Kilroy Realty's (KRC) CEO John Kilroy on Q1 2016 Results - Earnings Call Transcript

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Kilroy Realty Corporation. (NYSE:KRC)

Q1 2016 Results Earnings Conference Call

April 28, 2016, 01:00 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

Heidi Roth - Executive Vice President, Chief Accounting Officer and Controller

Michelle Ngo - Senior VP/Treasurer

Analysts

Blaine Heck - Wells Fargo

Craig Mailman - KeyBanc

Nick Yulico - UBS

Manny Korchman - Citi

John Guinee - Stifel

John Kim - BMO Capital Markets

Michael Carroll - RBC Capital Markets

Vincent Chao - Deutsche Bank

Jed Reagan - Green Street Advisors

Jamie Feldman - Bank of America Merrill Lynch

Steve Sakwa - Evercore

Operator

Good day ladies and gentlemen and welcome to the Q1 2016 Kilroy Realty Corporation's Earnings Conference Call. My name is LaToya [ph] and I will be your operator for today. At this time, all participants are in listen-only mode. [Operator Instructions].As a reminder, this conference is being recorded.

I would now like to turn the conference over to the Executive Vice President, Chief Financial Officer, Tyler Rose. Please proceed.

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 the first quarter, Jeff will dicuss conditions in our key markets. I’ll finish up with financial highlights and review of our updated earnings guidance for 2016. Then we will be happy to take your questions. John?

John Kilroy

Thank you, Tyler. Hello everybody and thanks for joining us today. Four months into the New Year fundamentals in our markets remain healthy. Rental rates and net absorption continue to increase, while vacancy rates continue to decrease in the innovation driven sub markets of San Francisco, Seattle, Los Angeles, and San Diego.

Cap rates and IRRs on West Coast transactions continue to reflect strong investor demand for quality real estate. VC investment in the Bay area was up slightly over last quarter and on an annualized basis was 50% to 75% greater than investment in the years of 2011, 2012 and 2013.

VC fund raising was at its highest level in over 15 years and sublease phased in the San Francisco market declined 23% quarter-over-quarter to approximately 1.7 million square feet or only 2% of the total market.

The ongoing strength and resilience of our West Coast real estate market helped dry up our solid performance in the first quarter. We signed leases on 239,000 square feet of space in our stabilized portfolio maintaining occupancy to near 95%. We delivered and stabilized 381 million of new development ahead of schedule and under budget we added a key corner site to our Flower Mart project in San Francisco enhancing the project overall development potential and value. We closed 267 million of dispositions and we report strong overall financial results including a more than 20% increase in same store NOI.

More specifically on the operations front, we signed 239,000 square feet of leases in our stabilized portfolio during the quarter at rents that were up 11% on a cash basis and 21% on a GAAP basis. And we are also seeing this trend and letters of intent. We have approximately 330,000 square feet of LOIs in our stabilized portfolio of rents that are up 20% on a cash basis and 40% on a GAAP basis. And an 115,000 square of LOIs in our development pipeline at rents higher than pro forma.

We also continued to successfully execute on our end process development program delivering and stabilizing our fully leased projects at 350 Mission Street and 333 Brannan and on schedule and under budget. Together these two projects represented a total investment of $381 million at an average stabilized cash return on cost of approximately 8%. At current market cap rates we estimate that these two projects would be valued at double our investment. That leaves two projects that we recently completed in lease up and two projects under construction, together they represent a total of estimated investment of approximately $910 million, the first recently completed project in lease up is The heights at Del Mar, a 75,000 square foot office building completed late last year that is located in coastal San Diego immediately adjacent to our proposed the One Paseo mixed use project.

We recently signed a letter of intent for approximately half of that building. The second project in lease up is the 370,000 square foot new office component of Columbia Square in Hollywood that was completed in the first quarter. Since our last call, we signed approximately 83,000 square feet of letters of intent with several entertainment related tenants together with Viacom and Fender leases, the second phase of the project is now 80% committed and we anticipate being fully committed by the end of the year.

Including the historic office component of Columbia Square their overall office portion of the project is now 85% committed. The first project under construction is the 200 unit 20 storey residential tower at Columbia Square that will be completed later this year leasing has just commenced and is going strongly.

