Kilroy Realty's (KRC) CEO John Kilroy on Q4 2015 Results - Earnings Call Transcript

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Kilroy Realty Corporation (NYSE:KRC)

Q4 2015 Earnings Conference Call

February 1, 2016 02:00 PM ET

Executives

Tyler Rose - EVP and CFO

John Kilroy - Chairman, President and CEO

Jeff Hawken - EVP and COO

Robert Paratte - EVP, Leasing and Development

David Simon - EVP, Southern California

Mike Sanford - EVP, Northern California

Analysts

Ross Nussbaum - UBS

Craig Mailman - KeyBanc Capital Markets

Jamie Feldman - Bank of America Merrill Lynch

Manny Korchman - Citigroup

Brendan Maiorana - Wells Fargo

Vincent Chao - Deutsche Bank

Jed Reagan - Green Street Advisors

Dave Rodgers - Robert W. Baird

John Guinee - Stifel Nicolaus

John Kim - BMO Capital Markets

Ian Weissman - Credit Suisse

Michael Carroll - RBC Capital Markets

Michael Bilerman - Citigroup

Operator

Good day ladies and gentlemen and welcome to the Fourth Quarter 2015 Kilroy Realty Corporation's Earnings Conference Call. At this time, all participants are in listen-only mode. [Operator Instructions].

I would like to turn the call over to Tyler Rose, Executive Vice President and Chief Financial Officer.

Tyler Rose

Good morning everyone. Thank you for joining us. On the call with me today are John Kilroy, Jeff Hawken, David Simon, Heidi Roth, Mike Sanford, Rob Paratte and Michelle Ngo.

At the outset, I need to say that some of the information we will be discussing is forward-looking in nature. Please refer to our supplemental package for a statement regarding the forward-looking information in this call and in the supplemental. This call is being telecast live on our web site and will be available for replay for the next eight days both by phone and over the Internet. Our earnings release and supplemental packages have been filed on a Form 8-K with the SEC and both are also available on our web site.

John will start the call with a review of 2015 and 2016. Jeff will discuss conditions in our key markets. I will finish up with financial highlights and review of our initial earnings guidance for 2016 that we provided in this morning's release. Then we will be happy to take your questions. John?

John Kilroy

Thank you, Tyler. Hello everyone and thank you for joining us today. I will start my comment today with a brief review of the West Coast market conditions. Then I will cover 2015 highlights, and I will finish with some color and outlook for 2016.

While we recognize that there are macro factors creating uncertainties about the capital markets and future business conditions, West Coast market fundamentals for office space continue to outperform. We see strong demand and limited supply for the type of work environments that our tenant base requires. Rental rates and net absorption continue to increase, while vacancy rates continue to decrease year-over-year in the innovation driven markets of San Francisco, Seattle, Los Angeles, and the submarkets of Del Mar in San Diego.

Cap rates and IRRs on West Coast transactions continue to reflect strong demand for quality real estate. While Bay Area VC funding in the fourth quarter was down from the highs of 2014 and early 2015, it is still well above the healthy levels of 2011, 2012, and 2013, which was a period of considerably higher vacancy rates. And already early in the first quarter, brokers are advising that there are currently 750,000 square feet of new leases in process in the San Francisco market.

Against this backdrop, KRC had another strong year of operating performance in 2015. We exceeded every one of our internal targets. On leasing performance, we signed 1.5 million square feet during the year, exceeding our goal of 1 million square feet, with strong cash rent spreads of 22%.

On year end occupancy, we provided initial guidance of 94% and ended the year 94.8%. On same store cash NOI growth, we provided initial guidance range of 2.5% to 3.5% and achieved 4.7% for the year. And on FFO and FAD per share, we initially provided FFO per share guidance of $3.27, and increased to $0.12 throughout the year. And we beat our FAD per share budget by more than 25% for the payout ratio of 66% at year end.

We managed our development program, with great focus and discipline, delivering fully leased, under construction projects on time and on budget, securing critical entitlement approvals for future projects and reloading our pipeline on a selective basis, with projects that offer clear value creation opportunities. Excuse me, I am getting a cold.

We maintained a strong balance sheet and availability to capital, exceeding our capital recycling targets, raising $790 million in new public debt and equity, decreasing debt-to-EBITDA from 7.4 times last year to 5.7 times this year, and earning credit grade upgrades from both major rating agencies.

More specifically on the operations front, we finished the year with fourth quarter leasing activity of approximately 398,000 square feet of new or renewing leases, at rents that were 15% higher on a cash basis, and 25% higher on a GAAP basis. This strong leasing performance resulted in better than expected cash same store growth of 9% in the fourth quarter. We also have 350,000 square feet of LOIs currently in place.

This continued strength in all of our markets, not only translate into strong operating results, but also increase interest in all of our development projects. Last quarter we delivered and stabilized our two building 339,000 square foot office project at Crossing 900 in Redwood City, that is fully leased to [box]. Combined with the delivery of the 100,000 square foot [new office] space at Columbia Square last summer, these two projects represented total estimated investment of $270 million with an average stabilized cash ROC of more than 8%. Based on today's cap rates, value creation of both projects is estimated to total approximately $275 million, effectively doubling the investment. That leaves us with six projects under construction or in lease-up.

Two of the six, Salesforce and Dropbox will be delivered fully leased in the second quarter. The new office component of Columbia Square will be complete from a base building perspective this quarter, it is 58% leased with good activity from both large entertainment users and from smaller prospects with whom we are currently negotiating LOIs. The residential component of Columbia Square will begin its projected one year leaseup phase in the second quarter. The Heights in Del Mar is now in lease negotiations, in process for two of the three floors, and as you know, last summer, we started the exchange on 16th in Mission Bay, with a total projected investment of $485 million. The project is expected to be completed in the third quarter of 2017. We remain in advanced negotiations with several prospective tenants, and we are seeing interests from new prospects on a regular basis.

On the entitlement front, we made significant progress on both, One Paseo and the Flower Mart during the year. We effectively settled all remaining outstanding issues with the community groups and surrounding neighbors on the One Paseo mixed use project in Del Mar and San Francisco with the Flower Mart side, we successfully found common ground and reached agreements with local community groups. And we are making great progress on entitlement and design for both projects.

Finally, we acquired two additional development opportunities in 2015 for an aggregate purchase price of $128 million. 333 Dexter in the popular South Lake Union neighborhood of Seattle and 100 Hooper, a fully entitled site in San Francisco.

To fund our growth and take advantage of the strong market for real estate, we continue to have success through our capital recycling program. In mid-January, we closed the sale to Intuit, the entire office campus at lease from us in San Diego, for a purchase price of $262 million. The campus has four buildings encompassing roughly 466,000 square feet.

