17% Bull market.
Now, let's say over the balance sheet in July we drew down all the proceeds from the sale of 5 million shares of equity we issued in 2018 on a forward basis, roughly $90 million of forward equity issued in the first quarter under the ATM remains undrawn at this time, we intend to draw it down in the fourth quarter of 2020.
We raised $500 million of 10 year bond to 3.05% in September .
Where an escrow to sell our only Orange County building for proceeds of $116 million.
And with these transactions, we have substantial debt capacity and flexibility prior to drive the ATM, we will have approximately $150 million of cash and $750 million of capacity under our bank line and an incremental $600 million under the accordion feature we have a large unencumbered portfolio with only two mortgages very little floating rate debt and no significant maturity.
As until 2022.
Our debt to market cap at quarter end was approximately 28% and our debt to EBITDA was approximately 6.6 times.
Adjusted for the remaining equity forward transaction, we expect our debt to EBITDA to come down as our leased development projects come on stream.
Now, let's discuss our updated guidance for 2019 provided in Yesterdays earnings release to begin I 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 to market intelligence as we know it today and its significant shifts in the economy, our market dependent demand construction costs and then by going forward could have a meaning.
I will 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.
For those caveats, our updated assumptions for 2019 are as follows we forecast remaining 2019 development spending of 125 million to $150 million our forecast for year end office occupancy remains at 94% to 95% given the recent commencement on some of our leases in San Francisco in Seattle, We.
Increasing our projected 2019, GAAP same store NOI by 50 basis points to 3.5% to 4.5%.
And our forecast for cash same store NOI remains flat for the year.
Last quarter, we provided updated earnings guidance for 2019 up $3.67, the $3.78 per share where the midpoint of $3.73 per share.
Heading into the fourth quarter. There are many moving parts given its strong result from the third quarter. Two recent acquisition the timing of our disposition the benefit of our recent bond offering we are increasing and narrowing our range to $3, an 82 cents a three our than 88 cents and increasing the midpoint by 12 cents to $3, an 85 cents per share.
This mid point would imply a fourth quarter ever FFO per share of 94 cents, which is seven thats lower than our third quarter results, primarily driven by the downtime associated with Dropbox expanding into the exchange and moving out of 333, and 345 Brennan a full quarter of entrance bands from the new bond and the gist.
Position.
As a reminder, we're projecting revenue recognition at three to three and 345 brand and by the end of year.
That's the latest news from currency now will be happy to take your questions operator.
We will now begin the question and answer session to ask your question. You Me Press Star then one on your Touchtone phone if you're using these speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then queue. At this time, we will pause momentarily to assemble our roster the first.
Question comes from Nick Yulico of Scotia Bank. Please go ahead.
Oh thanks.
First off on a oyster point congrats on getting that at least on what stripe can you give us a feel for the rents on that you talked about.
Yes. The overall first phase project is now exceeded underwriting so imagine you're getting higher rents for the office then for the lab there.
Yeah, I don't want to get into specific rents on specific deals snack.
Let's just say that of our office in life Science.
Across the board that I mentioned in our.
And our call earlier remarks.
We are continuing to be in a very high 7% or better Aro sees most of these leases or 10 to 15 years throughout the once we've mentioned and they typically have three three and half 4% annual bumps that's about as good as I can give to you.
Okay, and and as we're thinking about though you know future phases of.
Oyster point, you know your desire to do office versus lab, there I mean does this.
Ill does this mean that the overall yield on this whole project could be could be higher for the future phases. If if you were to do more office are you looking to do more office there.
I don't want to get into predicting what the yields in a future going to be.
Hi, I mentioned when we underwrote. This thing we were looking in the early to mid Sixs, we've done quite a bit better than that I think we'll do better in the other phases, obviously subject to market conditions as it relates to tack versus life science.
I'm sort of agnostic.
We do what we think isn't the best Centrus of our shareholders and we have the unique situation with the product in the environment that we've created a kilroy extra point remember, we have 40 acres plus 10 acre Marina.
We have something that nobody else has we have an extraordinary views the ferry service et cetera, I think there's going to be a blockbuster project I think it's going to appeal increasingly to attack as well as to life science and we're working with many people in both camps.
Okay. Thank you and just last question on Culver City. The acquisition you did there.
Yeah, our understanding is that there're there're a lot of people looking at that project.
You end up getting it.
You know, there's there's just densification potential there which is to try to can you talk a little bit more about.
