Kilroy Realty's (KRC) CEO John Kilroy on Q2 2014 Results - Earnings Call Transcript

Jul.29.14 | About: Kilroy Realty (KRC)

Kilroy Realty Corporation (NYSE:KRC)

Q2 2014 Earnings Conference Call

July 29, 2014 1:00 PM ET

Executives

Tyler Rose – Executive Vice President and Chief Financial Officer

John Kilroy – Chairman, President and Chief Executive Officer

Jeffrey Hawken – Executive Vice President and Chief Operating Officer

Eli Khouri – Executive Vice President and Chief Investment Officer

David Simon – Executive Vice President

Analysts

Craig Mailman – KeyBanc Capital Markets

James Feldman – Bank of America Merrill Lynch

Emmanuel Korchman – Citigroup Global Markets Inc.

Vance Edelson – Morgan Stanley

Gabriel Hilmoe – ISI Group

Brendan Maiorana – Wells Fargo Securities LLC

David Rodgers – Robert W. Baird & Company

Vincent Chao – Deutsche Bank Securities, Inc.

Jed Reagan – Green Street Advisors

John Guinee III – Stifel, Nicolaus & Company

Operator

Good day, ladies and gentlemen. And welcome to the Q2 2014 Kilroy Realty Corporation Earnings Conference Call. My name is Stephanie, and I will be your operator for today. At this time, all participants are in a listen-only mode. We will conduct a question-and answer-session towards the end of this conference. (Operator Instructions)

As a reminder, this conference is being recorded for replay purposes and now I'd like to turn the call over to Tyler Rose, Executive Vice President and CFO. Please proceed.

Tyler Rose

Good morning, everyone. Thank you for joining us. On the call with me today are John Kilroy, Jeff Hawken, Eli Khouri, David Simon, Heidi Roth 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 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 seven days, both by phone and over the Internet. Our press 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 quarter. Jeff will review conditions in our key markets. I’ll finish up with financial highlights and updated earnings guidance for 2014. Then we’ll be happy to take your questions. John?

John Kilroy

Thank you, Tyler. Hello, everyone and thank you for joining us today.

We had another strong quarter with solid execution as West Coast real estate markets continue to strengthen. And we made good progress with all of our strategic initiatives. The highlights include the following.

We increased our occupancy by 120 basis points to 93.6%, our stabilized portfolio is now nearly 96% leased, our same store portfolio generated strong year-over-year growth on both the cash and a GAAP basis as we continue to see the benefits of rising rents and demand across all of our markets.

In our development portfolio we executed one lease and have an LOI for a second that increased our office projects under construction to 71% leased and 85% committed, up from 67% leased last quarter. We successfully reloaded our development pipeline with two new projects in San Francisco arguably the best market in the country and now have signed an LOI to acquire a terrific site in the vibrant South Lake Union submarket of Seattle.

We completed two San Diego dispositions totally $63 million which included a land parcel and two smaller vacant buildings. We increased our borrowing capacity, extended the term and lower pricing on our credit line. And we received an upgrade in our credit rating outlook to positive from stable from both S&P and Moody's.

Let's take a look at some of the details.

On the leasing front, we had an another solid quarter signing newer renewing leases on 470,000 square feet at rents that were 11% higher on a cash basis and 20% higher on a GAAP basis than rents in the expiring leases. Year-to-date, we've now executed approximately 1.3 million square feet and we currently have 450,000 square feet of in place letters of intent.

Our existing development program continues to outperform with the strength of our franchise growing more evident each quarter. Our six projects currently under construction totaled just over 2.5 million square feet and it represented total estimated investment of $1.5 billion. Five of the projects are now fully leased or committed and we expect to deliver two of them in the fourth quarter. That represents an on-time delivery for the new LinkedIn office campus in Sunnyvale and an accelerated delivery for the new Synopsys campus in Mountain View.

At Columbia Square, we signed 93,000 square-foot lease with NeueHouse for all of the office space in Phase 1, which includes the two historical buildings. NeueHouse is the world's first unique private workspace provider offering a series of spaces, experiences, and amenities catering to innovators in the film, design, fashion, publishing, and tech industries.

The cost of the project has increased slightly to reflect the larger Phase 1 square footage of approximately 10,000 square feet, another improvements to the space. Our projected rents for both the office and residential components of the overall project have also increased based on improving market dynamics. At our Crossing/900 development in the Redwood City, we have a four project LOI that would resolve in a phase delivery of the two buildings starting in late 2015, more to come on this as we complete our negotiations.

In the Del Mar sub-market, we are preparing to start the 75,000 square foot Heights office project later this year. The estimated total investment would be approximately 45 million. As we said on prior calls, we have also been working on a number of new development opportunities, here is a status report on three new projects. First, in May, we completed the acquisition of a development site in the Mission Bay Area of San Francisco. We think this is a terrific opportunity as it is fully entitled and exactly the kind of product users prefer.

In addition, based upon our current plans, we will be delivering the project at a time when very little other supply is forecasted to come online. We paid $95 million, or approximately $140 per FAR foot for the 3.1 acre site and expect to invest approximately $450 million, including land to build four LEED-Gold mid-rise office buildings, totaling approximately 680,000 square feet.

We think this is an outstanding purchase not only because of the three attributes we noted above, but also in just a few months, we have seen a land value of our site almost doubled based on what we understand is the current pricing for a nearby parcel that we don't think is well located.

Our site is located adjacent to the 280 Freeway and alongside the 16th Street Corridor, which is the primary artery connecting Mission Bay with joining residential neighborhoods, including Potrero Hill, the Mission District and Dogpatch, all of which are popular with the cities young technology workers. The site is highly accessible to public transit and bicycle path. It will be within walking distance of the new Central Subway line and the recently announced new home of the Golden State Warriors.

We have flexibility to build the campus in two phases with the first phase scheduled to begin by the second quarter of 2015. Depending on discussions with perspective tenants, we could start the entire project in one phase. Second is, we announced last week we have entered into an agreement to acquire a 1.9 acre land site in the Central SOMA region of San Francisco for $27 million subject to approval by the seller shareholders. We've been in discussions to acquire the site for some time and expect to close the transaction by the end of the year.

This is a compelling opportunity that will allow us deliver this type of product most tenants seek in a location that provides tremendous access to transportation, including the future Central Subway. Delivery of this opportunity is projected to be 18 months to 24 months after that of the Kilroy Mission Bay project. We are excited to establish a foothold of this location and what should become a tremendous office development opportunity.

And third, we have executed a letter of intent to purchase the development site in South Lake Union submarket of Seattle that would be our first development project in that region. The development site is designed to allow for more than 580,000 square feet of office, residential, and retail. We have the flexibility to develop in multiple phases depending on market conditions, more to come on this opportunity.