We also sold a non-strategic 7.6 acre parcel of land in Carlsbad for $4.5 million last month and we are in discussion to sell the remaining adjacent three parcels. Combined with the transactions we completed in 2015, which consisted of 10 buildings and a land parcel, we have generated $602 million of proceeds since January 2015 to help fund our development projects. Tyler will provide more detailed disposition guidance later in the call, but we continue to be very aggressive on this front.

Now let's move to the year ahead; based on our discussions with global heads of real estate, executives of companies in our markets and the brokerage community, demand continues to look strong against the backdrop of low vacancy rates, low availability of contiguous blocks of desirable space, constrained supply and increasing rental rates. We are encouraged that numerous companies are in the planning stages for significant new requirements over the next two to four years in all of our markets.

On the transaction front, cap rates remain very favorable, with a deep and diverse pool of buyers. Of course, we don't have a crystal ball, so we can only report on what we are seeing and hearing. We will continue to take our lead from the conditions we see on the ground, making decisions, as we move through the year with the same discipline that we have always exercised.

Our overwriting goal remains the same, to preserve and build long term value for our shareholders, that is why we remain committed to markets with strong, long term growth dynamics and those that attract an innovative workforce in the growing companies that need their talents. That is why we are adamant about location in these markets seeking out neighborhoods with the same cultural personalities, attractive lifestyle amenities and excellent access to public transportation and the other required services. And that's why we are prudent in our decisions about when to pursue each new development project.

As most of you know, we have a strong track record of pre-leasing. Approximately 80% of our development has been leased upon construction/completion, and 90% upon stabilization and all of our projects were built at very accretive returns. As stated in prior conference calls, we have four potential near term development projects, any of which could start this year, subject to macro and market conditions.

100 Hooper Street, located in the SOMA District of San Francisco, is fully entitled and we can start construction at any time. Our strategy here remains the same. We will wait for significant leasing momentum at the Exchange or Hooper itself before we break ground.

One Paseo, our mixed use development project in Del Mar, is expected to have final entitlement approval by the summer, and at both the Academy in Hollywood and 333 Dexter in Seattle, we expect final governmental approvals by the third quarter.

Further out on the development horizon is the Flower Mart project in San Francisco. Our expected timeframe to move forward is about two years, again, subject to market conditions and receipt of entitlements.

To wrap up, we believe we are entering the year with a premier West Coast office portfolio, a development pipeline that will create substantial value over time, and as always, a strong balance sheet. Our key objectives for 2016 are to continue to execute a strong leasing program, both in our stabilized portfolio as well as our development pipeline, capturing better rent growth, delivering new properties on time and on budget, succeed with our capital recycling program and maintain our financial strength.

With that, I will turn the call over to Jeff for a closer look at our markets. Jeff?

Jeff Hawken

Thanks John. Hello everyone. As you all know, our West Coast real estate markets were among the strongest in the nation last year, led once again by exceptional growth in demand, and absorption in both the San Francisco Bay area and Greater Seattle.

Starting with San Francisco, metrics continue to move in an upward positive production. 2015 topped last year's historical high in net absorption of just under 2 million square feet, with a new high of 2.1 million square feet. Similarly, ground rates grew roughly 13% year-over-year on top of 2014's 11% growth rate.

Demand exhibited similar growth with 19 companies currently seeking spaces greater than 100,000 square feet. Against the backdrop of these strong fundamentals for the full year 2015, we executed 381,000 square feet of leases in the Bay Area, with rents 43% higher on a cash basis, and 53% on a GAAP basis.

We are currently 99.1% leased and our in place rents for the region are approximately 32% below market. In Greater Seattle, fundamentals also continue to increase, as large technology companies including Salesforce, DocuSign and Juno Therapeutics expand their footprint. Net absorption for the year totaled 2.5 million square feet, surpassing the past three year's 2 million square foot average. Rents increased 7.5% year-over-year to hit a 10-year peak.

In 2015, we signed more than 236,000 square feet at cash rents that were 18% higher than prior rates, and GAAP rents that were 36% higher than prior rates. Our Seattle portfolio is currently 98% leased and our in-placed rents are approximately 8% below market.

In San Diego, despite the quarter's slight negative net absorption, primarily driven by Qualcomm's vacancy, the year posted positive net absorption of 555,000 square feet. Rental rates surpassed pre-recession 2008 levels, and there were 11 new class-A leasing transactions greater than 20,000 square feet in 2015, after only three in 2014.

In 2015, we executed nearly 350,000 square feet in San Diego at cash rents 3% above prior rates, and GAAP rents 15% above prior rates. Our San Diego portfolio is currently 90.9% leased, driven by the move-outs we discussed last quarter. Our San Diego in-placed rents were approximately 7% above market.

In Los Angeles, creative services and entertainment continue to drive rents higher and vacancy rates and cap rates lower, particularly in the selected markets of West LA, Playa Vista, Beverly Hills and Hollywood.

In 2015, we signed almost 475,000 square feet of leases, with rents that were 15% higher on a cash basis, and 19% higher on a GAAP basis. Across our Los Angeles portfolio, we are now 95.6% leased. Our in-placed rents there are approximately 15% below market.

Across our entire portfolio, we now estimate our rents are about 16% below market. Given our strong leasing performance over the past few years, our lease expirations in 2016 totaled only at little over 700,000 square feet, representing 5.8% of the total leases. Almost half of the 700,000 square feet is in Los Angeles, and a third is in San Diego. Rents on 2016 expirations are approximately 15% below market.

That's a review of our markets. Now Tyler will cover our financial results in more detail. Tyler?

Tyler Rose

Thanks Jeff. FFO per share was $0.80 in the fourth quarter, and $3.39 for the year. That's an increase of 19% over our 2014 results. FFO improved across the year on higher rents, contribution from new development and land sale.

We entered the year with stabilized occupancy of 94.8%, better than we projected primarily from early move-in. We ended the year with a stabilized portfolio of 96.1% leased. Same store NOI has also grown in step with higher rents. Adjusting for non-recurring items, cash NOI was up 9%, and GAAP NOI was flat in the fourth quarter.

For the full year, adjusted NOI grew 4.7% on a cash basis, and 3.6% on a GAAP basis. During the fourth quarter, we paid two maturing mortgages totaling $90 million, as well as $325 million in maturing bonds.

As John noted, we completed the sale earlier this month of four adjacent office properties, encompassing 466,000 square feet, that make up the Intuit campus in San Diego and a 7.6 acre land park located in Carlsbad, for total proceeds of $267 million. These assets were held-for-sale at the end of the year.

Taking our current financial position and the recent completion of the sale transaction, we have approximately $290 million of cash, and $25 drawn on our $600 million bank line, which is expandable to $900 million.