How much square footage you could ultimately build there and how we should think about.
When this could become a.
Yes, just say is this a new development is it a redevelopment of existing space and you have to wait.
The full 39 months on the lease term to get the projects started or would you think about.
Hambly attendance out earlier.
I wanted to talk about that I think talking about strategy with tenants and what competitors as bad to do on a telephone call.
We do have a we're looking at early stages of looking at what we might be able to redevelop the project to over time it would be many many.
Times, the the square footage that's there now in the meantime.
Todd or do you want to talk about the yields on that project.
I think I think over the next excuse me I'll do it over the next.
Three or so years, we think we get to north maybe a high six.
We're going in right now.
In the mid threes.
On a ROTC basis.
Okay out thats not an excuse me, that's not allocating any value to the future development.
Okay. Thanks, and then I just one last question on the.
The onetime items this quarter I think tell you said it was three cents is that.
Is that all in an NOI as we're thinking about just a clean runway rate on NOI going forward is it as the three cents all should be stripped out of NOI this quarter.
Yeah, Yeah, it's related to parking and some common area maintenance true ups, but yet to NOI.
All right thanks, everyone.
The next question comes from Craig Melman of Keybanc capital markets. Please go ahead.
Hey, guys, maybe Tyler just sticking on guidance. So if we think theres a lot of moving parts you guys are up 12 cents.
Over last quarter kind of stripping out the three centric at nine cents how much of that was just the recurring kinda upside from three Q versus some of these other moving parts of acquisitions.
And Commencements and other things.
Yeah, I mean, if you break down to 12 cents.
Yes, roughly seven cents to that as core noncore noncore I just went through sort of core the core is about three and a half sand and then the acquisition is accretive initially.
And the bond transaction is later and lower and rate than we had anticipated. So that's the other different.
Okay. That's helpful and I know, John you said kind of three and half going in on blackwelder, what's that when you assume kind of the Fas 141 impact for the below market leases so on a GAAP basis.
Tyler you want to take that.
Yeah, it's about mid five.
With that.
And then John you had mentioned the sequel lawsuit you're kind of done.
For the flower Mart and the passion kind of said you wanted to hold off on leasing there till the losses are done can you give an update on prospects there may be potential timing on on a pre lease.
Before you go forward.
No.
I won't I won't for competitive reasons.
Okay, that's fair.
Are you guys. Thanks.
The next question comes from Jason Green of Evercore. Please go ahead.
Good afternoon, how should we think about the remaining dropbox space at the exchange coming on your at 52% now how much does phase two in Q1 of 20 in phase three and three Q2 0 add to that 52%.
Hi, Jason its Michelle Dropbox up the exchange is scheduled to come online the rest of it towards the end of the here in the December .
Okay.
And just to be clear on the disposition side, the 150 million that.
I'm sorry, the hundred 50 million, it's not in guidance right now is that expected in fiscal year 19 or is that a fiscal year 20 event.
The the disposition, we're in escrow to sell <unk> project for 116 million that should be closing any day, we sold a property early this year for roughly 20. So that's roughly 135 that the dispositions that will Cook will complete in 2019, we haven't given 2020 guidance yet on disposition.
Okay. Thank you.
Yeah, and Jason just to clarify in terms of Dropbox sceptics change there will be on phase two roughly 50000 square feet coming online by the end of the here and then the remaining days will be coming online towards the middle of the here next year.
Okay. Thank you.
Sure. The next question comes from Manny Korchman of Citi. Please go ahead.
Hi, everyone.
You guys have had a busy acquisition.
Market or been busy.
What does acquisition pipeline look like right now going forward if you could.
Yeah.
We don't have anything with regard to existing buildings per se that where we evaluate everything we're not in in negotiations on any existing buildings were looking always.
You know if we're missing something.
As I said in prior calls I don't see us buying a lot of existing buildings. The exception would be something like a blackwelder, where it's an okay going in return, but it has significant redevelopment potential for the future I like that just buying core not interested.
And then you're talking about the 2020 lease rollovers.
So that large space on over 100000 square feet, what are the prospects look like there or the prospect of retention of that's on it.
Hey, many it's Rob Paratte.
So we have a.
A year, a little bit over a year left before that vacancy occurs and we're already.
In discussions with people on it we've had some good leasing activity on current vacancy we havent. The project and then lastly, I would say we're undertaking a mild refresh of the project itself lobbies landscaping that sort of thing same thing that we did at Sabre Springs and del Mar Corporate Center, which we think will.