We also continue to make great strides on the entitlement front. In Hollywood, we anticipate receipt of entitlements on the academy side by the time Columbia Square is completed and leased. And in San Diego and Del Mar, we are on track at our One Paseo project to be entitled by the end of this year. We're also making good progress on the entitlements for medical office building in the UTC submarket of San Diego. While we are obviously active on the development front, we remain very disciplined and have a clear eye on current deliveries and preleasing progress to prudently manage our pipeline.

We are diversified in terms of location, tenants, product type and timing and are conservative with phasing and funding. Subject to market conditions and preleasing, we believe we can maintain a reasonably consistent level of activity that balances development upside with market risk.

To provide a more – to provide a bit more color, at year end, we expect our in-process development as a percentage of enterprise value to be roughly 12%, down from 19% currently. Depending on market conditions over the next several years, we project our pipeline could stay in the $1 billion to $1.5 billion range and average approximately 15% of enterprise value.

Moving to capital recycling, we sold two non-income producing projects during the quarter. In April, we completed the sale of an undeveloped land parcel in the Rancho Bernardo submarket in San Diego for gross proceeds of approximately $33.1 million. And at June, we sold two vacant office building located in the University Town Center submarket of San Diego for gross proceeds of approximately $29.5 million.

Currently under contract on two other properties one of which is a non-income producing land parcel in Orange County and we are in the market with four other properties throughout our portfolio. We remain on track to complete $150 million of sales by the end of the year, it could substantially exceed this target depending upon market conditions.

To summarize, we had a very successful first half as we continue to see strong fundamentals across our markets, while technology and innovation remain primary drivers of growth, we're also now seeing improvement in non-tech industries as well. And in many cases, we are seeing credit profiles improve as large proven companies such as LinkedIn, Facebook, Yahoo, Apple, Microsoft to name just a few are acquiring early and mid-stage companies in both Northern and Southern California.

Going forward, we have positioned ourselves to take advantage of increasing tenant demand, a reduction of quality spaces available to meet that demand, and predictive rental growth. These dynamics, which are increasing the case in most of our markets coupled with supply restriction such as Prop M in San Francisco have created favorable landlord environments that should allow us to create meaningful value throughout our portfolio.

We will remain discipline in terms of new development and focused on maintaining a strong balance sheet.

And with that, I'll turn the call over to Jeff for a review of our markets. Jeff?

Jeffrey Hawken

Thanks, John. Hello, everyone. As John has made clear, we continue to see broad improvement both economic and real estate fundamentals. Unemployment fell in all of our markets in June and job growth continued. The San Francisco Bay Area posted the lowest unemployment rate at just over 4%, while Los Angeles showed the most improvement with its rate dropping from 10.3% to 8.2%. San Diego posted the best year-over-year job growth adding nearly 35,000 new jobs, a 3% growth rate. The Seattle region had a June unemployment rate of 4.8% and year-over-year job growth in excess of 45,000 jobs.

Let’s take a look at each markets starting with the leader San Francisco. Halfway through 2014, San Francisco was outperforming once again generating new leases at a rate that brokerage community predicts will produce another record year for the area.

Year-to-date, there have been 10 leases signed that are greater than 1,000 square feet with 2014 projected to be the highest level in 14 years. Brokers are reporting 7.5 million square feet demand with 15 tenants in the market seeking space greater than 100,000 square feet. These figures suggest that the current plan supply factoring the limitations from Prop M will fall short of the current need for space given preleasing activity on current development and the relative lack of large blocks. This should lead to further strong rental rate increases, and that's what we've been seen in our portfolio.

As an example, at 360 3rd Street, we recaptured a space from a tenant who had planned to sublease and ended up with a higher quality credit and significantly higher rents. The new 20,000 square-foot space was leased at a rate of $16 IG which is greater than a 30% increase to the bottom line over the prior rate that was agreed upon about a year ago. Similarly, at our 303 2nd Street, we are negotiating a renewal and expansion from existing tenant that will result in greater than a 50% increase of the bottom line on the expansion space.

Class A direct vacancy for SOMA is now under 1%. Currently, we are at 98.4% leased in the Bay Area. And in Seattle the region continues to attract Millennials at a faster pace than nearly every other major U.S. city and was recently ranked the second best place to live for this demographic.

The most recent employment forecast calls for 2014 job growth, up 2.5%, substantially higher than the 1.6% expected nation-wide. In our primary Seattle submarkets of CBD, Bellevue and South Lake Union, Class A direct vacancy rates are now at 6.2% and 4.5% respectively and rents have continued to increase.

The demand has been driven by the hi-tech industry, which accounted for more than 50% of all Puget Sound office leasing activity in 2013 and currently accounts for more than 40% of potentially activity. We are currently 97.9% leased in our Seattle properties.

In San Diego, the coastal markets continued steady improvement with no current new office supply. Year-over-year job growth continues to outstrip all other West Coast markets and the region's unemployment rate is now 6.1%. In our Del Mar and Sorrento Mesa submarkets Class A direct vacancy rates are now 8.8% and 7.2% respectively.

In July, we executed a 13-year 176,000 square foot renewal on extension with AMN Healthcare at one of our Del Mar properties. The lease was scheduled to expire in 2018 with an early termination right in mid-2015 and will now expire in 2027.

Our San Diego portfolio is currently 93.4% leased, by a larger and more varied Los Angeles, nonetheless experiencing better economic fundamentals, with the May unemployment rate dropping nearly 200 basis points and job growth keeping pace with most other growth regions of the West Coast including San Francisco and Seattle.

In Los Angeles, entertainment, media and advertisement industries continue to drive growth particularly in Hollywood and the West Side which has seen the strongest rent growth. The overall Class A direct vacancy in Los Angeles is currently 16.8%. Across our Los Angeles portfolio we are now at 95.2% leased. In terms of overall portfolio of rents last quarter we reported rents, they were roughly 5% below market and these levels have improved approximately 5% to 10% below market in the second quarter.

For 2014 and 2015, they are 6% and 9% under market respectively. That's an update on our markets. Now, I'll pass the call to Tyler who will cover our financial results in more detail. Tyler?

Tyler Rose

Thanks, Jeff. FFO was $0.72 per share in the second quarter. That includes the previously disclosed $0.04 related to the gain on sale of the Rancho Bernardo land and $0.02 from a lease termination fee accrual. As we discussed last quarter the lease termination fee we paid in the third quarter but under GAAP will be amortized over the first three quarters of the year. We also have $0.01 of acquisition related expenses in the second quarter.

We ended the second quarter with stabilized occupancy at 93.6% up from 92.4% at the end of the first quarter, driven largely by two leases in San Diego. Same store NOI continued to improve in the second quarter, adjusted for a $5.2 million cash receipt related to a property damage settlement in the second quarter of 2013 and the accrued lease termination fee at $1.5 million in the second quarter of 2014. Same store cash and GAAP NOI were up 10.2% and 7.8% respectively.

Improving NOI reflected to higher rents and occupancy for realizing across much of our portfolio. We raised $22.6 million of equity during the quarter through at-the-market stock option program at an average price of $61.01. We also completed our bank line renewal with positive results. We increased the size of our unsecured credit line to $600 million and extended the maturity of both the bank line and $150 million term loan to July 2019. We also reduced our borrowing cost on both facilities.