Now let's discuss our initial guidance for 2016. 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. [indiscernible] forecasting guidance for collecting information and market intelligence as we know it today and a significant shift in the economy, our markets current demand, construction costs and new office supply going forward, which have a meaningful impact on our results in ways not currently reflected on our analysis; projected revenue recognition date for new development, subject to several factors that we can't control, including the timing of tenant occupancies.

With those caveats, our assumptions for 2016 are as follows; as always, we don't forecast any potential acquisitions or acquisition-related expenses. We anticipate 2016 development spending on our projects under construction, to be approximately $250 million. As John noted earlier, we expect to deliver 350 Mission Street to Salesforce and 333 Brannan to Dropbox in the second quarter.

At Columbia Square in Hollywood, we expect to commence leasing on the residential units at Columbia Square in the second quarter, with stabilization 12 months out. Fender is projected to pick occupancy in the fourth quarter, and Viacom at the end of the year. We expect streamlined rent to average $9 million per quarter, approximately 60% of this is attributable to development projects.

We project same store NOI growth of 6% to 8%, actually that's on a cash basis, substantially higher than 2015. First quarter same store results will be relatively higher than the rest of the year. We expect operating margins to be around 71%. We expect the year end occupancy to be in the 94.5% to 95% range. Our recurring CapEx budget is approximately $80 million, which would result in a FAD payout ratio of approximately 65% to 70% assuming everything else stays the same. Depending on development starts and market conditions, we could issue bonds to help fund new development spending, given our low leverage.

In terms of capital recycling, our current range of between $350 million to $650 million with a $500 million midpoint, which includes $266 million already completed. Taking all this into consideration, we are providing initial 2016 FFO guidance of $3.31 to $3.51 per share for the $3.41 per share midpoint. This is up 7% from $3.20 per share in 2015, excluding the land sale.

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

Question-and-Answer Session

Operator

[Operator Instructions]. First question comes from Ross Nussbaum from UBS.

Ross Nussbaum

Hey John, good afternoon.

John Kilroy

Hey Rob.

Ross Nussbaum

Can you talk about the Exchange a little more? I think last time, we got together toward the end of last year, you had talked about also I think being far down the road in negotiations potentially and tenants that could take half or all the building. Can you characterize how have things changed or progressed in the last couple of months, with respect to leasing of that asset?

John Kilroy

I think they are on track with what we all talked about in NAREIT and so forth. We do have one very large transaction for the entirety of it. I stated back then, its up for Board approval in the first quarter this year. We don't know if that is going to be this month, which is now February, or next month. We are told its likely to be this month. So we are encouraged by that.

We have other transactions, one which is for approximately half, which is going up for approval as well, the timing, I don't know Rob, whether you know -- on that, whether that's now or?

Robert Paratte

First quarter.

John Kilroy

All right. And then a number of others behind that. And since that time, since NAREIT, we have had a number of new RFPs and what not. So we now have a mixed year of tech, non-tech, medical, lifescience, a variety of different users that want the building, and our goal there is to make sure that we create the maximum value for our shareholders, as there is a couple of deals that we think are -- will be extraordinary. So we are very focused on those.

Ross Nussbaum

Okay. I appreciate it. And then maybe a same question on 100 Hooper. You mentioned in the comments that you are going to wait for the leasing momentum or further leasing it at the exchange. But can you characterize kind of the level of discussions you are on at 100 Hooper specifically?

John Kilroy

Yeah. I am going to ask Rob to do that. Remember, we just bought that site a few months ago, and we spent a little time redoing the design. But Rob will just go through project quickly, and what it is in terms of the two different uses and where we are?

Robert Paratte

So we have about 400,000 square feet entitled with Prop M allocation, and that's an important distinction to make. Approximately 80,000 square feet of that is the PDR space, production, distribution and repair space. We have a very good credit tenant that is looking at potentially taking a good portion of that PDR space, and they are also evaluating perhaps taking some office space in addition to that. But as John said earlier, we are really focused on the exchange and executing on the activity we have there.

Ross Nussbaum

Thanks. I will jump back.

Operator

Next question comes from Manny Korchman from Citi.

Manny Korchman

Good afternoon guys. Just had a question. So I believe when Jeff was going through his comments, he said that there were 19 requirements over 100,000 square feet? Client's call, I think that was up to 26, but I don't think there was that much space available in between for sort of those requirements to get taken up? So maybe you can give us an update on what happened to go from 26 to 19?

John Kilroy

Well a portion of that -- I mentioned in my comments that there's roughly, according to brokers community about 750,000 square feet of deals that are -- what we are told are fairly eminent. So I think the lion's share of that difference is in that 750,000.

Manny Korchman

Okay. And then Tyler, on your guidance, to get to 94.5% to 95% occupied, why wouldn't that number approach your lease percentage number, rather than only up a handful basis points from where you are now?

Tyler Rose

Yeah, well actually right's in line with where we are now. So we are effectively -- we closed the year at 94.8% and our guidance is effectively in that same range. And that's due to -- we have 700,000 feet rolling in 2015, and we will be making some of those rolls with the other -- we are anticipating not making. So its just the normal churn. Well effectively, its frictional vacancy at this point, so its just the normal churn at this point.

Manny Korchman

And are there any big lumpy known move-outs in there that we should be modeling?

Jeff Hawken

This is Jeff. In 2016, we have only got two leases of 50,000 square feet or greater. One is in San Diego, and we have already got advanced negotiations on expected tenant to pay that space, and the other one is 90,000 square feet, also in San Diego, and that tenant is going to be made in about half of that building. And everything other than that is sort of smaller leases -- we have 94 leases rolling this year, so a lot of -- much-much smaller square footage.

Manny Korchman

Thanks guys.

Operator

Next question comes from Craig Mailman from KeyBanc Capital Markets.

Craig Mailman

Hey guys. Tyler, on the guidance for dispositions, it seems a little light relative to the $500 million to $1 billion you guys had talked about in NAREIT. Is there something that's still out of negotiations that you guys are considering, or is this just a more conservative number that could grow throughout the year?

Tyler Rose

This is a sort of the core disposition amount that we are talking about, versus any more strategic transactions. So we have been selling roughly this level for the last few years, and so no, it isn't any different than what we talked about, I think its just the core amount.

Craig Mailman

Okay. So that -- I think John was talking about a deal last year that could be kind of more sizeable, maybe strategic joint venture. So that's still on the table, but just not included in guidance?

John Kilroy

Yeah, this is John, Craig. Yeah, we have a number of sovereigns that want to do deals with us. We are contemplating what we want to do and how we want to proceed. So as Tyler mentioned, the guidance range on dispositions is just straight up asset sales. And yes, we are still contemplating that, we haven't come to a conclusion yet.

Craig Mailman

Okay. And then just one last quick one, the expected spend on the Academy kind of jumped sequentially. What's behind that?

John Kilroy

You want to take cover that, David?

