Q2 2019 Earnings Call
Okay and welcome to the Kilroy Realty Corporation.
Second quarter 2019 earnings conference call.
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I would now like to turn the conference over to Tyler Rose Executive Vice President and Chief Financial Officer. Please go ahead.
Good morning, everyone. Thank you for joining us on the call with me today are John Kilroy and several other senior members of our management team, we're all available for Q.
At the outset I need to say that some of the information we will be discussing it forward looking in nature. Please refer to our supplemental package for a statement regarding forward looking information in this call and in the supplemental this call is being telecast live on our website and will be available for replay for the next eight days, both by phone and over the Internet our earnings release and supplemental package have been filed a form 8-K, where do you see and both are also available on our website drawn with protocols and update on conditions in our markets and a review of the second quarter and I'll give you the financial highlights and discuss our updated 2019 earnings guidance.
Then we'll be happy to take your questions John .
Hi, Thanks, Tyler Hello, everybody and thank you for joining us.
I'll begin today with a review of market conditions and follow with details of our recent leasing performance then I'll bring you up to date on our development and capital recycling activities.
Conditions in our West Coast real estate markets remained very strong.
Across a wide variety of industries from Seattle to San Diego, the tight supply of available space combined with significant demand for high quality work environments.
Continued to drive rents and class a vacancy rates remain a frictional levels and all of our key markets.
Technology continues to be a key driver.
As I've said before I believe we're still in the early innings of this new digital era advanced computing technologies Turbo charged by artificial intelligence continue to influence healthcare finance retail and many other service industries that have proven difficult to disrupt in the past.
Another key driver of demand has been life science U.S. spending on health care exceeded 3.5 trillion in 2018 more than 18, 18% of U.S.G.P.. That's spending represents a huge opportunity for life science enterprises, and its driving new investment new businesses and new collaborations.
It is boosting demand than shrinking supply in traditional life science clusters from coastal San Diego to Seattle, and we believe this growth story is still in the early stages.
In addition, many of the major as we look to.
Hi to gauge the strength of the economic activity remain healthy West coast job growth continues to surpass that surpass the rest of the nation VC funding is at all time highs U.S. healthcare venture fund raising reached a record 21 billion in 2018 Big Tech continues to buy a little tech, which improves overall try to compare quality and the IPO markets, providing strong liquidity.
On the ground, we are increasingly seeing a trend that that the intersection of technology and life science is creating significant competition for office space and the same buildings across many of our markets in San Francisco, We signed a lease with Dropbox as you'll recall for the exchange, but we had both tech and life science users competing for the project.
You May also recall last year at our 363rd Street project, a life Science Company established 136000 square foot presence and what was the traditional office building.
In San Diego at our 94 or 55 Town Center drive development project, we have been in discussions with both Tech and life science companies for all of the project and now we're saying that Kilroy standpoint.
With a scarcity of new large state of the art highly amenitized work environments, we find ourselves negotiating more and more frequently with both tech and life science companies that are in competition for the same space and we expect this trend to continue.
These conditions laid the groundwork for a terrific second quarter and first half leasing performance UK our state.
We signed more than 2 million square feet of space in the first seven months of the year, putting us firmly on track for another year of record performance and that includes about 975000 square feet in our development program, which which scored more successes as Apple east our entire project get 333, Dexter in Seattle, and Cytokinetics lease more than 35% of the first phase of Kilroy Oyster point, just four months after commencing construction.
And our stabilized portfolio during the second quarter, we signed just under 900000 square feet of new and renewing leases cash rents that were up 41% and GAAP rents that were up 969% from prior levels.
Among the highlights San Francisco tenants, WPP and Sony both expanded their footprints in the city signing up for 234000 square feet between them a cash rents that were up 75% on a GAAP basis.
And ER and excuse me, 75% on a cash basis, the GAAP rents were up over 109%.
WPP expanded its existing footprint by 70%, while Sony establish a new presence in the city.