As John mentioned, both S&P and Moody's upgraded our ratings outlook to positive giving us good momentum to complete a potential bond offering. As previously discussed we plan to refinance our two 2014 debt maturities through a public debt-transaction. In order to take advantage of current rates we are considering accelerating the timing of the offering to be sooner rather than later. Subsequent to quarter end we had approximately $37 million of early redemption related to our exchangeable notes which mature on November.

The early redemption will not have any material net impact to our earnings; it will be a loss on early extinguishment of debt offset by lower interest expense. We currently have $15 million of unrestricted cash and a line balance of $165 million.

As John noted, we recently announced the execution of an agreement structured in a tax efficient manner for the seller to acquire a development site in the Central SOMA region of San Francisco for $27 million. We expect to issue $22 million of KRC stock to the seller and fund the reminder with cash. We anticipated completing the acquisition by the end of the year. We're limited into what we can disclose beyond the S-4 registration statement that was filed with the SEC last week.

Now let's discuss our updated guidance for 2014. 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 internal forecasting guidance reflects information and market intelligence as we know today. Any significant shifts in the economy or market pent-up demand, construction cost and new office supply going forward could have a meaningful impact on our results in ways not currently reflected in our analysis.

For those caveats our updated assumptions for 2014 are as follows. Our occupancy guidance at the end of the year remains the same but is revised to approximately 93.9% to reflect the sales of two vacant San Diego properties which has a positive impact of approximately 90 basis points. As always we don't forecast any potential acquisition or acquisition related expenses. Our projected remaining 2014 development spending for our current construction project is approximately $250 million. Our current guidance for 2014 capital recycling remains a $150 million, although this could increase significantly depending on market conditions. And we project an FAD payout ratio of 92% for the year, this includes higher projected CapEx in the third quarter, given the leasing commissions associated with the AMN early lease renewal I just mentioned.

To sum up, last quarter's 2014 FFO per share guidance range was $2.66 to $2.80 with a $2.73 midpoint. On an apple-to-apple's basis that midpoint would go down $0.01 to $2.72 based on the $0.01 of acquisition related expenses that were not in our forecast. However, adjusting for the earlier than anticipated occupancy of Synopsis and Mountain View, and better than forecasted operating performance for the reminder of the year, we're able to increase our 2014 midpoint by $0.04, $2.76 per share.

Finally, if we were to accelerate our bond offering by two months from our original forecast that would lower our estimate by about $0.02 or so. So on a net-basis then, we are increasing our midpoint to $2.74 per share and assuming an accelerated bond deal. Our updated entitlement 2014 FFO guidance range would then be $2.70 per share to $2.79 per share.

That's the latest news from KRC. Now, we'll be happy to take your questions. Operator?

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) The first question comes from the line of Craig Mailman from KeyBanc Capital Markets. Please proceed.

Craig Mailman – KeyBanc Capital Markets

Hey, guys. Tyler, on the accelerated bond deal, what was the timing in your original guidance versus now, is that just the two months difference?

Tyler Rose

Yes, roughly it was early October versus sometime in the near future. We haven't decided exactly when it will be, but it's two-plus months of earlier than we have originally forecasted.

Craig Mailman – KeyBanc Capital Markets

Okay. And sizing on the deal, what kind of a range do you guys thinking?

Tyler Rose

In the mid-$300 million range.

Craig Mailman – KeyBanc Capital Markets

Then just turning to kind of development and funding, you guys obviously are backfilling the pipeline with the land deals in San Francisco and Seattle. Just curious, kind of feel for funding here for the next 12 months, is it going to be – or are you guys just going to take the opportunity to ramp asset sales, kind of what you guys have in the market right now? And is it solved just using the ATM, or do you guys feel like overnight would be more appropriate?

Tyler Rose

Well, I think it's a combination. I will let John talk about dispositions, but on the – we're obviously looking at a bond transaction. We issued ATM in the second quarter and that's probably will be something we might look at again going forward. We obviously are doing our disposition. So it's a combination of all the above. I don't think we have any – obviously we don't have any plans currently do an overnight deal, I don't think that's necessary at this point. I think we're comfortable with the bond deal, the dispositions and using our ATM and using our line, we'll have to see over the next year whether an equity offering makes sense but at this point we don't have any plans for that.

Craig Mailman – KeyBanc Capital Markets

And just an update on dispositions, kind of where you guys have in the market, pricing and appetite you are seeing for those assets? And maybe just a sense on what you guys as you look at the portfolio would consider non-core at this point and maybe potentially on the block?

John Kilroy

Well, we'll tell you what we've done in the market in terms of talking about what's non-core, don’t be surprised at sometime if we sell something, it’s core just because we think it’s the appropriate thing to do. But, Eli, why don't you cover what we've got in the market and where our thinking is.

Eli Khouri

Yes, sure. So we've already closed on 63 for the year, 3 million, and we are non-refundable on another similar amount hitting around 125, it’s kind of "in the bank," knock on wood on those in contract. We got another 50 to 100 in the market right now and those are non-strategic assets, so I'm not going to mention them specifically right now that would easily take us up past the 150 plus number.

And then as John said, we are always evaluating quarter plans for the year especially in light of our capital goals and the capital markets that are out there, which remain strong. And so, there could be more to come on that. And if you look historically 2.5 years, we've now completed $900 million, and we've got another on top of the 60, 100 plus to go, so we'll be well over $1 billion by the end of this year, and that’s where we stand on what's in the portfolio. The things that are out there right now are non-strategic things up and down all of our different markets, so…

Craig Mailman – KeyBanc Capital Markets

Just one last one, you guys were early in San Francisco and clearly you are seeing really good rent growth still in some of the assets. But where we are in the cycle today and timing of one usually bought, are there any assets in San Francisco that you guys feel like you squeeze most of the upside out or and could potentially sell, or do you guys still see good run rate for everything at the portfolio?

John Kilroy

Well, just about everything that we own up here, just about when we're thinking, okay, there is another 15%, 20% to go, all of a sudden we go, okay, this is a 50% to go, because we've seen rapid escalation in rental rates and tremendous increase in demand.

Jeff commented on some of the deals that we've done. We're seeing a lot of this up and down the Coast, but particularly here in the Bay Area, where we have a 20% or 30% or a 50% and the rents are escalating very, very substantially. So we're going to harvest value, where we think it’s appropriate and where we feel it’s fairly easy to get to. And then we'll take a look at whether it’s appropriate to sell something. Right now we have nothing on the market in the city, we have a little building over in Marin, and we'll continue to look at everything. I've made clear over the years, I have no offence to any of the women on the line – I have no mother fixation about any asset.