David Simon

Yeah, I got it. Refinement in scope changes and increased size, so the project is bigger than was originally anticipated. We are able to get some square footage, and we refine the scope. And commensurate with that are rental rates. So from a yield perspective, we are on the same place where we were two years ago when we acquired the land. So it feels pretty good.

Craig Mailman

Perfect. Thank you.

Operator

Next question comes from Jamie Feldman.

Jamie Feldman

Thank you. Tyler, so focusing on the 6% to 8% cash same store growth; can you just walk us through the major pieces that gets you there? Because it sounds like your occupancy is relatively flat and you are losing order, and you may even be losing some space?

Tyler Rose

No. I think the big jump in same store cash is the burn off of free rent. So we have had -- you can see the difference we had in the fourth quarter between our cash and our GAAP same store on those, and we are going to continue to have a little bit of that in 2016, particularly in the beginning of the year, where we are getting the real benefit now on some of the leases we signed over the last couple of years that had some free rent in them. So it's being driven by higher, or less free rent I guess.

Jamie Feldman

Okay. So what about on a GAAP basis? How do you think it will look?

Tyler Rose

So on a GAAP basis, we are estimating sort of 2% to 4%.

Jamie Feldman

Okay. What are you assuming for leasing spreads?

Tyler Rose

Well we have said that the overall portfolio, I think, in 2016 is 15%.

Jamie Feldman

Okay. All right. And then, John, you had mentioned several companies in planning stages for significant new requirements in markets over the next few years. Would you say there is -- are there any new ones to the pipeline, or these are conversations you have been having for a while? Just maybe an update on what companies and tenants are feeling and thinking these days, watching the stock market decline and other macro issues?

John Kilroy

Okay. I am going to ask Rob to jump in a second. There are some additions, which I can't obviously talk about which companies they are. But we are seeing some pretty strong demand for two to four years out, that's been going on for the last year or two. These are companies that are pretty much household names, big balance sheet that are looking at how they modernize. Just like Viacom did down in Hollywood, where they brought all their divisions together and they -- in some cases, they expanded various divisions, and in some cases divisions were reduced in size. But overall, they want to get their people together.

The same thing is happening at San Francisco, Seattle, San Diego and Hollywood.

Robert Paratte

To add on to what John said, Jamie, a lot of my job is involved in meeting with the senior levels of these companies, Fortune 500 companies. And specifically, with respect to San Francisco, the key people are saying and they are having trouble getting their real estate to catch up to their hiring plans, and these are large tech, large cap tech companies. And so they are constantly looking at how to not only deal with the short term, which is where sub lease comes into play; but how to deal with the long term, 2017-2018. And I would touch on the exchange, actually, is the only campus that's available in San Francisco in that timeframe. So we are poised really well.

If you look at us portfolio-wide, I would say the same thing is true. Seattle is on everyone's radar screen, and so is Los Angeles, in terms of where -- and it all blows down to one thing, finding the talent and finding facilities that helps house that talent.

Jamie Feldman

Okay. That's helpful. Thank you.

Operator

Next question comes from Brendan Maiorana from Wells Fargo.

Brendan Maiorana

Thanks. Good morning out there. John, there is lots of large, more mature tech companies in the Valley. They are not in the city, in San Francisco. Do you think you will see or not -- that don't have a meaningful presence in the city. Do you think you will see some or one of those tenants make a statement in 2016 and take that major space in the city?

John Kilroy

I can't say whether its 2016. There is a couple of major tech companies that are looking at some of the space that's under construction right now, for major requirements; whether they move on that this year or not, I can't really tell you, Brendan. But I can tell you that, amongst the -- within the comments that Rob Paratte made and I made to Jamie a moment ago about future requirements, there are some big plays that are going on right now, that I think are going to be eye popping. If they go forward, they are going to be eye popping for San Francisco, they are going to be eye popping for Seattle.

Its very difficult to say when people -- think about it, if something doesn't -- look at our Flower Mart as an example. We have got a couple of major companies that are looking at that, one of which has been looking at for over a year, another one of which is looking at right now, and they are trying to figure out, how they -- what they are going to move into the city, what they are going to expand in the city in certain cases. How this all works, and I am very encouraged by sort of the tables that we have set, and the interest in the meal that's going to served three to four years from now on our projects. Time will tell, but I think you are going to see a continuation of the trend that we have seen over the last four years, which is folks migrating to where the labor wants to live and play, you have to get two better areas than the city of San Francisco and Seattle.

And in both markets, there is supply constraints, particularly in the city of San Francisco with Prop M. and we know what the preference is for these companies in terms of the types of buildings that they want. So more to come, but [indiscernible].

Brendan Maiorana

Okay, great. And then maybe, somewhat related to that, at the Exchange; so how is the mindset in terms of thinking about leasing that project between tenant credit, sort of trying to find the right type of tenant that maximizes maybe the long term value of the location. And then, just trying to put to bed, the exposure in terms of getting leased up as quickly as possible? How do you sort of think about it?

John Kilroy

I think that's a very-very good question, and obviously there have been a few analysts, some of whom have spoken on this call or they will speak later on the call, that are contemplating the same kind of thing. I am not interested in seeing deals done. I mean, let's look at our job. Our job is long term value creation, and I am very mindful and we are all mindful of the pressure that people would like to put on to just sign something up. But we have an opportunity to do some things that I think are going to -- if they happen, it will be eye popping. And that's our job, is to make sure that we -- I don't want a binary situation, where we wait too long that nothing happens, but I don't think that's the case.

If you look at what's happened since we started construction six months ago, and since we announced the acquisition of the property, roughly a year and a half ago, and we have to go through a reentitlement or a redesign and so forth, we have seen the market fundamentals improve significantly. We have seen rental rates go up tremendously. We have seen vacancy rates go down. We have seen the available stock be absorbed, and we are seeing buildings that are being built beyond this one that are generally a little bit different kind of building, and not necessarily a sought after as the kinds of buildings that we are building there.

So we think the market and the fundamentals have been proved in our direction, and when we take a look at some of the opportunities that we are working on, they have such long leases and such good credit, that I think they are major home runs if we put them together. And if we don't, then we can go add and lease any number of companies, $100,000 or $200,000 or $300,000 and make it multi-tenant, and I am not worried about that. So I think we are doing the right thing. I am sure there are a lot of folks on this call that would like just to make an announcement, hey we'd sign this, or we have done this or we have done that.

I just want to put in perspective something, that needs to be said, I mentioned in my comments that 80% of our development, since we have been a public company in 1997; 80% of our development, or 80% of that stuff has been leased by the time we completed construction. And we are up to 90% or 93% within a year they are after to stabilization. And more recently, I know we have had a lot of announcements, Salesforce or Dropbox and some others, where we literally made the deals as we acquire the property or shortly thereafter.