Help us push rents and fill the space [noise].
Where is that when Rob.
Long Beach.
Thanks.
Was there a follow up Mr. Korchman.
Thank you. Thank you. The next question comes from John Guinee of Stifel. Please go ahead.
Great. Thank you a nice job guys, Hey, Tyler about a year and a half ago in.
New York City in June I think any rate you had an investor day and you.
Gave kind of a soft guidance of late 2020.
Fell at about maybe $4.50 a share.
How do you feel about that.
Yeah, you asked me that every quarter, it's getting to be a tradition I think but.
Yeah, and I think the answer is that if you. If you were do go back in time and everything had played out the way we had bought it might that at that point, we'd be very close to that number obviously with less dispositions and more acquisitions and bond deal is a different timing and and larger sized.
That number would change, but I think the answer your questions. Yes, we would we would still be on track of everything else that same.
It did everything stayed the same and are you still on track.
No nothing same thing.
So a higher or lower.
We're not going to comment and I will provide guidance on right on our 2020 numbers next call.
Great. Thank you.
The next question comes from Derek Johnston of Deutsche Bank. Please go ahead.
Hi, everyone. How you doing what are your thoughts on how anti trust and potential regulatory actions on Fang companies could impact their demand for office space.
Hey, Derek it's Rob Paratte again.
You know that we can't we can't predict what the outcome of these.
Various actions that are in the news are going to have on these companies but.
Given the day to day conversations we have with all of them.
There is no cessation and their demand for space, particularly on the West coast that you're seeing their demand also in New York and other areas like Austin So.
Thus far and how will that affect one company more than another hard to predict and what the ultimate outcome will be hard to predict but we're seeing a lot of demand and continued growth in all of our markets.
Okay, Great and and you had no there has been a fair. It's interesting you say that amount of debate about accelerating leasing demand in New York City from the attack or the expanding Fang companies.
Does this concern you guys at all and would you ever consider maybe a build to suit project in Manhattan or even other markets with your partners.
Yeah, we've been asked but we haven't done it and I don't think that New York City really needs Kilroy.
The second part of your question does it doesn't concern us not at all because they're growing as much as they are growing in New York, they're growing in Seattle are growing in San Francisco Bay area.
They're coming to San Diego, It's it's a unique time right now and the other side of that is everybody likes the focus of the thanks, because it's sort of it in the press lately, but.
The number what did we once the number 149 or something unicorns.
And the Bay area with a don't don't hold me these numbers because I'm just trying to remember what the article was but it's the number of new companies that are growing.
Sort of exponentially in the Bay area is something I've never seen before it's and it's because you know these folks are all.
Coming here because of the ecosystem and any time you pick up a newspaper.
There is always another one so there's a lot of folks out there demanding space way beyond that banks.
That's good color and then just lastly from me I think there's been.
Some pretty.
Well documented chatter about prop 13, making its way to the ballot again next year, you guys have a fairly young or new portfolio. How do you view that certain seriously you're closer to it on the ground or what do you think about that.
You want to cover that John .
Tighter.
Yeah, I'm, obviously, we're watching that I'm watching the polls and how that might play out the votes next November .
If it if it passes which is not necessarily going to pass, but if it passes it will take several years the sort of get implemented what we've said previously is a initially anyway for us at the two to two to 4000 head as you point out we have a fairly young new portfolio.
So it doesn't impact us initially as much overtime.
Thank you guys.
The next question comes from Jamie Feldman of Bank of America Merrill Lynch. Please go ahead.
Thanks, I guess, John or kind of sticking with your comments on the San Francisco.
Unicorn.
Robin companies. There then we see a little bit of a hiccup here in the SEC IPO market.
The IPO market in general have you seen any change in mood or centimeter cash our investment flows and your west coast markets.
Hey, Jamie it's Rob Paratte again.
We're not seeing any change in fact Q3, there was $26 billion of VC funding nationally 60% of that came to the west coast and 20% of that came to life science.
So we see a very and that's on par with you know very close to Q2 of 2019 so.
We're not seeing any let up in that and as John said earlier, the amount of young growing companies in the Bay area and and elsewhere frankly is truly astounding right now.
Okay. That's helpful.
And then you have you seen any change in either tenant demand or.
And co working operators are looking for space since we were told its IPO.
Well, it's always been there's no tell group.
There are number of other competitors, we work, they're always looking for space and so forth.
I want to make it clear to everybody on the call.