Eli Khouri

Yes, and just something real quick, John, if you look over the last couple of months, there has been about a 10% jump up in price per foot based on what you just mentioned, the rental increases. And so, while we thought there was – we were sort of out of room with cap rates, I think people held their IRR target steady, but got more aggressive on their back-end assumptions because of this rental rate increase.

So we're seeing a lot trading now and things that six months ago would have been in the – three months ago might have been in the 600 range now being in the upper 600s, we're seeing things straight in the 700s and if you – we use something – will be announced here recently is in a high 700s, and things that can trade in the $800 or $900 range with a right profile are out there in these market conditions.

So we thought there was nothing left in a particular asset. We would have been long in the last three months and there was a big jump, so…

Craig Mailman – KeyBanc Capital Markets

Great. Thank you.

Operator

Thank you. The next question comes from Jamie Feldman from Bank of America. Please proceed.

John Kilroy

You there, Jamie?

James Feldman – Bank of America Merrill Lynch

I'm sorry. Thank you. So you have pretty happy comments across all your markets in terms of the things improving, can you dig a little deeper into both Los Angeles and San Diego and talk to us about maybe across the different submarkets, how much better things you are getting in terms of rent growth?

John Kilroy

I'll let Jeff get into some statistics in a second, but just generally speaking, we are seeing – Jeff how many quarters of positive absorption that we had over the past, just generally been the past three or four years, chipping away, chipping away, reducing the inventory of quality buildings, now if you want something that's decent, you pretty much have to have it built. We think that plays to our strengths with regard to some of the development properties.

In Del Mar, we announced today and we've been talking about our NAREIT and so forth that we are going to start this little building at the heights of 75,000 square feet. We think we're going to get in the sort of high 40s or early 50s square foot on that building and that’s kind of where the market is for newer product there.

So it’s definitely – we are seeing more hiring as Jeff pointed out on statistics down at San Diego and job growth and all those things are good. Now speaking of the specific markets down there, Del Mar, we like that market the best, it’s very supply constraint. I think we control all the supply now between the little building at the Heights and our One Paseo project, in terms of Sorrento Mesa, that market is obviously very tight as well.

When you get to the outline markets at 1-15, Mission Bay all those thing, I personally – Steve would probably disagree with me, but I personally look at most of that stuff, not all, but most of the stuff in those markets is a little bit more commodity like people would gravitate to the nicer project with better amenities. But it’s truly the Del Mar a little bit and UTC, some on Sorrento Mesa, where people are really focused on. And rental growth, Jeff, can we just talk about that in San Diego?

Jeffrey Hawken

Yes, I mean, the rental growth year-over-year in Del Mar is really the standout, 24% rent growth change, so we're really seeing nice lift in that market in particular. And the rest of the markets are doing okay, but obviously Del Mar is the standout.

John Kilroy

And, David, in terms of LA, you want to just cover, that was the second part of your question, wasn’t Jamie?

James Feldman – Bank of America Merrill Lynch

Correct, thanks.

John Kilroy

Yes.

David Simon

Yes, I think Jamie, LA, as you know, I mean fragmented market, the markets that continue to do well the ones we've talked about in the past, Santa Monica continues to be very tight via Hollywood. I mean, the space that is getting absorbed is the product that is creating and attracting the creative collaborative users. Our space and our activity is up in our buildings in Hollywood because of the environments that we are creating giving and creating a sense of place for these users, especially the entertainment, media, and technology guys.

So, rents are moving with the quality product, when LA with a lot of commodity buildings and you don’t have the same users looking at the commodity buildings as you do the creative buildings that, we're creating that – in these various markets. So it’s fragmented, but it’s growing for the quality products.

Jeffrey Hawken

And Jamie, this is Jeff, just to give you a little more color on the change in rent. So in the 101 corridor or Calabasas, year-over-year up 37%, Hollywood is up 18% and West LA is up 17.6%, so really, really strong rent growth.

James Feldman – Bank of America Merrill Lynch

So then what are you guys seeing in the Wilshire Corridor and Olympic Corridor? Are those kind of getting passed over as you go from Santa Monica to Hollywood?

David Simon

Yes. I mean, your commodity space, Jamie, so it’s a different class of tenant typically the look for that, it’s a little more competitive with pricing there, it’s hard to move rents and some of those, some of them are better than others, but these nondescript buildings that are just standalone buildings with not a lot of amenities don’t have really an environment or really a commodity. And if you are a tenant, there really has a sense of place in your employees and you want to be in an environment, you are not even looking at.

John Kilroy

The comment I make is that the common thing that we are seeing up and down are West Coast markets is, there is a real premium for – as David pointed out the kind of environment that people want that they use to help, attract, or retain people. And there is a just a real problem now with a lot of this office stock is technologically obsolete.

And the – with higher employment densities, existing buildings have issues with the elevator or restrooms ventilating, stairway capacity and all that kind of stuff that I talked about for a long time. So commodity buildings tend not to do as well. And we are seeing even in markets where there is a bit higher vacancy, we expect you will see – continue to see new construction at the margin, simply to accommodate the new workplace of the 20% tree type tenant. It’s – you are going to see higher rents in office buildings and those that have the right kind of environments in a dense configuration and it cause less on a per employee basis than a lower density building. So those trends just continue to make magnify in the markets that we're doing business in, and we think we're particularly well positioned with our portfolio in our development.

James Feldman – Bank of America Merrill Lynch

Okay. And then just finally, so you guys know how since you are anchoring Columbia Square, I think in the old classy building on Columbia Square, what does this mean for your strategy for the rest of the project?

David Simon

Jamie, it’s David. Yes, I mean, the strategy continues to be, I mean, we've always envisioned this project to create a sense of place environment, creative environment, collaborative space, indoor/outdoor opportunities. NeueHouse fits perfectly into that. It’s going to be a creative hub for higher net worth entrepreneurs, people in the film, publishing industries, and things like that.

So with respect to the other two office building, it’s only going to add more fuel and the activity, we'll increase, it’s been pretty good over the last couple of months, NeueHouse has been well received in the market and the activity continues to be good. So I think with respect to the other two buildings by the end of 2015 when they come online, we should be in a position where we have them substantially leased.

James Feldman – Bank of America Merrill Lynch

Okay, great. Thank you.

John Kilroy

You're welcome.

Operator

Thank you. The next question comes from the line of Michael Bilerman from Citi. Please proceed.

Emmanuel Korchman – Citigroup Global Markets Inc.

Hi, it's actually Manny Korchman here with Michael. John, given your commentary on tech consolidation and sort of what's been happening in that space. Are you concerned that when you take sort of a large high-growth company buying a smaller high-growth company that all-in-all they will need less space, or do you see the opposite happening?

John Kilroy

Generally, when they are buying them, it’s because they figure, it’s a great add-on product, we're away to get into a market or a segment of the market they want to be in that there is already somebody that’s there and has technology and has some better mouth strap, and generally it’s because they want to expand the activity.