But on Crossing 900 as an example, with Box, we were under construction for 10 months when we made that deal. And in Columbia Square Phase one, NeueHouse was 14 months after we started construction. In Phase two, Viacom was 14 months after we started construction, and Fender, 21 months after we started construction and Fender, 21 months after we started construction.

And here in the city, a couple of other datapoints, there is 222 Second Street, which LinkedIn leased from Tishman Speyer, and that's roughly, the better part of 0.5 million square feet. I believe that was a year after they started construction and 500 Howard, which was also Tishman Speyer with a variety of tenants, with about two years after starting construction. Our own 360 Third Street Building, where it’s a variety of tenants, PAC-12, etcetera, took about two years to lease up after we bought that building and repositioned it. And then of course, DIRECTV took the better part of two years to put together.

So, I think what we are seeing with some companies is a more normal gestation period for a deal, and that's just -- I'd like everything to be leased the day we announced it, its just not ever happened that way on all projects, but I am very encouraged with where we are at, and I expect that we are going to have very good results there. So sorry for the long answer, but I wanted to put it in perspective.

Brendan Maiorana

That's great perspective. Just last one maybe, Mike Sanford if he is on. So it looks like Zenefits jumped into your top 10 tenant list. I think they maybe had an expiration that was coming up and were you guys able to structure a longer term renewal and expansion with them?

John Kilroy

I think he was asking Mike that question, if Mike knows the answer?

Mike Sanford

So, we structured a couple of things we benefit, that they've grown in the building. So I think that's what you're seeing.

Brendan Maiorana

Okay, great. Thank you.

Operator

Next question comes from Vincent Chao from Deutsche Bank.

Vincent Chao

Good morning everyone. Just a couple questions here. Just in terms of the tightness of the San Francisco market and understanding that it's not a lot of space relative to The Exchange; but just curious given that tightness if you're starting to have any meaningful conversations on your 2017 maturities in the Bay Area?

Mike Sanford

This is Mike. I think what you have seen us do over time, is be very proactive and looking a year or two out in trying to smooth out our expirations. We have done a good job of that in all of our markets, here in San Francisco as well. So we are always having those conversations in advance. That's something that we do on a regular basis.

Vincent Chao

Okay. And are you seeing increased demand from the tenants to get those done earlier?

Mike Sanford

Definitely. I think as John has laid out, there is much more demand than supply, and those tenants that are in our existing buildings have the same problems with the ones that want to move into San Francisco. They are trying to protect their operations as well.

Vincent Chao

Okay. And then just turning to the investment markets John, it sounds like your commentary was fairly positive terms of not really seeing any changes in the strong demand and the cap rate environment. But beyond cap rates, I was just curious if there's any other changes that you've noticed in the markets, whether or not that's bid/ask spreads or time to close deals or anything like that that might be a shift from what you've seen?

John Kilroy

Well, I haven't seen anything that's a deterioration. What we have seen is some products that frankly, I would surprise, that the values they traded for, whether it was in San Francisco or LA. Some of the stuff, in my view, was not what I'd call core -- kind of core locations, but not necessarily core, that traded at really healthy values in my opinion, based upon assumptions of -- I think the markets, assuming that they are going to continue to be rental rates, we underwrite everything, we bought very little last year, we bought nothing, other than a couple of land sites.

So I'd say that, some of the products that are coming on-stream are great. Some of the products that are coming on-stream are kind of -- Mike and Rob, help me, or I'd say kind of not first cabin, not necessarily best location, and yet they are trading at pretty high numbers. We have seen a few projects that have come onstream, and I got to be careful, because we probably got confidentiality agreements on a couple of these things. We have seen a couple of things where the pricing was so over the moon for the outset or the location that they had to backup and ask for a different bid or lower bid. But those are properties, that in my mind -- its like -- somebody says they are going to sell you a Volkswagen Bug for $80,000, you are probably not going to get a lot of bids. So there is some of that.

Vincent Chao

Okay. And then just from a foreign investor demand perspective, any changes there? And maybe specifically the Chinese investor, any pullback there in light of sort of the government's efforts to stem some capital outflows?

John Kilroy

We haven't seen anything. Obviously, we don't -- there's probably some better sources on that with East Hill and HFF and CBRE and what not. But we haven't seen any pullback. To the contrary, we are seeing a number of foreign governments that are wanting to be in the cities that we are in.

I think Bellevue, Washington represents a pretty interesting story. The Chinese have become very big investors in that market on to be developed housing, and I know there has been some more plays in LA. But I can't speak to the -- whether it has changed up or down, other than by what we have seen and we are probably not the best one to answer that question in the broader perspective.

Vincent Chao

Okay. Thank you.

John Kilroy

Welcome.

Operator

Next question comes from Jed Reagan from Green Street Advisors.

Jed Reagan

Good morning, guys. Can you talk a little bit about your current views on sublease trends in the Bay Area? Is there anything that gives you concern and how those numbers are trending recently or how things might go from here through the rest of 2016?

Mike Sanford

Hey Jed, it's Mike. Yeah, so sublease space ticked up in the fourth quarter to about 2.2 million square feet, which is just about 3% of the total market supply in San Francisco. So still at barely healthy levels. I tell you, since the end of the fourth quarter in January, it has actually dropped back down to about 2 million feet. And two of the bigger chunks in there from the fourth quarter was the Dropbox space, which we have talked a lot about. Its about 210,000 feet, and they are rumored to be in leases for all of it, and then the other one would be the Twitter space, which is about 100,000 feet, and they are in LOI -- our leases are about 60 of it.

So you know, those deals happen, you are sort of in the mid-twos percent of sublease space for the market, which is very healthy across the board. I think, as we have said, its actually a nice release valve for some tenants to build or grow, some of the smart ones who want to grow in the spaces.

The other thing that I would say is, what's really important about the Dropbox space is, it was oversubscribed with demand as soon as it came on the market. And that's obviously because it’s the kind of product that today's modern tenant wants, and as John mentioned, there's not that much of that in San Francisco, let alone any event available today. So when that product becomes available, it gets taken up fairly quickly.

Jed Reagan

Okay. Thanks.

John Kilroy

And Jed, there has been in this space, and Rob, help me on this, the space that I think its Charles Schwab has had on the market I guess, probably a year now, and that's roughly 300,000 square feet, and its all chopped up. Its in tiny little offices and so forth, and to go in and sublease it, I think the problem is, there have been a lot of people that have been interested in that space. I don't know where it is in negotiation right now, but the rumor we get back from people, is they looked at it, but the CapEx you'd have to spend is too great, given the length of remaining term. So its just not a plug and play.