In San Diego to existing tenants expanded their space in our del Mar portfolio by more than 90000 square feet in the aggregate with cash rents then increased about 12% and GAAP rents increased 31% on a weighted average basis. We ended the second quarter with our stabilized portfolio.
97.2% leased we estimate that in place rents across our stabilized portfolio at the end of the quarter remain more than 20% below market the highest level in company history.
Now, let's talk about the progress across our in process development program, starting in Seattle, We signed a long term lease with Apple in June for all 635000 square feet.
At our 333 Dexter project in South Lake Union.
Three three to Dexter is our first ground up development project in Seattle.
And it's designed scale and location one of the city's most sought after submarkets attracted attention from a variety of organizations.
It's a great example of how our development program creates substantial value our cost basis in this brand new state of the our project is roughly 65% where older product has recently traded.
And we have now locked in an attractive revenue stream with a high quality tenant for the long term.
In San Francisco during the second quarter, we added 100 Hooper, a 400000 square foot project to our stabilized portfolio. We also delivered the first half of the exchange on 16, a 750000 square foot project and demo and del Mar the retail portion of our one Paseo mixed use project is now 94% leased and 72% occupied.
The office portion of the project, which delivers in mid 2021 is 68% leased an 81% committed.
Rents for both retail and office started setting records for the del Mar Submarket and for San Diego County projects residential units will begin delivering towards the end of the summer and phase one is already approximately 20% committed.
Our success at one Paseo underscores the compelling attraction of the live work and play environment, We've created.
In Hollywood.
As previously announced the office space at our online mixed use project is fully leased to Netflix both office and residential components of the project remain on schedule for a 2020 completion.
Moving to life Science, we have two projects underway totaling 820000 square feet. That's phase one of Kilroy Oyster point in South San Francisco and 94 55 Town Center drive in the University Town Center Submarket in San Diego.
And I am happy to report that we are in active lease negotiations for the entirety.
This square footage and just yesterday, we announced that Cytokinetics signed a 12 year lease for 235000 square feet at Kilroy standpoint, taking more than 35%.
Phase one.
In the aggregate our $2.2 billion of projects under construction is two thirds leased excluding resi and retail.
Upon stabilization the five projects will generate an estimated cash NOI of approximately 140 million roughly 80% from office in life science and 20% from residential.
Before turning to the development pipeline I'd like to recap our development track record in this cycle. Since 2013, we have delivered over 2 billion of projects at cost, 90% of which was office and 10% residential where the cash return of roughly 7.7% generating more than $165 million of stabilized NOI on the leasing front three quarters of the projects were started spec and 95% were leased prior to completion.
Obviously, we're pleased with this performance.
Now moving to development pipeline.
On July 18th we received unanimous approval from the San Francisco Planning Commission for our Flower Mart project. The next and final step is for the board of Supervisors to approve the project development agreement. This fall.
On the acquisition front, we continue to evaluate opportunities that could add immediate cash flow and other opportunities that would replenish our development pipeline, while we have not been large scale buyers of operating properties in the past few years, we are seeing a few select properties in our key markets that could offer growing yields and other attractive metrics, including below market rents and meaningful discounts to replacement cost.
And our capital recycling program, we completed the disposition of a small property located along the one on one corridor in Westlake village for $18 million.
And I have a second asset currently in the market.
Together with Westlake together with a couple of assets sale earlier this year.
Beans, we've now exited the one on one quarter or completely.
We now believe that.
Other asset dispositions, we are evaluating are likely to happen next year with the new timing, we expect our total dispositions and 2019 to be about $150 million.
I'll wrap up my comments with five key takeaways.
Market conditions are the best we've seen in some time and we are capitalizing on this across the portfolio driving rents increasing value.
Well, we continue to believe development is the best way to create value and we believe 333 Dexter is another. Good example of that we are underwriting acquisitions of existing assets with favorable valuation metrics more to come on that we remain disciplined in evaluating new development starts replenishing our pipeline and pursuing other strategic opportunities. We continue to place balance sheet strength and financial flexibility at the core of our business strategy and we have a highly experienced and talented management team up and down the west coast that is well positioned to continue to create significant value for our shareholders that completes my remarks, now I'll turn it over to tighter for review of the financial results resolved. Thank you dollar.