The Kilroy has I think it's something.
Michelle correct me, if I'm wrong, but it's well under 1% I think it's under a half a percent exposure to.
Two co working.
You know, we've not been a big fan of having that kind of tenet in our bid on our buildings in scale.
But just a comment about we work.
There's been a lot of speculation in the press what dot what does this mean that it's going to meet different things in different cities I want to gas, but if they give any of that space back there's basis terrific space. Its total plug and play for most of the tech companies.
So we'll see what happens with those guys.
Okay.
So I know you and quickly to.
Some of the financials here, but I guess as we just kind of think through the next year. So.
Can you just walk through kind of sources and uses of.
Funding.
Yeah, so in terms of spending.
I had about 125 million remaining this year.
And roughly 500 million or so next year, assuming nothing else happened.
And in terms of funding that as I said, we'll have 150 million of cash we have the 90 million of ATM.
And we're looking obviously are doing dispositions next year and you know we have that capacity and other capacity to to do that venture as equity we leave all the doors open and we'll evaluate it but more than half of it as is funded today and will you know as we always do all will be selling properties and doing other funding next year.
Okay. Thank you.
The next question comes from Blaine Heck of Wells Fargo. Please go ahead.
Hi, Thanks can you guys talk about the type of tenant you guys are targeting at 2100 kettner any early indications of interest to you guys are seeing there and just in general what factors need you comfortable going ahead with spec development in that market.
Well the markets. It's just an incredible market is very supply constrained. It you know, it's where a lot of the housing is where.
The millennials want to be in the tech companies and so forth to support that.
I don't think you could find a better location other than maybe one for sale office now because of the one to say a retail residential so you just couldn't ask for better site and better.
Market conditions.
Than what we have there also the product that we're developing its lower rise what does it Rob five stories, yes, roughly 200000 feet with ground floor retail brick and timber hi ceiling heights lots of Dax I mean, it's it's the it's the bees needs. If I can use that expression in office space in terms.
As of the user crowd, we have any we have all kinds of people that are interested the building or portions of the building we won't quote around at this point rents are going up a one to say orencia set new highs.
Yes, and other things going on we think are going to set new highs and you know we just started construction that thing delivers what the into next year robber or maybe your stabilizes 2021 is that right.
Yes 2021.
So I don't want to quota run at this point, but I think it'll be a record brager.
Well the follow up on that and and not to get into specific rents that maybe to Rob I guess, where do you think market rent growth could shake out in San Diego and I guess more importantly in Submarkets you guys operate in.
The next 12 months I mean, how are you seeing growth there that's getting closer to your other major markets at this point.
Yeah, we are I mean, San Diego rent growth is a 9.2% I mean, I've undershot my rent growth projections.
The last few quarters.
So I think particularly with the folding in what John said about the unique character up 2100 and rent growth you know about 10% is not going to surprise me again, it's really it's one thing to be in the markets, where the tenants want to be also building this type of product and collaborating.
With the tenant flash clients that we deal with.
And to answer your other question now there's a lot of interest from different categories of tenants, whether it be tech or.
You know some professional service firms that sort of thing.
Very helpful. Thanks, guys.
The next question comes from Dave Rodgers of Baird. Please go ahead.
Yeah tell there maybe start on the accounting side with you if I could quickly on the exchange can you talk about the capitalization.
I've interest there and kind of how you see that burning off that's true the final phases of occupancy.
In terms of the actual numbers I don't have the numbers, but I mean that Michelle said that that will be fully completing capitalization by mid next year. When phase three comes online and will be reducing cap interest at the end of this year when phase two comes online.
Yeah, and we expect to cap interest for the year to be in that roughly 80 million ferrets in a similar run rate.
Second quarter in third quarter.
And is that just lower capitalization from exchange offset by the added development projects.
Right.
Okay.
The season that quarter, I think you'd mentioned some time ago. Some restoration fees from Dropbox of you recorded all those or will you get those later or would those bleed into 20.
Yeah, those are all been amortized into our numbers.
Okay, so still collecting them on a GAAP basis, and then the downtime.
Just to be clear they've been at amortized. So we've collected all those.
And on Okay.
Yep.
Thank you for that you mentioned, a the downtime I think at the Brannan Street assets, Tyler with the move ins and move outs, but it sounds like that downtime is literally limited just to the fourth quarter. This year.
That's correct, we expect Bruce to move in and in December . So this is effectively two months of downtime.
A few months okay. Thanks.