So we think it’s a positive not only from a credit standpoint, but from a standpoint, it’s all about, I can't emphasize this enough, if you all heard me speak multiple times, you've heard me at NAREIT, you’ve heard me on all these calls, I think I was speaking about this before just about anybody else in the space. It’s all about the employee, it’s all about attracting and retaining the best and the brightest and that’s frequently what they are buying.

They are buying a – they might be buying an algorithm or whatever the heck it is, but they are buying the people it go with it to make it happen. And we're seeing it, I can tell you that that talking with some of the PCs and Angel investment community about things that they are working on with their early and mid-life companies that there are a lot of big companies snooping around and taking action, and we just think it’s going to continue and frankly as a landlord, we think it’s good.

Emmanuel Korchman – Citigroup Global Markets Inc.

Great. And then on NeueHouse, two questions there, one in your press release, you commented that there is going to be a potential future deals there, if you could give us maybe a little bit color on that?

John Kilroy

I'm sorry, I don’t know if you cut out or whether my ears were closed. But what was the question again?

Emmanuel Korchman – Citigroup Global Markets Inc.

On the NeueHouse deal, I believe in your press release you talked about future opportunities with that tenant. Could you give us some more color on that?

John Kilroy

Sure, Dave, do you want to cover that?

David Simon

Yes, I'll take that. Look, we're a growing company with a great business model that is extremely successful in Manhattan that will translate into couple of key markets – markets that we are in – on the West Coast. So to the extent there is opportunities in the other markets we're in and portfolio that we have a great relationship with management. We think there could be some other opportunities for us to do business with them.

Emmanuel Korchman – Citigroup Global Markets Inc.

And are they putting up the capital or you for the improvements?

John Kilroy

Well, in terms of the expansion into other markets is, we have no obligation if you will. We think – we found that we really see eye to eye on where the markets are going, where the industry is, what's needed in the markets and what not, and we enjoy working together. So each deal is going to be looked at an individual deal. I hope that answers your question.

Emmanuel Korchman – Citigroup Global Markets Inc.

And then one last one from me, on the Flower Mart parcel, it looks like the sort of the site overall is owned by several different owners. Do you need to consolidate further there to make that a success, or can you build just on the site you are about to buy?

John Kilroy

We can build on the site that we're about to buy, and I can't comment on the rest.

Emmanuel Korchman – Citigroup Global Markets Inc.

Perfect. Thank you so much.

John Kilroy

You're welcome.

Operator

Thank you. Your next question comes from the line of Vance Edelson from Morgan Stanley. Please proceed.

Vance Edelson – Morgan Stanley

Great. Thank you. So assuming you would like to continue development in Hollywood over the longer-term even beyond Academy. I'm just wondering given the limited land availability, what are the prospects that some of the older establishments in the neighborhood that maybe you’ve seen better deals that they sell out, allowing the land to be repurposed, is that how you see it playing out in the coming years, so that Hollywood can continue to be a growth opportunity for you?

John Kilroy

Well, hang on, David. With regard to Hollywood, remember that there is areas where it’s like everything else. If you think of a gentrification, it generally starts in an area and then it moves out into circle or sometimes it’s not a circle, because there is obstructions or whatever. That will occur over time in Hollywood. We think that our Columbia Square project and Academy and Square project are both extraordinarily well located, but what they have going for them is their entire city blocks, where we can create the kind of environment that people really want to be in as opposed, you couldn’t do that in just a one-off building or a one-off little parcel. But over time, we think other things will become available, they always do.

But you got to get through a lot of different hurdles, if you have something gets historical, they are not going to let you not surround with it. They are going to be very, very tough. And if you have things that have four adamancies then you’ve got to determine whether or not they – it’s an appropriate thing to develop. David, do you want to expand on that?

David Simon

Yes, no, I agree a 100%. Look, in all these markets that are gentrifying, there is opportunities, there is assemblage opportunities. We're low on the ground down there and we see what's going on. So as John said, things could come together in a way that, are hard to envision now, but given our feet on the ground there, we are – our eyes are open and looking at everything there. So we think there is good runway in that market.

Vance Edelson – Morgan Stanley

Okay, great. And then just given the length of the lease with NeueHouse, anything you can tell us about your due diligence on their financial house, I assume it’s solid and I assume you have the LOC and everything else necessary to reduce risk over time?

John Kilroy

Yes, they have an operation in Manhattan and we've obviously done our due diligence on that operation and we're comfortable with it. While we're not going to get into details of our – from the specifics of their financials, but we're comfortable at this point.

Vance Edelson – Morgan Stanley

Okay. And lastly, just sticking with Columbia Square you mentioned the projected rents has increased, can you tell us about the pricing for the resi units there, are we talking in the low 4s, for example, what's the variability around that or the furnace units a lot more expenses and so forth? And have these numbers climb some sense Columbia Square was first envisioned?

David Simon

Yes, I will – it’s David. So on the residential tower as a percentage, rents are probably up 8% to 10% given where we originally underwrote for both product types, and we think that trend is going to continue. So the time we come online in early 16 with some little bit of preleasing, you don’t do a lot of preleasing with resi, but call it five or six months in advance, we expect that trend to continue given the product and the environment that we are creating there.

Vance Edelson – Morgan Stanley

Okay, great. Thanks, guys.

Operator

Thank you. Your next question comes from the line of Gabriel Hilmoe from ISI Group.

Gabriel Hilmoe – ISI Group

Thanks. Tyler, could you give an updated range for cash same-store NOI guidance just given the results here today? I think last call you were at 3.5% for the year, but I also think there's some free rent coming in the back half?

Tyler Rose

Yes, there is some free rent. We do think our number will be up over last quarter's projection probably in the low 4s now, low 4% for cash same-store, but there is some free rent in the back half of the year that will moderate our same-store in the third and the fourth quarter.

Gabriel Hilmoe – ISI Group

Okay. And then maybe for Eli, as far as Seattle goes and John you mentioned the new partial in South Lake Union, but what kind of opportunity going forward do you see there in terms of expanding the development pipeline just given where market rents and land prices are today?

Eli Khouri

Well, look, I mean, we put our hands on a really good side, I mean we like South Lake Union a lot, I mean, it’s really is already the South of the SOMA of Seattle. And Seattle in the next market behind the Bay Area, where these tech companies want to be, I mean, it’s already home to the two biggest cloud companies, which are Amazon and Microsoft. And I know people like to talk about Amazon, but real insight tech people that we bother to try to talk to and get to know what's going on. I expect Amazon web services to be the big news over the next few years, and they're about 5 billion of revenue. And reasonable and people expect that to grow to about 25 billion, so that that’s going to be a big area of growth.

The University of Washington continues to be one of the best cloud-based computer science departments. So we like South Lake Union, you’ve seen the big guys move up there, you’ve seen Google, Twitter, Facebook, VMware – lot of the stalwarts from the Bay Area are going up there. And it's in a very virtuous cycle right now, where the great companies are attracting the best employees and new employers are attracted to go, try to seek out those employees as well and this creates very positive milieu up there and that's what's going on and there it shows no signs of abating. And because it's such a fundamental place for – the cloud has a long way to run here as the whole industry transitions from computing onsite to computing off-site.