Frankly, the sublease space, the other thing we are seeing with tenants is, we are talking to them, is that, in many cases this is -- as Mike points out, the release valve. They are able to plan for their bigger requirement, two or three years down the road, by taking subleased space now and taking the pressure off. One of the problems that all these companies have, is they end up. If its not a sublease thing, if they have got to go to -- people like us are going to say, we want a seven year or a 10-year or 12-year term. But just an interim release valve, people won't like to sign up for 10-years if they don't have to, because they know they are going to get out in three.

Jed Reagan

Sure. Makes sense. Okay, thank you. And as far as your plans for the shadow development pipeline, do you feel like you're still on track or are you rethinking the timing of any of those projects just based on some of the increased volatility we've seen in the capital markets or a sense that we're getting a little further along in the cycle or maybe just feeling like you've got a full enough plate as it is?

John Kilroy

Well yeah. I mean all those things are things we keep an eye on. What we are seeing on the ground, and the demand we are seeing for a couple of years out would suggest that we are probably going to get some of those projects off next year. But I think, this is the time. I mean, everybody knows -- who has ever heard me speak, knows that I concern about the macro, things that are going on in the world. We are not -- I mean, we are definitely subject to all that stuff. So yeah, we are going to be conservative and make sure that we get a lot of pre-leasing done across the portfolio and make sure that we like the -- what we are seeing in the tea leaves. And then we will make a decision.

But I'd say, the bias has become more conservative towards development -- spec development, given the factors that we are conforming with around the world.

Jed Reagan

Okay. So still sort of executing on your business plan as you have been and moving forward for now.

John Kilroy

Yeah exactly. For an example, look at One Paseo down in San Diego. That's about a $600 million project, about a $450 million new spend. It's three phases of residential, one phase of retail, and then the office. The office space, to be on there, what we are really encouraged by with the heights in the deals that we are doing there, is that people really love what's going to happen at One Paseo, and we are getting very good rents in office space, and in terms of the retail, we think we get that substantially leased, because its so -- the demographics are so strong there, so under retailed. And the same thing with the apartment.

So we are going to look at the different food groups, we are going to look at each individual market, we are going to look at the macro, we are going to look at how much we have leased or unleased in our core portfolio, how much we have leased or unleased in our development portfolio, and make decisions based upon that, but with a conservative bias.

Jed Reagan

Okay, makes sense. And just last one if I may real quick, in terms of the strategic sales transactions you talked about, would you consider selling one of your development projects after stabilization, shortly after stabilization or even before the asset delivers and stabilizes but maybe after you've gotten a certain amount of pre-leasing done?

John Kilroy

Well we consider a lot of different things. Remember, we have a Safe Harbor condition in REITs that prevent us from selling something actively, marketing it for two years following -- I think its two years or one year? I think its still two years, following completion. You can do ventures and sort of move around that way. But we consider everything. As we have said before -- I like optionality. We have options with regard to the resi or the retail, till we develop it and sell it, till we co-develop it, till we venture it once its done. We have multiple options and we think that's a good place to be.

Jed Reagan

Okay. Thank you for the color.

Operator

Next question comes from Dave Rodgers from Baird.

Dave Rodgers

Just kind of a little bit of follow-up on the asset sales, John, for you and for Tyler; and I guess Jed was getting a little bit of this. But in terms of the asset sales, $350 million to $650 million in the guidance for this year, how much of that is dependent on the new starts? And I guess the second part of that would be really where does that money end up going? If you end up doing some larger venture, you hit the top end of your guidance for asset sales, are you feeling comfortable enough buying land, how much of that is going to go into development and how much of that goes into a dividend, etcetera? As you sit here today, I know it's not clear, but just curious on your thoughts of being smaller maybe in the next year or so as opposed to continuing to grow?

John Kilroy

Well, I think we continue to grow just by the stuff that we have going on and by -- and rents is another form of growth organically. But that's a good question, and as you know, when you sell an asset, if you sell it for $100, your basis is 50, you have a choice. You can 1031 or exchange it into a number of properties and spend at least $100 on those properties, where you have some tax. Or you can pay a special dividend. So if our basis is 50 and our sale is 100, we have a choice; did we trade into $100 worth of new stuff, or did we distribute $50 as a special dividend. So all those choices are before us, we are not going to go buy something that we don't believe has more upside than what we are selling, or where we can't make money off it. Just to go part money, I think we'd rather just do a special. But we will see.

Dave Rodgers

Okay and maybe a follow-up to that; I think you said 19 requirements in San Francisco over 100,000 square feet. If you looked at just new developments and the projects that you're working on, how many of those 19 would still be interested I guess in a new development project relative to others? And I don't know Mike or John if you have any color or clarity on that?

John Kilroy

Yeah, well remember those are current requirements. And what's not shown in anybody's brokerage report is what people are looking at two to four years down the road, and those are the kinds of things that would kick off new development. Most of the folks that are in the market for 100,000 square feet plus or minus now, are in the market to fulfill a requirement now, and they are having a damn tough time; because most of the good space is gone. Now there is space coming, we know that.

There is Salesforce and Block 5 and J. Paul's buildings, all of which are high rises, and most of the other stuff that can be developed -- there is our Exchange for sure. And then the only other really shovel ready project of any magnitude, particularly the slower rise, is 100 Hooper.

So I think we are going to see some people step up for -- if we have talked about the exchange and speaking of Hooper, that project is so geared towards what the modern tenant wants in terms of floor plate size and lower scale, meaning not big tall buildings. But I think those all do very well. People are having a hard time right now finding space that works for them.

Dave Rodgers

Okay. Thank you, John.

John Kilroy

You're welcome.

Operator

Next question comes from John Guinee from Stifel.

John Guinee

John Guinee here. Here's a question for Tyler. When it's all said and done when you get through earnings season, you're probably going to have the best fundamentals in terms of mark-to-market and the best fundamentals in terms of same-store NOI of anybody in the office space. That's the good news. The bad news is CapEx re-leasing costs for you are about $7 a square foot a year and are not quite that high for others but are pretty high. When you do the math obviously a single-digit mark-to-market on re-leasing spreads doesn't cut it and make up for the CapEx spend. What do you think you need in terms of mark-to-market, in order to justify the kind of CapEx spend that you and others are dealing with?

Tyler Rose

Yeah. I mean, I probably have to do some analysis on that. But obviously, when we look at deals, we look at net effective rent internally. So we need to make sure that your rent is covering all of your costs, including CapEx, and I have to think about what that spread of rent growth would be, to come up with that number. But I don't know if you are right, that it needs to be double digit or not, because we have had years where we didn't have double digit rent growth, and I think we still have positive net effective rent.

John Kilroy

I think the other thing, John, that I mentioned -- this is John Kilroy; is that what you have seen in our portfolio if you look at it, in terms of particularly the core portfolio, we have done such a major transformation of converting, what was, call it the old space, your father's office space if you will, to the new modern space. And that's much more plug and play. What we are finding there, is that tenants that move into space that's already been converted, far or less in a way it changes. So that's the other trend that I think is going to begin to show up over time.