The second project under construction is the Exchange on 16th, our 700,000 square foot office campus in San Francisco’s Mission Bay neighborhood that is projected to be completed late next year. We are continuing to pursue a terrific single tenant opportunity and are prepared to move to multi tenant strategy if that opportunity does work.

We also made a key strategic addition to our Flower Mart development project acquiring a strategic land parcel at the corner of 5th [ph] and brand and immediately adjacent to the acreage [ph] we already assembled for the project. The new land site with its key corner location gives the overall development inside greater market presence expands the projects design possibilities and enhances its overall value potential. We acquired the land for $31 million in cash and roughly 870,000 operating partnership units which brings our aggregate FAR [ph] cost to approximately $73 per square foot for the 7 acres that will constitute the Flower Mart and that’s in a market that’s trading at north of $250 in FAR output [ph].

Looking ahead we are mindful of the -- of the macro environment that will continue due diligent and will continue to diligently monitor all economic and real estate market indicators. As of now the West Coast market fundamentals remain favorable. Job growth continues with year-over-year increases averaging 3% to 4% compared to 2% for the rest of the country, nearly 75% of West Coast first quarter leasing activity was extraordinary and at the current rate of growth ` project 2016 net absorption May outpays last year.

We have four projects in our near term development pipeline. We are working on completing all necessary entitlement developing and evaluating market interest, in some cases having detailed pre leasing discussions and ensuring that we have a funding strategy in place should we choose to move forward. Our four projects include, 333 Dexter in Seattle Dynamics South Lake Union submarket. We are on track to receive final government approvals. This summer, tendered activity remains strong with limited competing supply we already are in advanced discussions with a number of strong credit companies that are interested in taking substantial space in the 333 Dexter project.

And at One Paseo, our mixed use development project in the Del Mar submarket in San Diego we also expect to receive final entitlements this summer we would likely start the residential and retail components first given the strong demand for these project types. The third potential of 2016 development start is 100 Hooper, located south of market in San Francisco.

It is fully entitled and shovel [ph] ready. We will wait for significant leasing momentum at the exchange or at Hooper itself before we break ground. But we have seeing increasing interest from a number of tenants just in the last month or so. The full potential 2016 starts with the academy, a mixed used project in Hollywood, we expect to receive final approvals in the third quarter with the office component of Columbia Square mostly spoken for and our Sunset media center fully leased. We are seeing increasing enquiries on the academy project.

On the disposition front, we continue to receive or rather review our existing portfolio for opportunities to sell asset into the very strong market for top quality real estate. As we noted on our last call, we completed 267 million of dispositions in January including the Intuit campus in the land side in Carlsbad. We are working on completing the sale of the remaining Carlsbad sides later this quarter.

We are also in detailed discussions in large joint venture transactions. We can’t get into specifics yet, but if we move forward with this proposed transaction we would likely significantly exceed the high end of our initial 2016 disposition guidance of $650 million, more to come on this.

That wraps up my remarks. To summarize we continue to see fundamental strength and opportunity in our markets but we are not taking anything for granted. We remain highly focused on execution, on capital recycling and on maintaining the strong balance sheet.

With that, I’ll turn it over to Jeff.

Jeff Hawken

Thanks, John. West Coast real estate markets continue to solid out performance in the first quarter with growth and demand at absorption and average rental rates outperforming the rest of the country. In the San Francisco Bay area demand continue to outstrip limited supply pushing up rents.

Class A direct vacancy remains affectively 0% in San Francisco SOMA district and was 7.4% in the South Financial district. The Silicon Valley Class A vacancy was 7%. We are currently 99.1% leased in the Bay area and our in place rents for the region are approximately 33% below market. The story is essentially the same at Seattle. Demand for prime space remained strong. Net absorption in the first quarter was 840,000 square feet of Class A direct vacancy rates in our primary Seattle submarkets of Bellevue and South Lake Union were 10.5 and 8.9 respectively.

Our Seattle portfolio is currently 98.1% leased and our in place rents are approximately 6% below market. San Diego continued its steady improvement and also had strong leasing in the quarter with net absorptions 660,000 square feet, private rents up 10% year-over-year.

In Del Mar, Class A direct vacancy was 10.5% and in Sorrento Mesa two storey corporate office vacancies was 5.8%. Our San Diego portfolio was currently 91.2% leased and our San Diego in place rents are approximately 80% [ph] above market driven by few large leases.