Thanks, John F. AFFO was 95 cents per share in the second quarter, which included the earlier than forecasted commencement of the first half of the exchange.
Same store NOI in the quarter grew 4.7% on a GAAP basis and declined 5.6% on a cash basis GAAP NOI growth was held by net five cent charge from bad debt in the prior year period.
As we've discussed on earlier calls cash NOI in the first half of the year has been impacted by a handful of large expiration, which have been largely release, but required from downtime for T.I.s, we expect cash in a wide to resume growing in the second half and to be roughly flat for the full year at the end of the second quarter or thereby portfolio at 93.8% occupied and 97.2% leased.
With our strong leasing activity through the first seven months of the year, we've effectively address all 2019 lease expiration with just 1.5% remaining.
And over the next 15 months, we only have one expiration greater than 100000 square feet Tilly's.
As John mentioned, we estimate that our portfolio wide average in place rents remain 20% or more below market.
By region in place rents for San Francisco are approximately 31% below market, Los Angeles, and Seattle, as our 11% below market and San Diego's or about 9% below market.
Also during the quarter, we increased our regular regular quarterly cash dividend by 6.6% to 48.5 cents per share or on an annualized rate of $1.94 per share. This represents close to a 30% increase over the past three years.
Now, let's move to the balance sheet, we drew down all the proceeds on the sale of 5 million shares of equity. We had placed last August on a forward basis and use the roughly $350 million to pay down our bank line roughly $90 million. The forward equity play for the first quarter under our ATM remains undrawn at this time.
With us that substantial debt capacity and flexibility, we have $690 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 maturities until 2022, our debt to market cap at quarter end was approximately 25.5% and our debt to EBITDA was approximately 6.1 times adjusted for the equity forward transaction.
Given favorable credit market conditions, and our choice to defer some anticipated asset disposal into next year, we're reviewing options to accelerate the timing of issuing new debt.
Now, let's discuss our updated guidance for 2019 provided in Yesterdays earnings release to begin let me remind you that we approach our near term performance forecasting with a high degree of caution given all the uncertainties in today's economy, our current guidance reflect information and market intelligence as we know it today any significant shifts in the economy, our market tenant demand construction cost and new 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 timing of tenant occupancy.
With those caveats, our updated assumptions for 2019 are as follows as John noted, we now expect dispositions for 2019, we had approximately $150 million, we forecast accelerating our next bond deal by a quarter given the lower disposition target. We forecast remaining 2019 development spending of 250 million to $300 million.
Our forecast for year end office occupancy remains at 94% to 95%.
We could and we continue to expect a 3% to 4% growth in GAAP same store NOI for the full year and flat results on a cash basis.
Taking all these assumptions into account, we are increasing our 2019 earnings guidance range to $3.67 to $3 and 78.
<unk> cents per share with a midpoint of $3.73 per share the midpoint increase of two cents is primarily driven by the earlier than forecasted commencement out the exchange.
Thats the latest news from parity I will be happy to take your questions operator.
Thank you.
We will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad.
If you are using a speakerphone please pick up your handset before pressing the keys.
To withdraw your question. Please press Star then two at this time, we will pause for a moment to assemble our roster.
Our first question today will come from John Kim of BMO capital markets.
Please go ahead.
Thank you congrats on the Apple lease that three to three Dexter.
It looks like the stabilization date with moved back a couple of years and I was wondering if you could discuss.
The timing of the ethanol contribution of the asset.
Yeah. So the projected it's going to be taken down in three phases, starting the second half of 2020 through into 2022 will be providing more detail on that and then in the coming quarters.
And do you stop capitalizing interest when occupancy takes place on the different phases.
Yep.
At the flower Mart it looks like there's some conflicting news item, whether or not to far Mike.
Just staying the project. After you completed can you just provide some.
Any further clarity you have on that.
Yeah. This is John .
John .