And finally, with regard to our portfolio, if you look at some of the stuff that -- most of the stuff we sold, that we have said is non-strategic, we have lots of CapEx in that, because you have heard me say before, the smaller buildings, every time a tenant moves in, a major tenant moves in, they want to change the lobby and everything else. We don't get into that as much with the bigger projects.

John Guinee

So you're not doing much more in the way of full mahogany conference rooms?

John Kilroy

Yeah. That doesn't happen. It doesn't happen. Matter of fact, that was with somebody here, and I can't say who it was. But one of the very major funding VCs of all these companies and one of the things we are talking about is how to simplify everybody's life with more plug and play kinds of space as opposed to everybody having their own designer and what not, because they really do use the space very similarly. Change the same color, maybe change the carpet, to get everything else.

John Guinee

Great. Thank you.

John Kilroy

You're welcome.

Operator

Next question comes from John Kim from BMO Capital Markets.

John Kim

Good morning. Thank you for reporting on a Monday instead of -- along with everybody else later in the week. I had a question on your San Diego dispositions and if you could provide some color on the cash gains of the IRRs you've achieved?

John Kilroy

Yeah. Tyler, you want to go through that?

Tyler Rose

You're talking about the --

John Kilroy

The Intuit, I think?

Tyler Rose

The Intuit transaction was a $260 million sales price and the basis is roughly $165 million, so there is a significant gain on that transaction.

John Kilroy

Yeah. But I think the IRR on that, if you look at unleveraged through ownership through point of sale was what?

Tyler Rose

Yeah, if you look at the IRR when we developed in 2007, the sale is about 13%.

John Kim

As a percentage of your NOI, San Diego is about half of what it was a couple of years ago. Is there a target internally that you're looking to have San Diego?

John Kilroy

Yeah. Few years ago, people used to say to me, what do you think San Diego is going to be. And I said, then it was X, its probably going to be with dispositions and development, somewhere between 80% and 120% and not the hard boundaries of that X. But obviously, as we have expanded north and so forth in full assets, there is has diminished down to the levels you are talking about. I would think, with the developments that we have in Los Angeles, in Seattle, here in the City, and then taking into consideration there, that's probably going to drop to, I don't know, 20% or less. That's just a guess.

John Kim

I think you're there already.

John Kilroy

Yeah well, I just supposed it was a guess. It could be 15%. I just don't know. One thing I think that everybody must remember about Kilroy, and you know, I love that chart which shows when we buy, when we develop, when we dispose off things, capital recycle. We are going to be very opportunistic, and that's what you have seen over the last couple of years. We are going to take advantage of what the market permits us to take advantage of, whether it's in efficiencies, and to firm that, we like to use the sale of existing assets, that where we think that we can get better growth by selling something and investing in something else, and we will see.

San Diego is coming back, if you look at the rent growth in San Diego, Del Mar is an example, in class A space year-over-year, 2015 over 2014 was 18%. Its projected to be somewhere between 6% to 9% of this year. We think that the trends are coming along. It has been slower to get to a terrific rent growth. It has taken a number of years, but its getting there, and there is very little new supply. There is a couple of buildings that have been built, that are pretty much spoken for. We have all little buildings there, and of course we have one for sale, and ultimately we are going to have some other opportunities there.

So I can't tell you what is good enough, so let it be. But its an important part of the company, and its plus or minus 20%, plus or minus 15%, sort of that range probably.

John Kim

Okay. I was wondering if you could comment on underwriting criteria in your markets? SL Green commented the last week that for certain kind of product, IRRs have changed? I'm wondering if you have seen that at all, given the sensitivity in that market?

John Kilroy

Well we haven't seen a tick-up in cap rates in our markets. With a one proviso, that if you are -- as I commented earlier, if you are looking at a building that has a lot of CapEx, or its not as high quality, then its going to be a price, presumably accordingly. But cap rates in San Francisco today, for quality space in the high threes or low fours and IRRs are in their high fives. In Silicon Valley, its sort of the same thing, maybe IRR is five to six. In Seattle, its cap rates of 4% to 5%, and kind of a 6% range IRRs. In LA, its anywhere from the high threes to the low to mid fours and cap rates, and low to mid to high, depending on the product, 6% IRRs. In San Diego and into Del Mar, its sort of in the 5% range on cap rates, and IRR is sort of the 6% to 7% range.

So that's kind of what we are seeing, and then against the backdrop, remember there is very little new supply. There is pretty good demand throughout all these markets, and we are seeing continued job hiring, postings and increases in that, and so pretty good job growth. So on the ground, it feels great.

John Kim

And can you remind us what target you have on development IRRs on an unlevered basis?

John Kilroy

Yeah. We talk more about ROCs and you kind of figure it out. Generally, what we have been doing is somewhere between 7.5% and 8.5%, sometimes a little bit better across any particular project. And typically, we get anywhere from 3% to 4% annual bumps.

John Kim

Got it. Okay. Thank you.

Tyler Rose

And John this is Tyler, just to clarify on the Intuit basis, its $100 million.

John Kilroy

Yeah, that's a thought. I knew that was kind of [indiscernible]. I think our original cost on the project was roughly $140 million something like that.

Operator

Next question comes from Ross Nussbaum from UBS.

Ross Nussbaum

Hey guys. I just had two quick follow-ups. It looks like one of your front page tenants Group Health Corp got acquired by Kaiser Permanente. Any sense of what that ultimately means in terms of their continued occupancy when their lease is up and I guess when is that?

John Kilroy

Are you talking about the Group Health in our Seattle portfolio?

Ross Nussbaum

Correct.

John Kilroy

They have already announced that they have a campus that they are working on and constructing and probably will be out by 2019. But there is always construction delays, so it could be longer. But we are aware of that, and Westlake/Terry is such a great location, that we are confident that we are going to have that taken care of.

John Kim

Got it. Okay. All right. That's all I have.

Operator

Next question comes from Derek van Dijkum from Credit Suisse.

Ian Weissman

Hi, it's actually Ian Weissman here. John, just given what your views are about cap rates and what you're seeing in the marketplace today, as you think about capital recycling at this stage of the cycle, what's your thoughts on just buying back stock given the value of where you currently trade?

John Kilroy

I think its an option. As you know in the last, kind of the earlier cycle, we bought back stock and its something that management looks at as the real possibility.

Ian Weissman

And what's the trigger point? I mean, your stock trades about a 20% discount NAV? You have been pretty active in selling that within this market? You talk about cap rates being 4% or below? What do you need to see to be more aggressive in buying back stock?

John Kilroy

I don't want to get into that right now, Ian. I mean, we have got a lot of things on our plate, and we are going to see how this market goes, and exercise what we think is in the best interest of shareholders in creating value. And we may have some special dividends, we may have some stock payback. We might do some other things we will see.