In the much larger Los Angeles market, growth in greater services and entertainment is having an impact on both rents and vacancy rates in the submarkets of West LA, Playa Vista, Beverly Hills and Hollywood.

Class A direct vacancy rate in West LA was 11.9%. Across our Los Angeles Portfolio, we are now 95.2% leased and our in place rents there are approximately 14% below market. Overall for our stabilized portfolio, in place rents were approximately 17% below market. For the remainder of the year we have approximately 520,000 square feet of explorations and over the next two years we only have one lease exploration greater than 100,000 square feet.

That’s a snapshot of markets. Now Tyler will cover financial results in more detail. Tyler?

Tyler Rose

Thanks Jeff. FFO per share was $0.82 in the first quarter, to beat our internal budget by about a$0.01 with the early delivery of 350 Mission in mid March and 350 Brannan Street towards the end of March. As I mentioned on our last call, we will see meaningful growth in cash NOI in 2016, but the biggest bump occurring in the first quarter and moderating over the remainder of the year.

In the first quarter, same store NOI grew 20.3% driven by higher rental rates and the burn off primarily to the [Indiscernible] and Synopsys leases, offset by lower average occupancy. Same store GAAP NOI was up a more modest 0.1% in the quarter driven by the lower average occupancy and lower tenant reimbursement offset to the positive by the higher rent.

You will note that our property taxes were down year-over-year by about $1.5 million. This was due to conservative estimates of [Indiscernible]. Development property which is completely offset by lower [Indiscernible] so it has no impact on same store results or the bottom line. We currently have $260 million of restricted cash on hand and $130 million drawn on our $600 million bank lines.

Now, let’s discuss our updated 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. Our internal forecasting guidance for collecting [ph] information and market intelligence as we know it today, any significant shifts in the economy, our markets tenants 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 updated assumptions for 2016 are as follows; as always, we don't forecast any potential acquisitions or acquisition-related expenses. We anticipate remaining 2016 development spending of approximately $200 million on our projects under construction and lease up properties. We expect straight line rent to average $8 million per quarter approximately 60% of this is attributable to recently completed development project. We are increasing our projected 2016 same store cash NOI growth to a range of 7% top 9% GAAP [ph] or same store is expected to be in the 2% to 4% for the year.

Last quarter we provided a year on occupancy range of 94.5% to 95%. We are now comfortable at the high end of that range. Our recurring CapEx budget remains approximately $80 million would result in an FAD payout ratio of approximately 65% assuming everything else stays the same.

In terms of capital recycling our current 2016 range is between $350 million to $650 million with a $500 million midpoint, but as John indicated if we are successful in completing a large joint venture transaction we could significantly exceed the high end of that range.

And lastly in terms of guidance, last quarter we provided an initial 2016 FFO range of $3.31 to $3.51 per share for the midpoint of $3.41 given the early delivery of the two San Francisco development project and the continued strength in our market, we are increasing the midpoint of our 2016 guidance by $0.02 to $3.43 per share and updating our range to $3.36 to $3.50 per share.

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

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from Blaine Heck with Wells Fargo. Please proceed.

Blaine Heck

Thanks, good morning out there. Just starting with the investment market. I know you guys are looking at everything on market. It sounds like pricing has been holding up thus far and you haven’t seen much change in demand in cap rates, but are there any other indications out there that pricing could see a bit of a break whether it be bid/ask spreads or the depth of the buyer pool or anything else such that you might want to increase or accelerate dispositions?

John Kilroy

Well, this is John speaking. I don’t know about accelerating dispositions. We have a very disciplined plan and we seem to have pretty good success in terms of -- do we see anything is changing? I think others have talked about over the last quarter too and we have that. You don’t see as many bidders at some of the really core, real Class A sales. Although you still see a dozen or so and then it generally narrows down to two or three in the final round. But pricing has remained very strong. If you look at land, lands being acquired -- there is not much acquired in San Francisco, down in the Valley, Mike, it’s very robust, the pricing is strong.

Tyler Rose

Yes. No, I think across the board asset, demand remains strong as John said the land side continues to increase quarter-over-quarter.

Blaine Heck

Thanks. That’s helpful. And then can you talk a little bit more about demand for the exchange? I think one of the major prospects was at the Feb meeting with their Boards and so did that happened and I guess behind that tenant are the same perspective tenants are still involved or has the prospect changed at all?