Microsoft is a big player and the backbone of the build-out of the cloud. And they're a big player cloud services too. And Amazon is the biggest player in cloud services. So, I think the trajectory of Seattle is very good.

Gabriel Hilmoe – ISI Group

All right, thanks. I appreciate it.

Eli Khouri

And I would just add that, it's a lot more than the cloud that goes on up there, but I mean that's – I'm mentioning that just as an avenue of growth or continues to be a whole start-up environment there that is very similar to the Bay Area. And you have the Expedia's and the drugstore.com's and the Concur's and the Traffic Tech and the mobile and you've got T-Mobile and many other industries up there. So it's a just a very robust environment overall up there right now, and like I said, I think it's in a very virtuous cycle that have some lacks.

Gabriel Hilmoe – ISI Group

All right. Thank you.

Operator

Thank you. Your next question comes from the line of Brendan Maiorana from Wells Fargo Securities. Please proceed.

Brendan Maiorana – Wells Fargo Securities LLC

Thanks. Good morning. John, I think you mentioned that you had an LOI for all of crossing 900,000 square feet. Can you share kind of where rents are now that you think you're likely to get relative to pro-forma when you originally commence that deal?

John Kilroy

Well, I don't want to get into a lot of specifics until we sign the lease, but let's just say that it has been – as has been the case in many of the development deals that we, our initial underwriting we exceeded pretty substantially, because the market improved, demand increased, rents went up, maybe we were too conservative. I would expect and I believe that the same will be true when we look at that deal more specifically, that's about as much as I can give you.

Brendan Maiorana – Wells Fargo Securities LLC

Okay. And I think you mentioned – I didn't get – I think you mentioned timing but I didn't quite catch it. Did you say sort of middle of 2015 is maybe when – if this LOI goes through that the rent could commence there?

John Kilroy

Jeff, let's face it – let's the for-quarter – sorry, I have got so many facts and figures in my head, I'm not sure I have the right one for the question.

Tyler Rose

They would – this is Tyler, they would take – assuming it worked out, they would take the two buildings in phases I being the – in the second-half of 2015 the first phase. And then a year, I think, or so later they take the second building.

Brendan Maiorana – Wells Fargo Securities LLC

Okay. Great. And this question is probably for Eli but Menlo Park, you guys have really done a great job moving the occupancy up there. I think you're in kind of the mid to low 80%s a year ago and you're now essentially fully leased.

Do you still see more upside there or have you kind of captured the upside in rents and occupancy that you saw when you did that deal two, three years ago?

Eli Khouri

Well, couple of things have happened recently and that's a good question, we think about it all the time. And if you look at Facebook's earnings, Facebook is kind of a stone's throw from here, if you're a good thrower. And they had great earnings recently. They are expanding, they are solidifying their position in the Menlo Park market. This is a very – this is a really well located site.

So, we're very confident in kind of the performance of this site. It took us a while to get our feet underneath us and for Facebook to kind of gain the solid ground that they have to more solidify the Menlo Park location as if the home of one of the big tech players. And we think that's been accomplished and what we do next is up for a valuation with that. But we're – we will be confident continuing to own it. I would see scenarios where at some point in time we would say, we could deploy that elsewhere but no current plans and a change in direction right now.

Brendan Maiorana – Wells Fargo Securities LLC

Okay. Fair enough. Just last one, you guys had very nice rent spreads on both cash and a GAAP basis and I think the spread between the two is about 9% or 10% on a six-year average term which suggest that the in place bumps are pretty healthy. Can you kind of give us some color in terms of what your annual bumps look like in your leases now and are you pushing on that metric at all as a way to improve rent economics or is it just trying to lose the face rent as much as you can?

John Kilroy

Let me give you a – just serve a general thing and then Jeff can give you more specifics. We've always pushed rent, I mean, that's our job. And we converted a lot of tenants thinking in San Francisco, not just we, but we pushed hard and I think the market followed and tenants got with it, but we – it used to be $1 bump market in San Francisco, and we have some leases like that. But now we're reaching – typically getting 3% or more per annum mandatory bumps. The same thing is happening at Seattle.

It doesn't happen on every deal. It doesn't happen on every building, but generally speaking it's happened more and more. And we think that is the nature of the landlords' market and sort of broke that mindset that it was a separate plus $1. As well as rents have increased, obviously $1 is less than 3%, so we favored the latter.

So Jeff, you want to give a little bit more color on that?

Jeffrey Hawken

Yes, yes, John, thanks. I would say historically over the last year or so 3% was sort of the norm but we're definitely been pushing that in the various markets and various buildings. So it's anywhere from 3% to 5% whether it goes to 3.5% or 4% or 4.5% or 5%, so we're definitely pushing the envelope and continue to push where it makes sense and we can get it. So things are definitely in the uptick.

Brendan Maiorana – Wells Fargo Securities LLC

Okay. All right. Thank you.

Operator

Thank you. Your next question comes from the line of Dave Rodgers from Robert W. Baird. Please proceed.

David Rodgers – Robert W. Baird & Company

Yeah, maybe for John or for Eli, I think very early in the call Jeff talked about getting AMN back a little bit early and then being able to push that lease out with a nice spread. Given that you've got very low role in San Francisco over the course in the next couple of years, I think 600,000 square feet or so, can you talk about maybe getting some of that space back or actively working that space to maybe get at that space little bit early?

John Kilroy

Well, you've seen us, I mean, when we bought 201, we had a lot of Wells Fargo in there that had term and we were able to get them out. They were at a low rate. We were able to have them carry the space till we repositioned it and tenant improvement for new tenants at much higher rates. We're going to continue to do that where we can. It's hard to get – give you a rule of thumb because each one of those is an individual negotiation.

I don't know that we have any big 100,000 footers, 200,000 footers where we can do that, but we have lots of 10s and 20s and we're going to continue to milk that. Jeff, you want to add to that?

Jeffrey Hawken

Yes, I think that's right. If you look at our role over the next couple of years, we don't have any really sizeable transactions but again we're very active with our portfolio constantly talking with tenants to see if they need to expand or move out of space, or if they don't need the space. So again I think you'll continue to see us be very aggressive in managing actively the portfolio.

David Rodgers – Robert W. Baird & Company

Great. And maybe for John, thanks for the color around your development pipeline relative to your enterprise value. I think that's helpful. I guess, so we – as you think about maybe playing this cycle versus next cycle and how much capital at risk you're willing to put to work. I mean, in terms of that 15% average to EBITDA or to enterprise value, are you comfortable being all spec on that or a certain percentage leased. I mean, how do you think about that range with regard to with that risk?