Yeah, the flower Mart came to us and the city and said there with all the buildings that are going on a say ari.
You know everybody else in central Soma that it's going to be changed the character of the area from industrial to put much more upscale.
We think maybe it would be better for us to go over to the produce smart that's going to be built do you would you accommodate us we talked to say they said is fine with US you still get credit for saving the flower Mart for the project called the rest I. So they may very well move there they have the option to do that that's been approved by the city in all its different components, including the supervisors in terms of the supporting it.
So we don't know whether they'll come back or not it doesn't cost us any more money because the money was already there so.
And in fact, it would increase our leasable office square footage.
Slightly if they did not come back so more to come on that.
As far as the total costs looks like similar projects that you have on the $850 range per square foot.
Is that a good benchmark for the flower Mart and can you also provide an update on the litigation at the project. So I can talk about litigation, there's a variety of other than to say that.
People are endeavoring to negotiate a successful completion were hopeful that will happen, but I can't becoming because of it is litigation I can't get into specifics to that in terms of the cost.
Let's just say that we're going to have a very favorable cost basis, but we are in negotiation with a lot of different people for the flower Mart and I don't want to talk about what the cost is.
Understood is going to make its good to be favorable.
Got it.
Thanks, a lot.
The next question will come from Nick Yulico of Scotia Bank. Please go ahead.
Thanks, just following up on on flower Mart.
I guess can you give us a feel for where you think demand is like in the city right now and.
You know what are class where of class a market rents for new construction in the city reason too.
Yeah, well demand is I don't think I've ever seen demand any stronger as you've seen us announced over the past I know years worth of conference calls Weve been leasing space at record rates for space that is.
Isn't contiguous space that may not be available other than in tranches over the next couple of years.
Hi, and thanks for all in older buildings, like three or three and three sexy and into a won and so forth at 101st.
Rents.
In the Brannan Street corridor for quality product.
It is.
Let's just say north of $80 Triple net and I think moving higher.
Okay. That's very helpful and then going back to the Oyster point lease Cytokinetics did file some information about it and.
Based on that rent it looks like the project is yes, it's already going to yell is already yielding over 7% I mean, how how should we you know assuming you've got some more rents for for the rest of the space I mean, how should we think about potential rent growth in that market and then also.
Yeah like future phases of construction costs to manage this.
I mean is this a development that's going to get closer to an 8% yield overtime.
I'm not going to I'm not going to put my neck out there because every time I do you guys want to chop it off because something happens but.
We think that the phase one will exceed our our pro forma expectations that we've talked about before future phases. We think we'll rents will grow tremendously in that market you've heard us say before that the same tenants types of tenants in many of the same names leased space in Cambridge lease space in South San Francisco for the similar kinds of properties their operations.
And if you take a look and draw a little bit of a of a forward thinking too where rents by going Sam South San Francisco looked at where they are in Cambridge, We think that we think we're going to see big rent increases over the next number of years, and we think rensselaer escalate significantly in the future phases of Kale Pete.
And just one last question on the on the lease that was signed.
Yeah. It looks like there's you know the tenant is.
It doesn't pay rent on the full amount of square footage in the first year. It pays a piece of that I wasn't sure if that was because they they're not taking all the space or if there was that was built in is some like additional.
Free rent component.
Tom do you want to handle that.
Well, maybe I'll go ahead, yes, no I think they're taking the 160 in the first 12 months and then the remainder over time.
And the second year, the total to 35.
Okay. Thanks, everyone nice job.
The next question will come from Craig Mailman of Keybanc capital markets. Please go ahead.
Hey, guys.
Hello, just one quick one on guidance on the bond deal kind of what should we think about size and timing on that one.
Yeah, I mean, we're still working on it I mean 350 to 400, maybe on size and.
Timing.
Maybe September ish kind of thing.
Still working on.
Okay. That's fair and then John just on your comments that you are seeing more acquisition opportunities could you just kind of.
Juxtapose that with.
Good development pipeline, you have with flower Mart, and others and kind of.