Maybe last just to John and his follow up on a Tyler's comments earlier about funding you had talked for a number of quarters about larger joint venture sales. It doesn't sound like that's off the table, but you just kind of Didnt mentioned it overtly today can I just ask about kind of any progress that you might be making there and if that's still kind of a main avenue for you in the future.
Oh, it's certainly an avenue and it's certainly something that we keep abreast of in talk with folks all the time in specifics.
But right now we don't have anything that we are negotiating in detail.
And with the leasing we're doing and so forth type kind of feel that if we're going to do adventure on development project, It's probably a lot better to do it when you have a lease at hand, rather than when it's back because the differential in.
In thresholds for IR are and so forth or a little bit different but that's certainly a source that we look to for the future.
All right. Thank you.
And we have a follow up from Manny Korchman of Citi. Please go ahead.
It's Michael Bilerman here with Manny.
John Congratulations on the island Oyster point strike deal.
I I know they felt like it years left on towns and are you involved at all on their potential subleased to that space or providing them any compensation for lease termination payment or is it solely a they're going to deal with that and they'll move in and then 2022.
To your space.
It's the latter.
Okay, and then just we have no exposure.
And then are you in Helmand on sub lease or you you're definitely going like a service that you will provide for them.
They haven't asked us it's not generally what we do so I don't know I I have no I know contemplate us being involved in that at all Michael.
Okay, and then just stepping back from it you know clearly at least from what they're trying to put out there into the presses.
One of the big desires for them to move down to San Francisco is.
Yes, the need for spacing he believed to grow which is quite limited right now in San Francisco, which is great from a rent perspective for you and great for free to lease up your development in.
San Francisco proper.
Does it concern you at all with tenants feel that can't expand in this city and or have to pay absorbing at rents.
To get space you know, it's just a trend potentially that others may go down and seek alternatives to the San Francisco market.
Well you know like what's a big question and it's certainly I don't see it as a trend their economies that move out all the time, but theres many more companies that move and I don't like the idea I'm not going to agree with you that are exorbitant rents.
If you look at what these car types of companies pay and other markets around the world. San Francisco is is in the upper quarter up from a percentile standpoint, but it's certainly not anywhere near the highest so I think there's room to go on rent as to the availability now with the sequel lawsuits saw.
So we're going to see projects come on stream I mean, we have the flower Mart cores and Tishman Speyer has their eight or 900000 paid 700000 be whatever it is.
And so forth. So the problem is Oh. This is just come about the seek resolution and people move for various reasons I'm not going to get into any comments with regard to the recent announcement on our oyster point tenet that is.
Better I addressed by them.
Yeah, no it and that's that I wouldn't expect you to comment on that one is more so thinking about that situation then.
Some reasons that they put out there in the press sense to their move and whether you know as you think about what's happening in the city, whether that could portend to others.
I appreciate your but the color you can provide.
Yeah, well one of the things we're excited about with flower Mart with the scale of that remember that's the first phase is pretty good sized and then there is a second phase that we have the ability to accommodate a large user or a number of large users with.
The ability to scale up and frankly, we're seeing that more and more frequently with particularly with the the big the faster growing companies.
If you think about.
The Chelsea area there in New York, you saw big user come in and take some space than take some more space than take more space to take more space and more space well you know the these these folks are are growing and when they put their their foot down in a place generally they put a second foot down and then pretty soon you have a lot more.
Oh, well, we have in and what we offer in scale in South San Francisco is almost unprecedented.
We have in phase two three and four roughly 2 million square feet, we can deliver and I think eight or nine building seven or eight buildings.
You could think of those all as all being a phase under themselves and then we have they always stir point Tech Center I think we call. It right next door, which is literally a budding phase two of voice or point, where we only have 145000 feet and we think we can get it entitled.
For another half million plus square feet as well so.
People like these companies like to know they can't grow and if you think about that was very a very big point with our relationship in expanding dropbox into their new headquarters we.
Did their first headquarters and what was the 345 years later, we did a bigger headquarters and we didnt have to go to a lender or partner and get permission. So forth. So we think we have a pretty good program.
To deal with the.
Frankly, the best working environments in buildings, you can you can develop in areas with great amenities and transportation you add to that scalability you end up with something it's extremely unique.
Alright, great soon a few weeks.
Great. Thank you. This concludes our question and answer session I would like to turn the conference back over to Tyler Rose for any closing remarks.
Thank you for joining us today, we appreciate your interest in care thing by.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.