John Kilroy

Dave, I have to kid you a little bit and say I can't believe you asked me that question, because I think I've been pretty consistent over the last 17 years or 18 years. I hate empty space. So why manufacture it if you think it's going to be empty. We'll build spec when we think we are building into a very strong market but we're always watching before we start other things in the same market what our pre-leasing or our early leasing is across the company, in each market, obviously got to feel good about the macro-environment. Taking it as an example, the deal we're buying up in Seattle.

The land price, I'm not going to get into it, because we have a – we do have an NDA and so forth but it's an okay, purchase price is not huge amount of money, it's about $70 and FAR foot cost on a net basis. And we don’t – we did not forecast starting construction on that building for, I think three years. If we start it earlier it's because we have a tenant in tow or we think we're uniquely positioned.

We are not going to get into 15% enterprise value spec. I'm just not built for it. I'm too old for it, although I feel pretty young I say that because I want to refer to everybody the fact that I've been doing this a long time. Our team is been doing it a long time. We do not want to get over our skis. We are going to continue to show a very strong balance sheet. We are just not going to – trees don’t grow to the sky and more spec development doesn’t mean better. It's just – we're going to be conservative. One of the reasons – you’ve mentioned…

David Rodgers – Robert W. Baird & Company

[Multiple Speakers]

John Kilroy

Sorry, go ahead. Pardon me?

David Rodgers – Robert W. Baird & Company

For total NOI, our LOIs for new and renewal leases, I don’t know if you quoted that in your comments, John, I think you usually provide it, I don’t know if you can give us an update, if I missed it? Sorry.

John Kilroy

Tyler or Jeff, were at two different locations, that’s the reason I'm feeling things back and forth. On the – you're talking about LOIs, we have what is it 450,000 something like that.

Tyler Rose

Yes, 450,000 of LIOs and about 36% of that is new and 64% is renewal.

David Rodgers – Robert W. Baird & Company

All right. Thanks, guys.

Tyler Rose

Yes.

Operator

Thank you. Your next question comes from the line of Vincent Chao from Deutsche Bank. Please proceed.

Vincent Chao – Deutsche Bank Securities, Inc.

Hey, everyone, just a couple of questions here. Just on the – going back to the dispositions, I think the $63 million under contract, I think one of those two is, I think was land partial. I'm just curious of the other stuff that’s in the market and under contract, how much of that is non-income producing?

John Kilroy

There is one more piece of a land in that.

Vincent Chao – Deutsche Bank Securities, Inc.

Okay.

John Kilroy

The $20 million.

Vincent Chao – Deutsche Bank Securities, Inc.

Okay, okay. And then that’s one of the ones being marketed?

John Kilroy

Now it’s – that’s committed.

Vincent Chao – Deutsche Bank Securities, Inc.

Got it, okay. And then just going back to the Central SOMA land parcel acquisition, is the Mission Bay project being fully entitled, what is the entitlement status of Central SOMA, I know that’s not planned for start for quite a while, but…

John Kilroy

It requires entitlements.

Vincent Chao – Deutsche Bank Securities, Inc.

Okay.

John Kilroy

It’s going to be on the same boat that just about everybody else's parcel and we'll see it’s going to be, which is that there is the Prop. M limitation, and there got to be quite a few people queued up, and the city is going to have to determine which project they consider is to be the most worthy et cetera.

Vincent Chao – Deutsche Bank Securities, Inc.

Okay. And I'm sure you've come to overall though potential land in end market, just curious if there is anything else that sort of out there that meets the criteria that should be interested in?

John Kilroy

I would be pretty – again not to be a smart aleck, but I would be pretty foolish to tell that to you when our competitors can listen to this call.

Vincent Chao – Deutsche Bank Securities, Inc.

Right, right. Okay, fair enough. That’s it. Thanks, guys.

John Kilroy

You're welcome.

Operator

Thank you. Your next question comes from the line of Jed Reagan from Green Street Advisors. Please proceed.

Jed Reagan – Green Street Advisors

Good morning, guys. Related to that we heard some speculation in the market that the City of San Francisco may perhaps loosen up Prop M restrictions over time to kind of help keep startup tech company in the city. Just wondering you can comment on anything you’ve heard along those lines and if you think that’s even a possibility?

John Kilroy

It would require a voter action across the City. And it's like any campaign would have to persuade a majority of the voters that that’s the right way to go. I probably know some things that others may not know, but I'm not in a liberty to discuss it. But that that’s all something it’s going to require special elections et cetera, so it’s nothing, it’s eminent.

Jed Reagan – Green Street Advisors

It’s on the ballot or?

John Kilroy

No, there's nothing on the ballot now if it’s possible.

Jed Reagan – Green Street Advisors

Okay. And on the Crossing/900 LOI, just wonder if you can talk about kind of where those negotiations are, I mean sort of timing wise you posted those finished line there?

John Kilroy

Well, I answer that in one second, Jed. Let me just go back to the other thing. I would not bet on Prop M loosening up, I think that would be a bad bet.

Jed Reagan – Green Street Advisors

Okay, that’s helpful. Crossing/900 LOI, are we close?

John Kilroy

Yes.

Jed Reagan – Green Street Advisors

Okay. Any updates on One Paseo or the potential Santa Fe Summit developments in San Diego?

John Kilroy

One Paseo, we believe we'll have entitlements by the end of the year. The EIR has been gone through by the City, we think we're in good shape there. It’s going to be released. We expect to be before the Planning Commission, I believe it’s the end of summer, early fall, and the City Council thereafter as I've always said in California, anybody with $33 can file a sequel lawsuit from what our attorneys tell us, they feel, we're in very good shape if somebody does that, hopefully they won't. With regard to Santa Fe Summit, we've had interaction with a major tenant down there. We continue to estimate our interaction with them, but other than that, we don’t have anything specific to talk about at this time.

Jed Reagan – Green Street Advisors

Okay, thanks. And then just last one on San Diego, just wondering if the UTC asset sales signal that you're essentially conceding that submarket to your big competitors down there. And is it – would it be fair to kind of conclude from that that other San Diego submarkets besides Del Mar and Sorrento Mesa could be considered as non-core at this point for you guys?

John Kilroy

Well, I think I've made it pretty clear that we are – we pruned out the stuff on the 15, we may have a couple of assets left to go, we like our Kilroy Sabre Springs project there. We don’t think that’s replaceable and particularly the location or the intersection of the 15 or rather the – yes, 15 and 56. Mission Bay, where we've got a few assets down there, we are looking at. But by and large, we have moved towards more CBD and urban-esque type of properties, because that’s where most people want to be.

In terms of conceding UTC, we've never really had a lot in UTC. We have Governor Park, which is a submarket of UTC, and we have the assets that we just sold, and we have the one building that we're entitling for MLB, that will be, we think will slam-dunk the MLB portion, the others we don’t consider as strategic. So we're going to continue to prune away those things that are smaller. We're really not looking to buy, of course, now it’s sort of buying anything at a price that makes sense that we want to own. But we're really not looking at buying and developing things in a $50 million.