Having to fund all this with where the equity is maybe doing more mixed more debt dispose kinda.
How the mix of capital allocation could go.
In the next 12 to 24 months.
Thank you I mean.
We you know as you just on dispositions to begin with we gave a guidance early in the year. So I think everybody remembers of between 150 and.
Was it $350.
Yeah.
Yes, and we're at the lower end, we explained before that some of the assets, we thought we'd be selling.
We think we can create some significant value by repositioning them before we sell them. So that's that means were probably more strict dispositions next year journeys acquisitions I don't want people to go out and think that we're going to want to become massive acquires were not.
But we are seeing a couple of assets that we think are extraordinarily well positioned for huge increases in the future with that are currently accretive and if we can be successful in acquiring those than we think that's a good place for shareholders I Totter. If you want to talk more about funding if that I think there was a second part of your question.
Yeah, I mean in terms of the funding of the existing.
Needs.
29 teams effectively taken care of with the dispositions that were still doing any ATM forward that we drew down in the first quarter. So 2019.
Checked off and then for 2020 as we just talked about we're looking at a potential bond deal that would pre fund some of the 2020 development spending and then to the extent, we do acquire something or decide to do more development is going well.
Evaluate and you know the other the other alternatives that we've always used which is dispositions debt and equity we have a lot of debt capacity and there is also the joint venture alternative.
Okay, and then just Johnny Nokia wants to think you guys are buying too much is order of magnitude maybe of what you guys think you could take down and maybe the spread between those type of stabilized yields versus what you're getting on your developments.
Well Thats, obviously, you're not going to get on anything you buy to reposition or that gets reposition during the course of time, you're not going to get anywhere near the development yields I don't want to get into specific yields because we have deals in discussion and I just think thats inappropriate to talk about because people do listen or read the scripts that are competitors and I just feel uncomfortable talking about it but.
Yes, it is definitely safe to say that you're not going to go out and acquire high quality best in class assets and have them be anywhere near the the the yields that kilroy has been able to achieve in this cycle, including currently in our development. So there's there's probably 250 basis points plus or minus.
Possibly more.
I have a spread but when I'm looking at is it you know if you can end up with something that is slightly accretive that can become massively accretive half years down the road that are like that.
And what do you think and how much would you spend on that's just wide kind of goalpost.
Well it'd be a fraction of what we do from a development standpoint, or what do we have.
<unk> are saddled I'm, just curious if thats still the case and then just how it's looking from.
Kind of a phased perspective I know in the past you said, maybe it'd be two phases is there enough demand out there to just do it all at once and just kind of thoughts around that.
I think there's enough Dan the first of all the entitlements that we have will be a entitlements for what we call phase one which is everything but the gateway building, which is roughly three 350000 square feet worth of.
Leasable space so.
When we think it's likely that we will start.
If they if the state it gets staggered a little bit between the blocks building and the market. All building is the market all building doesn't take as long to start so it all doesn't technically start at the same time, but I think it will finish at the same time.
And then just in terms of demand I I, there's very very strong demand by major companies for all of it.
And I am talking about all of it.
Yeah, where theres companies don't want all of it for themselves.
Okay, great. Thanks.
The next question will come from Steve Sakwa.
Core. Please go ahead.
Thanks, Good morning out there John I guess to kind of follow up on that point about the demand just help us understand how you sort of decided on a cytokinetics.
I realize it's a little bit more of a.
Smaller biotech company has a couple of drugs.
Its not traditional household name, it's certainly not an apple from a credit perspective. So how did you guys go about sort of evaluating that company.
Kind of giving them part of phase one given the kind of demand it sounds like thats behind that.
I think it will be come become very clear in our next conference call.
Yeah.
Okay.
Alright, thank you.
Our next question will come from Jamie Feldman of Bank of America Merrill Lynch. Please go ahead.
Great. Thank you.
I want to talk a little bit about rent growth can you just talk about you know across your major markets, what you're seeing in terms of net effective rent growth and.
Maybe how does it feel versus last year.
You want to cover that wrong.