Rob Paratte

This is Rob Paratte. I will answer that question. The large prospects we are still speaking with has ongoing meetings with their Board and management and we think it’s coming to fruition here shortly. We have about 2 million square feet of life science and medical interest in the project. We have 5 NDAs signed and there is interest outside of the life science medical use as well. So from an activity point of view, we are really pleased with what we are seeing and our construction and development teams are busy working on all of these different prospects.

Blaine Heck

Great. Thanks guys.

Operator

Your next question comes from Craig Mailman with KeyBanc. Please proceed.

Craig Mailman

Hey guys. Just a follow-up on the acquisition that are questioned. You guys have about $260 million kind of set aside for potential 1031s and I’m assuming there could be some gains if you alternately go forward with the JV transactions. Just curious your thoughts on putting that capital to work in the acquisition market versus paying potentially a special dividend?

John Kilroy

Well, on the Intuit sale, which was a lion share of that $268 million, about half of that is gained and we are evaluating -- we are continuing to evaluate whether we do an exchange because theories of exchange is whether we do a special, I’m thinking it’s -- if I was waiting and I would say it’s probably 70/30. It’s going to be a special. About half in other words the gain portion. And on the venture, we have it structured in a way where we do not require -- it's not a taxable event so those funds would be available for general corporate purposes.

Craig Mailman

Okay. That’s helpful. And then just a follow-up on the exchange and 100 Hooper, how long are you going to give the full building tenant until you guys decide to go the multi-tenant route and how much overlap is there between the two buildings in terms of the demand?

John Kilroy

The two buildings been exchanged in 100 Hooper?

Craig Mailman

Yes.

John Kilroy

Well, let’s deal with it. Let’s deal with it first, the last question first. How long are we going to give the big tenant? I would say that if we don’t have a deal with them, some weeks of documentation are done by the end of second then we will flip to the multi-tenant scenario. And with regard to overlap between Hooper in the exchange, they are independent. We have interest in Hooper that’s unrelated to the exchange but we have people that have looked at the exchange have looked at Hooper but we have two different specific prospect looking at Hooper only.

Craig Mailman

Okay. But you have the 2 million square feet on the exchange, how much do you think is unique on 100 Hooper?

John Kilroy

I don’t understand the question.

Craig Mailman

How much demand do you guys have of 100 Hooper? It would be totally different than the 2 million square feet, just curious.

John Kilroy

Yes. Totally different sense. We have two different tenants. Each that are interested in roughly 200,000 square feet.

Craig Mailman

Great. Thank you, guys.

Operator

The next question comes from Nick Yulico with UBS. Please proceed.

Nick Yulico

Thanks. John, can you just talk little bit more about the motivation to do the joint venture and then what you would be using the proceeds for?

John Kilroy

Well, I think that proceeds would be used to fund development. We are not interested in selling stocks. We’d like to self fund as best we can. And in terms of the motivation, strategically, I think it would be a great relationship to have for the future.

Nick Yulico

Okay. And then just going back to the 2 million square feet of tenants with an exchange. If we look at stats from brokerage firms you talked about roughly 3.5 million square feet of sort of office demand tenants in the market today. But sounds like the 2 million might include other types of tenants that wouldn’t be in the source traditional office demand. Is that the way to think about this?

John Kilroy

Yes. I think you should look at it, as Mission Bay continues to improve and have a great story behind it. Sandy Weill just made a $185 million donation to the UCSF. It is a very specific location for a lot of users and we think more desirable than other sub markets. So, I think that’s the right way to look at it.

Nick Yulico

And is there any change in the economics if you are going more on the life science route than traditional office development?

John Kilroy

Remember, our yields are -- pro forma there at around 8% and we think we do that or better in either scenario.

Nick Yulico

Okay. Thanks.

John Kilroy

You are welcome.

Operator

Your next question comes from Manny Korchman with Citi. Please proceed.

Manny Korchman

Good morning, guys. If we think about the recent sublet space that’s been taken up in the San Francisco market or is about to be taken up, do you think that ease or the speed at which that was taken up will inspire other people to list their sublease space? Essentially, they look out and say hey look, these guys put up space, they got it leased, why don’t we do the same.

Mike Sanford

Manny. Hey, it’s Mike. Obviously, really hard for us to say. I don’t think one sort of gets the other. I think as we’ve discussed, what you’ve seen is a sublease space that is more in line with what today’s modern user wants like we saw at China Basin and other spots. That’s the kind of space that’s getting leased up faster and we continue to see that that space is staying on the market and sort of that, call three months plus or minus average for that kind of space, a little bit longer for other sectors. But if it’s desirable for the modern tenant it’s moving fairly quickly and we expect to continue to see that.