Generally, there are multiples of $100 million, they have a much more strategic long-term nature about them. We think they would command if they were to be sold much lower cap rates or values. And that that’s just the way the company has been directing itself. So I think you will see more asset sales in San Diego, a little bit here in the air, and some land parcels.

Jed Reagan – Green Street Advisors

Okay, thanks. And then the Mission, you said Mission value, you are looking at some things I assume that’s on the disposition, not acquisition side?

John Kilroy

That’s right.

Jed Reagan – Green Street Advisors

Okay.

John Kilroy

There is nothing specific to announce there. And I want for all my people who are listing in from San Diego, we don’t have some joint plan to get out San Diego, we love San Diego. Just remember, as I said a few years ago, if you think of San Diego as x, we'll probably be somewhere in the bandwidth of 80% to 120% of x, as we sell things and as we develop things. And I think that’s still a pretty good thing to focus on.

Jed Reagan – Green Street Advisors

All right, great. Thanks for the color, guys.

Operator

Thank you. Your next question comes from the line of John Guinee from Stifel. Please proceed.

John Guinee III – Stifel, Nicolaus & Company

Great. Thank you. Well, job well done. One sort of big picture question and some knickknacks. Couple of things. I guess, John, you are talking about $600 million of annual development deliveries, you’ve got some big gains on sales, it’s – my recollection is, it’s very hard to 10/31 income-producing asset gains into development. What's all that mean for the ability to not increase your dividend and what's that mean for the ability to not go consistently to the equity markets?

John Kilroy

Well, that’s a big question, John. Obviously, we want to minimize the amount of tax that we can through 10/31. So we can do those (inaudible), that’s one of the things that Eli, and I and Tyler and other work on regularly. But you can always do the special dividend. We haven’t had to do that. We hope, we don’t have to do that. But we also want to make sure that we continue to recycle and fund our development and so forth.

So that’s just big picture. Eli, you want to comment on that, just more specifically, and I mean, I know you're living and breathing that in and the weeds on are each and every day.

Eli Khouri

Yes, I mean two caveats to what you just said there, everything you said is true. But one thing that we've been very careful to do is, where we're getting out some of these smaller non-strategic things as we've aggregated them and traded them into the land parcels that we bought. For example, we have the Block 40. We have assets that are filling up the full potential of the Block 40 land.

Secondly, we do have some assets where we have a little bit of room that the tax gains on them are manageable and we don't need to do 1031 Exchanges. And then we have a couple of other strategies that would still allow us to raise cash through dispositions without getting too convoluted over special dividends and all of that. So it's not a zero bank account in terms of delivering sales proceeds against development, it's not a one-for-one either, and you're correct on that.

So we try to maximize that the best that we can.

John Guinee III – Stifel, Nicolaus & Company

Okay. And then a couple just sort of clean-up questions. David Simon, the other David Simon, if I look at NeueHouse just really quickly, is it a stage take-down, are they taking all the square-footage at once? And then what's just the big picture break-even for those guys in terms of how many quarters, months, or years until they're covering their lease cost with their operating business?

And then Eli, what was the price per pound on the vacant buildings in UTC and sort of drill down into the specifics of those assets so people can get a sense for what vacant product goes for in Southern California?

David Simon

John, David. The take-down is 100% first quarter 2015. Occupancies, we've been up and running; build-out, build-out completed. With respect to break-even, just by way of example, New York was up and running and positive within the first couple of months so we expect to have that kind of activity level here, if not higher given the way they curate their base and their people they bring in, a lot of them are coming from New York. So, pretty positive about it all around to hit the ground, running really strong.

John Kilroy

Eli, you want to handle that?

Eli Khouri

Yes, and I'll handle the town center building sales. I mean, I think the most important thing I can tell you about is, we went through that a bunch of different ways and by the time we realize the price we could get in that for the market and we added our cost to get it leased and to get it re-had and then our sales proceeds from doing that, it was a better economic decision to sell it empty. We got a very favorable price for it empty. The solved returns by the next buyer, and I'm not disparaging any buyer, if you look at things the way they look at them but our solved returns for going through all the work versus selling them empty was a very clear decision to sell them empty.

I think the stabilized price upon doing all of that work was going to be $300 and something, and you had to back out of that the cost to get there. And so if you back out what you assume the costs are, then you can figure out sort of what our disposition price was on those buildings. Those are older buildings. They were never strategic to us. I don't think they're really representative of our broader portfolio in any way and ended up being just a really good opportunistic deal for us to do where we wanted to be out of them.

And the two ways were get out now for a really good price or do the – put in the elbow grease, but in doing so we wouldn't have made any additional money, we might have gone backwards a little bit. So that's the story on NeueHouse.

John Guinee III – Stifel, Nicolaus & Company

Great. Okay, thank you very much.

John Kilroy

John, this is John Kilroy. Just one further comment, we got these buildings as a result of buying the Allen Group back in 1997. And they were – these were probably the lowest quality buildings in that portfolio. Probably the lowest quality buildings or a bunch of lowest quality buildings, we had San Diego. And, it just would require – they were built kind of merchant builder style, how cheaply can you build them and accommodate the tenants' needs. And they didn't fit the more modern user without lot of rework and those are the kinds of assets we want to get rid of, therefore we don’t think they have real legs.

John Guinee III – Stifel, Nicolaus & Company

You sold them for what, $234 a square foot?

Eli Khouri

Yes.

John Guinee III – Stifel, Nicolaus & Company

Yes, got you. Thank you.

Operator

Thank you. The last question comes from the line of Jamie Feldman from Bank of America. Please proceed.

James Feldman – Bank of America Merrill Lynch

Great. Thank you. Just one final NeueHouse question, so can you just talk about some of the other sites they were considering around LA and how they ended up deciding on Hollywood versus some of the other submarkets like Playa Vista, Burbank, West Hollywood parts district?

David Simon

Yes, Jamie. I'll give you some color on that. Look, they're very sophisticated group. I think history and film and television is very important to them, branding is very important to them. The location of Hollywood, its central creative community that it is, and continues to be and to continue to develop into was very attractive to them.

The uniqueness, they wouldn't go in just some standalone buildings and environment that we created, it's the whole community that we're creating in Columbia Square coupled with the historic component of the building, the history and the entertainment and the media field made it very attractive to them.

James Feldman – Bank of America Merrill Lynch

So, what other sites are they considering?

David Simon

Well, I mean they looked in downtown, they looked on the West Side, but there wasn't anything obviously as unique and interesting as what we were creating in Hollywood.

James Feldman – Bank of America Merrill Lynch

All right, great. Thank you.

Operator

Thank you. There were no more questions and I would like to turn the call over Mr. Tyler Rose for closing remarks.

Tyler Rose

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

Operator

Thank you. Ladies and gentlemen, that concludes your conference call for today. You may now disconnect. Thank you for joining and enjoy the rest of your day.

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Kilroy Realty (NYSE:KRC): Q2 FFO of $0.72 beats by $0.03. Revenue of $129.19M (+9.6% Y/Y) beats by $12.09M.