Sure Hi, John Jamie.
This is rob paratte by the way.
You know starting with Seattle, we just see continued pressure on rents so again.
Based on what brokers are forecasting for the year for the remainder of this year.
I wouldn't be surprised to see it in the double digits again in terms of net rent growth.
The Seattle Puget Sound area added over 43000 jobs in the past 12 months. So there's I think this pent up demand with a lot of employees in the area plus people moving in.
And the thing tenants up there or pushing a lot of this.
Rent growth as well as just occupancy.
In San Francisco, I think again, it will likely be among brokers are predicting and especially for larger transactions that will be in the double digits again, so whether that's 10 or 12%.
Hard to say right now, but based on the demand we're seeing.
And the number of tenants that are in the market.
It's looking like it it will be.
At least as good as last year and your question was I'd say up and down the coast how to the markets look how to rent growth look I'd say they look in every case better than they did last year.
So it's.
Very dynamic time right now in Los Angeles, probably in the just again, depending on the Submarket I think in the west side of L.A. and Hollywood.
You could start getting into double digit, but it's probably more I'd say safer to say, 5% to 8% rent growth.
In San Diego has.
Really stirred humming well I mean, just in terms of the amount of activity that's going on with tenants that are in the market, but also tenants that haven't yet come to the market that are looking so we're seeing particularly in San Diego.
In the right Submarkets, whether it's our del Mar area were one Seo is or.
For example are little literally project, we're starting to see different types of tech So I think rent growth.
Again, probably won't be in the double digits, but can certainly be.
In the mid mid single digits.
All right that's very helpful.
And then as you think about that we keep seeing more more news coming out of San Jose and Silicon Valley, I guess Silicon valley occupancy improving.
San Jose a lot of investment in housing and mixed use what do you what are your thoughts on what's happening down there and your appetite to get even more involved.
In San Diego.
No I'm, sorry, Silicon Valley Peninsula, San Jose.
Yeah, I think San Jose has got a lot of people that are assuming theres going to be tremendous growth and there is in my mind I like San Jose I think it's a wonderful place we've looked at it very thoroughly weve had a lot. We reviewed all our property some of which have been bought by some of our peers.
But theres no limitation on what you can build rental stone justify new construction that doesn't mean that rents will get there, but if you need a million square feet, there probably eight or nine people you can talk to for that million square feet. So the scarcity factor.
On the demand supply.
Hi is balance is not to our liking at this point that could change.
Okay.
And then Tyler had mentioned one exploration over 100000 square feet over the next 15 months.
Can you talk about that lease in your prospects either renew it or if you think it's a move out.
Yes, it's going to be a move out and I think we'll move the rents up considerably by repositioning it but it will take a little time and that happens to be in a property that we were thinking about.
Our remodeling anyway, so it's part of a larger development of multiple buildings.
So they but they are moving out Jamie.
Whereas it and.
It's his coat Kilroy I think we called Kilroy Center long Beach.
But you plan to keep the asset not sell it.
I don't want to talk about what we might be doing with any particular asset until we announce it we don't talk about.
Okay.
And then just bigger picture when you guys. It looks like you're very comfortable growing more in life science. What are you thinking on the regulatory environment in drug pricing and how that might impact the sector.
It's hard I mean, who if you knew that I wouldn't be in the real estate business I'd be making that bet, making zillions of dollars. So I don't mean to be flip it but I don't know that anybody can make a call on that I think you have to look at is the fact is our general our population is getting older. We got massive problems with diabetes and Alzheimer's in a variety of other things that would bankrupt the comp the country. If we don't find new.
Protocols to deal with the new drugs to deal with it and so I think that we are going to find this area continue to expand I think its technology is going to bring prices down and developed new new remedies and whatnot. So I think it's pretty well baked that it's going to grow.
We'll drug prices tamarin, tamp that down a little bit I don't know how to predict that Jim.
Okay I appreciate your thoughts thank you.
The next question will come from John Guinee of Stifel. Please go ahead.
Oh.
Well you guys have been busy out there and.