Manny Korchman

And maybe just to prolonged needs, the Hopper discussion for another second year. Do you see any life science or sort of that medical used tenant going sort of outside of Mission Bay and down to Hooper, or is that just outside of that realm and that’s going to be more of a typical San Francisco tenant we all think about?

John Kilroy

Hooper would be the only life science that would come to Hooper, would be the administrative components of larger companies but Hooper’s really strictly office space.

Manny Korchman

Thanks.

Operator

Your next question comes from John Guinee with Stifel. Please proceed.

John Guinee

Okay. John Guinee here. Couple of questions. I’m looking at your land bank, John and you talked about an incredibly low basis at the Flower Mart but I’m sure there is a lot of costs until you are essentially pat ready. And then you look like you have some relatively low per FAR amounts in some of these land positions but you seem to be pretty full in others. Can you sort of talk through where you think there is maybe a high basis on some of these lands positions and maybe a very low basis on others?

John Kilroy

Well, Flower Mart is hugely low. It’s less than a third of what current market is. If you look at Dexter that we recently bought, you could argue that’s at market but things are now -- where things are trading at today is significant higher. Where we be full is that one for sale. But fortunately the map on the development program we have still is pretty good. We are not going to be in the 8% yield on average that we kind of hit everywhere else at one for sale.

About roughly half of that project is residential and then roughly a quarter of it is retail and a core of it is office. So, we are probably going to be in the 7% range there until the project costs. And then in any of the given parcel, it just depends. Well, we bought some of these things while ago and we’ve accrued expenses. There is very little land left anywhere where we own our parcels. So, we think we are in pretty good position.

Manny Korchman

Okay. And then the second comment is I guess this is probably for Tyler. It looks if I did the back of the envelope math is right now you’ve got a run rate of $0.87 a quarter for second, third and fourth quarter FFO. By the same token you have been expensing a lot of -- I’m sorry, you have been capitalizing 55%, 60% of your overall interest expense. Are you going to be reducing a percentage of interest capitalize and still be able to get to $0.87 or how does that work?

Tyler Rose

Well, it really depends on what we start this year. I think with our current forecast, obviously the numbers will also be impacted a lot by dispositions right. So, we are comfortable with our current forecast that I laid out. We don’t give quarterly guidance but obviously, if we stop development then we won’t be capitalizing interests. But our plans -- we have another roughly $300 million of spend on our existing development and then if we start Dexter or one for sale or whatever in future we will continue to capitalize. So it really depends but at this point we are comfortable with our forecast.

Manny Korchman

Right. Thank you.

Operator

Your next question comes from John Kim with BMO Capital Markets. Please proceed.

John Kim

Thanks. Good morning. I was interested in your commentary that [Indiscernible] projects 2016 net absorption to outpace last year. Was that for all of your West Coast markets or San Francisco in particular and do you agree with that investment?

John Kilroy

It’s for all of the West Coast.

John Kim

And is that consistent with what you are seeing?

John Kilroy

Well, I don’t know about San Francisco whether it outpaces last year, simply in terms of net absorption, simply because there is so little space that’s available right now.

John Kim

Okay. And then on your balance sheet I’ve just got a couple questions. Assets held-for-sale, there is nothing in there in this period, should we just assume that any dispositions will be -- year?

John Kilroy

Yes. Well, as I mentioned, we are working on -- I think John mentioned that a couple of little land sites and costs which would be in the second quarter. We have another transaction in process. Don’t know when that will happen but more likely in the third quarter and then the remainder of what we talked about would be in the third and fourth quarter.

John Kim

And Tyler you mentioned restricted cash balance has gone up. What was this in relation to?

Tyler Rose

So that’s the Intuit sales proceeds that we were currently holding in an account, allowing us the option to think about either 1031s or special dividend, which John commented on.

John Kim

Got it. Okay. Thank you.

Operator

Your next question comes from Michael Carroll with RBC Capital Markets. Please proceed.

Michael Carroll

Thanks. You started the large tenant that’s looking at the exchange, what’s actually holding out the tenants’ decision? Do they just need to get the approvals from the Board to proceed or is there something else that they are waiting for?