Ian Weissman

Okay. Thank you very much.

Operator

Next question comes from Michael Carroll from RBC Capital Markets.

Michael Carroll

Thank you. John, for the past several quarters, you've indicated that the number of large tenants looking for space in San Francisco has far exceeded the available block. What options do tenants have that are looking for space, but are unable to lease one of these spaces that are available? Do they look outside the market or do they just delay their leasing needs?

Robert Paratte

This is Rob Paratte, I will try to answer that. I think it’s twofold. One, as both John and Mike pointed out earlier, they are taking sublease space where they can get it, and make a deal that makes sense, particularly in the two to three year time horizon. And I think other tenants -- again, these are large cap tenants, are looking at alternatives such as Seattle. And there is also quite a bit of, kind of, what I would call reverse activity, where you see firms that are based here in San Francisco, also looking on the Peninsula and South Bay. But it kind of restates what we said already, it’s about talent and it’s about being where the universities are and keeping these working groups contiguous and together. They don't want to split their creative groups up.

Michael Carroll

Okay.

John Kilroy

One of the things that if I might just add to that, it’s really important, and this is a normal thing here with all the folks up here, whether it’s in the Valley or in the city. Its proximity of public transportation, particularly if you think about the Valley, CalTrain, how many stops it is from Stanford? How many stops it is, and what the travel time is from the city. This is kind of creating havoc for some of the companies right now, because they are trying to figure out how do they accommodate their expansions that are down the road a little bit, given what's available and not available, and that's why we are very -- took action based upon the trend we could see there, to acquire the Flower Mart side and acquire 100 Hooper, because we think we provide one of the -- some of the only solutions in the lower rise product that they like. But it is creating havoc.

But one thing they can't do, or generally don't do, is just move willy-nilly to some place that might have land or buildings, because its all related to availability of talent, and where that talent wants to live.

Michael Carroll

Okay great. Thank you.

Operator

Next question comes from Manny Korchman from Citi.

Michael Bilerman

Hey John, it’s Michael Bilerman.

John Kilroy

Hi Michael.

Michael Bilerman

I'm just curious, you talked a little bit about sort of the discipline that you have and the conservative tact that you're going to take sort of going down the road in terms of both selling, buying and developing. And I'm curious as you think about the tenant side of the equation, with the reduction in VC funding, with the difficult exit or the IPO market, have they approached, are they taking a change in discipline in terms of requiring more TIs or thinking about space needs differently or waiting a little bit longer to commit? Has there been a change at all in how they're acting or in their discipline in terms of the marketplace?

John Kilroy

Yes. I would say that the jury is out on that Michael. But we haven't seen -- we don't want to get into the position of being the capital source beyond what we feel comfortable with, normal TIs and so forth, for some company that otherwise is not profitable or needs funding. We are not looking to be a VC, if you will. Rob, do you want to add any color to that, with what you are seeing up and down the marketplaces?

Robert Paratte

We are not seeing anything extraordinary change. I mean, tenants are aware of what the market conditions are in terms of what they are asking for and what they are likely to get. And I think, other landlords are acting as we are. Which is, as John said, we are not going to be putting in a disproportionate amount of capital to get a deal.

Michael Bilerman

Outside of TIs, it's just the negotiations. Has there been any shift I guess is -- you're acting conservatively and under a disciplined manner because you see what's going on around you and that's by the very nature of the value you've created over time. I'm just curious whether we have a negative feedback loop going on with some of these tenants that are looking at the same things and would be concerned about the marketplace?

John Kilroy

Yes. Again, I don't think we have enough input on that. We haven't seen it. We spend a lot of time -- I personally spend a lot of time. I know Rob does too spend a lot of time with the VCs, the angel investors and others that are involved, that aren't always VCs, that are family offices or others that are involved in a lot of these companies and a lot of those folks -- what we are getting is yes, you're going to see what value reductions, there are some people that have been burnt, where the company went from $4 billion to $10 billion, $6 billion or whatever it might be. Feel bad for those investors. If they are a tenants of ours, if they were okay, if we were okay at $4 billion, we are certainly okay at $6 billion and we did underwrite $10 billion. And what does all this mean, I don't know. But I think the big thing that I would ask everybody to look at is if you look at VC funding right now, and as I mentioned in my comments, VC fundings, the reduced VC funding in the fourth quarter was still like 1.5 times, 2 times what it was in 2010, 2011, 2012, 2013, and those were very good years with much higher vacancy rates.

When we moved into San Francisco in May, late May or early June of 2010; if my memory serves me right, so give me a little slack on this, if I am a few basis points off one way or the other. We were roughly 17% vacant north of market, and 14% or thereabouts vacant south of market. South of market today is essentially zipped, no vacancy. So I would contend, and I think others have written articles on this that, we don't need to have a level of IPO or VC funding that we have seen over the last few years, given the vacancy rates, they still have a very healthy office market. I mean, obviously, we would like to see more and everything is great, but I personally don't like overheated markets. I like markets that are good, and getting better and I think that's kind of what I am seeing right now, projected rental growth in San Francisco by the top brokers right now in Silicon Valley, somewhere in the neighborhood of 5% or greater, and that's an average rate. So better buildings are going to do better.

What we have always operated on, is to make sure that we stay true to location, the physicality, so that we have a product that most people want, and that's good in any market. But in a defensive way, it’s a kind of space that people want to be in. So I don't want to ramble on any further, but I feel like right now, people are being very -- the VCs and so forth, they are spending a lot of their money on third and fourth stage, as opposed to first stage, and that's not all bad.

Some companies will fail and deserve to fail, let's just be honest about this. The nature of technology is that, it rapidly evolves or even creates a revolution in it, and sometimes that obsoletes some other things. Look at some of the hardware providers and what not. While that's a tough thing on any particular company, if you look at it and the kind of hiring characteristics and so forth that we are seeing in most of our markets, if A company is going to lay off 400 people, those 400 people are going to get hired by somebody else, because that's just the nature of the labor market we have.

So its not -- I view that there is the natural sort of selection, and we will see some failures, we will see some companies that don't have the expansion plans they had. And I take this back to one of the reasons I really like what we are seeing and working on, at The Exchange, is because I think that the quality of tenant there is so terrific, that I think at a time, where there is less -- there is more confusion in the market. Just do business with really solid companies when you can, do solid lease terms. Don't do silly things. Don't underwrite them more aggressively. Don't put up more TI, be more conservative. And that's the way we are operating our company.

Michael Bilerman

All right. Okay. Thank you.

John Kilroy

You're welcome.

Operator

I would now like to turn the call back over to Tyler Rose, for closing comments.

Tyler Rose

Very well. Thank you for joining us today. We appreciate your interest in KRC. So long.

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