Question for you.
Directv probably get down below 10 years on the lease is that lease appreciably below or above or below market.
And then I noticed that your.
Residential deal on Vine is costing about a million dollars a unit can you talk about.
What kind of yield you can get on a million dollar a unit residential deal.
Yes, I will start I'll, let Steve talk about Reggie, but let me talk about the Directv the rent is very very very significantly below market.
Okay. That's all we need to know okay.
Steve you want to talk about the rising.
Sure John on yields on our resi buildings are in line with what other developers are delivering projects out and we're not we're not reporting those yields breaking them out but they are competitive they are accretive and they are important value to these mixed use projects.
Are you going vertical is steel and concrete in Hollywood and then doing a podium building in del Mar is that what my guesses.
Yes.
Okay. Thanks.
Our next question will come from Derek Johnston of Deutsche Bank. Please go ahead.
Hi, everyone. How you doing I know, we touched on funding briefly when I want it to be for direct so so what are the funding plans for flower Mart specifically.
Well, we've talked about that before and we have a lot of different ways of thinking about that it's just bigger project was it's exactly the same as we've talked about with others that is.
We could.
We could venture it we could.
We could add debt, we could add equity.
Any comp you. We can do dispositions were totally flexible right now I think we'll end up with a significant lease in due course, and then we will address our.
Our capital plan currently with announcing any lease.
Great Great and.
Just secondly, and lastly, so what do you have left to lease in San Francisco. This year, given the truly full occupancy and really is there much juice left to squeeze out of this orange and San Francisco in the second half of 19.
Thank you.
Tyler.
Yes, I mean as long as I've written.
I mentioned in my comments, there is very little left in 2019.
In the Bay area to leads were basically fall so.
Rents are below market in our San Francisco portfolio about 31%.
But we can't capture too much of that as Youre getting out in 2019.
Yes.
Our next question will come from Blaine Heck of Wells Fargo. Please go ahead.
Thanks, John you talked about acquisitions, I think you're referring mostly to operating properties and value add type deals, but I guess, how are you thinking about your land holdings at this point, obviously, you've got a lot of wood to chop with regards to oyster point and flower Mart, but are you guys still actively looking for other sites for development down the road.
Well yeah. We are when we look at everything Blaine is I think we've said multiple times over the years, we literally look at everything even.
Whether it's a potential development, whether it's a potential acquisition part of the market knowledge part of it is you know what what are others doing what do they see that we don't.
And sometimes we act on it with regard to your specifically with regard to development sites.
There are some sites that we liked because they are right in our wheelhouse and they check all the boxes and whether or not we'll be successful over time at acquiring some additional sites remains to be seen with regard to the two big projects, you mentioned oyster point and the flower Mart first of all Oyster point, we are in.
If we have a we have entitlements for another couple of million square feet at Oyster point, you have to go through a precise plan process, which takes about a year, we'll be submitting the precise plan for the subsequent phases in oyster point.
It would be we'd be hard pressed to be under construction in 15 months.
Assuming we wanted to start construction I don't think we get start probably for another 15 months plus or minus.
There for the next phase with regard to the flower Mart, obviously, we've got to see the city sold the lawsuits.
Hopefully that happens over the course of the next six to 12 months then we got to move the flower Mart off and then we start construction. So you know those are downstream.
There could be we have 2100, ketner down San Diego, which Michele what's the forgive me everybody, but I just can't remember the numbers on every single project thats of debts and the incremental spend of how much Michelle.
2100 hundred million.
The 100 million Vermillion, yes, yes, okay, yes, we'll probably start that sometime in the next six months based upon what we're seeing for tenant demand and then buying additional sites. You know were always were always looking more we'll report on that win win.
When we think we're serious about something or we have something.
To announce.
Alright, Thats really helpful. And then it looks like Capex per square foot and concessions on general were a little higher this quarter can you just talk about weather.
That was a mix issue and I guess.
Maybe for Rob more generally what are you seeing with respect to Ti and free rent in your markets.
Sure ill handle the last part of your question first.