John Kilroy

It’s the former. They need to get approval.

Michael Carroll

Okay. And we know you feel pretty good about the San Francisco market. Was there anything in that market that worries you that you are looking at right now?

John Kilroy

Well, there is things that always worry you in every market. I mean, San Francisco is an odd place compared to some places. There were a lot of things going on with regard to rent control ratios. They are increasing. This is for apartments. They are doubling the amount of affordable housings that you have to provide. That always hits office people in a way because we also have to provide as part of the extractions for office you have to provide funds for housing and so forth. So, all those things are always in the back of our mind. The thing that we're look at right now is construction costs which have spiked, it's basically a labor driven. Down in Silicon Valley right now labor costs were up considerably. How long you'll stay that way we don't know. We've been able to manage cost to where we forecast generally about 5% per year, and we've been able to as we mentioned, we had savings on the two buildings we just delivered.

But all those factors you have to really keep control of and if you have a project that is you've got to start soon, you better make sure you have forecasted your cost correctly. Now all our cost at the exchange, we have a guaranteed price max there. And we update our cost on Hooper and we're in great shape. But those are the kinds of things that we're worried about. And I know there's been a lot of speculation about is tech going south and all the rest, we're not seeing that, we're seeing the contrary.

Michael Carroll

Okay. And then lastly with the heightened Del Mar and Columbia Square you guys have the committed space already, what are the chances that those LOIs fall through, do you feel pretty confident that those will transition to sign lease?

David Simon

Hi, Michael, it's David Simon. The four LOIs at Columbia Square which account for about 85,000 square feet, all on lease negotiation, so high probability that those will all get completed, and the balance of the space with about 65,000 square feet. There's a good amount of activity that's been touring it, trading paper, but before that we talk about in the script, high probability that they'll get done.

Robert Paratte

This is Rob Paratte. At the hikes we're getting least comments back from our prospect on Friday and have a conference calls set up to discuss some, so it’s a normal process for making a deal.

Michael Carroll

Great. Thank you.

Operator

Your next question comes from Vincent Chao with Deutsche Bank. Please proceed.

Vincent Chao

Hey, everyone. Just quick question going back to the JV potential, just curious if there is any other detail you can share there are been, who approach to. Which markets we might be included in that and maybe number of assets kind of thing?

John Kilro

Couple of assets in San Francisco can disclose who it is, we're all bound by confidentially agreements.

Vincent Chao

Okay. So, couple of assets in San Francisco. Got it. And is it something you approach them about or do they reached out to you?

John Kilro

We've have dozen of sovereigns and like entities come into our office wanting to do transactions with us. We like these folks a lot.

Vincent Chao

Okay. And then just another question on the exchange, if the single tenant user -- they are going to approval process right now. But curious it sounds like the exchange would be relatively -- would be available relatively quickly. And if they are looking for that amount of space quickly I mean I guess what other options they really have today or would they be considering other market potentially?

John Kilro

As I said earlier there are lot of reasons why Mission Bay is so attractive and for the large user there's a very specific reason. So that is all I'm going to comment on.

Vincent Chao

Got it.

John Kilro

They are not, but they've told us they're not looking at anything else.

Vincent Chao

Got it. Okay. That's it. Thank you.

John Kilro

Welcome.

Operator

Your next question comes from Jed Reagan with Green Street Advisors. Please proceed.

Jed Reagan

Hey, good morning, guys. On the potential of JV transaction, can you help us just think about the timing for making a decision on that deal one way or the other?

John Kilro

Soon. I think by the next quarterly conference call.

Jed Reagan

Okay. That's helpful. And so you've got the four developments in the shadow pipeline that could potentially start this year. Can you help us to handicap the odds that one or more of those moves for this year, is it possible that all four could start this year and then I know that Hooper is sort of linked to exchange in terms of preleasing, but do you have a specific preleasing threshold for moving forward on the other three?

John Kilroy

Well, we don't have a specific – where we in Dexter right now, based upon the various entities they want that building and the fact that market is just on fire couple of – at this time last year Rob, what kind of – we have 4 million square feet under construction and that market was about half of it at leased, that's now all leased.

Google just announced that they are going forward with Vulcan on a new build-to-suit that starts out at 600,000 I think it goes up to 800,000 square feet. You've got Juno Therapeutic under construction. You got University of Washington that's going to start something for their medical school. We've got tremendous demand at a time when it's probably you couldn't script it better than this.