Blaine.
What's happening with the Thai market is basically.
Cost driven meaning that the costs are higher just because labor et cetera materials that kind of thing just given the economy that we have.
That said with our new development, particularly.
The T.I. tends to be a little bit higher, but we're also getting higher rents for that.
And it's also T.I.s are also driven largely by a function of how long the lease terms are.
That you sign so.
It's not.
In past in past markets and that sort of thing T. I become sort of a a concession that gets increase but thats not the case now it's really.
They're all in different Submarkets.
<unk> of RBC capital markets. Please go ahead.
[noise].
Mr. Carroll your line is open it may be muted on your end.
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Operator, let's move on the next question will come from Manny Korchman of Citi. Please go ahead.
Hey, guys I'm John can you talk about you talked about sort of an overlap between tech and life science tenants.
Can you talk about your leasing approach to those two different you know constituencies and how.
You are the mixture or or don't make sure for them to overlap.
I'm sorry, when many of the last part how what was the last part of your question cut out on how you manage how do you manage the leasing process between those two somewhat different constituencies within the same assets.
Well remember that in the sometimes isn't the same asset sometimes or it's a multi building thing all of the stuff, where there was a the exchange or whether it's a K O P or whether it's 20 455, they're all designed structurally mechanically et cetera floor loading ceiling height et cetera for life science, because they do have specific things that are are important to them. However, what we're seeing with the major tech companies as they also need more mechanical more a ceiling height and so it tends to fit pretty.
A pretty.
Consistently between the two uses in terms of Mexican them in a building as you know, there's various lab issues and so forth on lower floors versus higher floors, and so forth. So.
We're very conscious of making sure that the different types of uses we might put into a project are compatible.
And not.
Incompatible and we've not had any resistance.
The the as I mentioned in my comments.
All the space that we have and underway for life Science, we are negotiating negotiations with life science companies and in many cases with tech companies for the same space and I like that because the tech companies pushed life science companies on rent.
Thanks for that and then can you just give us updated thoughts on.
Your search for JV partners are there for existing assets or some of these large scale development.
Well, there's a lot of people out there that want to do.
Wanted to do ventures on existing product on life science product on the flower Mart on other projects that we're doing and so if we want to do that.
Unless there's some big changes in the marketplace at a macro context.
I think we have multiple candidates from which to choose with very favorable pricing more to come.
Thanks, John .
Welcome.
Our next question will come from Dave Rodgers of Baird. Please go ahead.
Hey, John maybe this dovetails a little bit with many last question, but with regard to kind of pushing asset sales into next year and bring the bond offering forward.
What was the main driver and kind of pushing the asset sales back and just kind of given the demand you're saying for asset would you want to get that done sooner rather than later so were there any triggers kind of in the first half of the year that led you to kind of push that back a little bit.
Well, it's it's as I try to explain it.
Previous conference calls.
The Mark to market, Dave on these assets is far greater than what we thought it was.
And we think we can significantly increase the value of them through repositioning and then to dispose of those of the assets that we had sort of earmarked we think it'll translate to much higher sale price.
So that's that's that's it's as simple as that.
So same assets, just maybe investing some more capital or is it more leasing when you're talking about repositioning.
It's investing some capital, which will we think achieve.
Significantly higher rents on the on the.
Expirations that we see over the next year or so.
And then capital.
Affirming.
Sorry go ahead.
Yeah, and I think it translates to a lower cap rate because it puts the assets in a much better line.
Fair enough and then is that a meaningful number in terms of the capex going into those for sale or potentially for around JV and it's it's not put it this way to value creation versus the added increment of investment isn't an enormous.
A positive return.
Okay. Thank you.
Welcome.
Ladies and gentlemen, this will conclude our question and answer session. At this time I'd like to turn the conference back over to Tyler Rose Executive Vice President and Chief Financial Officer for any closing remarks.
Thank you for joining us today, we appreciate your interest in K RC Goodbye.
The conference is now concluded thank you for attending today's presentation.
You may now disconnect your lines.