We're kind of only game in town that's going to be entitle to hear shortly and it can start in that market. I think we're going to have a substantial prelease, that's the way it feels in that, so that could go fairly soon. On One Paseo we should have our entitlements, I think it’s in June, David.

David Simon

Yes.

John Kilroy

And our plan there.

David Simon

Yes. Our plan for One Paseo to do it, the first phase is the retail, there's a lot of preleasing probably good portion of that will be preleased and they would go on to the first phase of apartment, so we feel pretty good about kind of the demand associated with the retail and apartment. And the office, Jed, it just going to be depended on the market and what we're seeing is kind of activity and people were talking to on the office base, but project setup in a way were to phase like that so we can take advantage of the demand.

John Kilroy

My current guess – and by the way when we do all the infrastructure from One Paseo, which is for the entire project and the lion share of the retail that gets built in the first phase and the first couple of hundred apartments, the first phase of that order of magnitude that's about a $150 million new spend. The project up at 333 Dexter in South Lake Union is just below 400 million. So I think those two are likely to go forward this year.

Jed Reagan

And then Academy maybe a little less likely?

John Kilroy

Well, it just depends, you ask me if there is certain thresholds, I don't want us to be setting on massive amounts of spec space whether it’s in different markets are not, I want to make sure we're consuming this stuff. So, besides the obvious macro things we're going to monitor where we are with our leasing in our under construction projects very tightly. I'm reluctant to give you a specific number, but I'd like the fact that we've said before if the exchange -- we have the substantial build to exchange, when we start Hooper we'll certainly thing about it. If we have a substantial prelease at Hooper will we start it? Yes. But we are not there yet. So we're going to remain flexible and we're going to remain -- we're not going to get over our skis with regard to funding or spec space.

Jed Reagan

Okay. That's make sense. And just last one from me, looks like you guys bought back a little bit of stock last quarter, seem like a good idea there. Pretty big discount NAV, why didn't do more of that and then maybe just how you're weighing additional buyback here versus other uses of capital?

Tyler Rose

Yes. We got our board approval late February. We tempt in, did a little bit of buyback and we got blacked out with that Flower Mart transaction where we're issuing unit. So we're out of the market for while, then when that came out of blackout we – the stock price had jump back up again, so we have a capital allocation decision between buying back stock or investing in development, given that we still like our development activity John just went through our bias is to save our capital for that, so at this point we're going to probably less buyback and more development.

Jed Reagan

Got it. Okay. Thank you guys.

Operator

Your next question comes from Jamie Feldman with Bank of America Merrill Lynch. Please proceed.

Jamie Feldman

Thank you. Can you talk more about demand for the academy and whether there is maybe single tenant users or the type of users that are planning up for that project?

David Simon

Yes. Hi, Jamie, it's David. As you know on Hollywood, you've seen Viacom come in large user consolidation. You see Netflix come in, large user consolidation and we've always known that their market is right for those kinds of consolidations. But the interesting thing about Hollywood as evidence in our 6255 projects and what's happening in the balance of Columbia Square, its smaller tenant market which is always been robust and terrific in Hollywood anywhere from 10, 15, 20, 25, 30,000 foot users.

Organically coming in over the hill from Burbank, recognizing product quality and all the things that they want, and Hollywood starting to really really be there for kind of the live work environment, so the demand is really good. There are some big users there we talk to on our central before we decided to split it up, but we didn't have enough space and you there is still out in the market so there's not a lot of supply for the large users but the small demand that we're seeing in El Centro and 6255 has really helped us move rates in the direction that we want to move it and we don't see in end in sight, because product quality out in the market, so we feel pretty good about that.

Jamie Feldman

Where do you think you rents need to be to start that and hit your target?

David Simon

Well, rents are there today, I mean we can hit our target, drive 8% plus or minus yields on the office. It would be nice have a large user to start something. There's also consideration on how many smaller users in the market. As you know smaller users don't typically prelease the 25,000 foot doesn't make his decision three years in advance. So there is additional risk associated with that if you rely on that, but that's something we consider and we knew El Centro would lease up fairly quickly as soon as we opened it up to multi tenant and that exactly what's happening. So, more to come but we feel pretty good out there.

Jamie Feldman

Okay. And then I guess just bigger picture. You know it’s a good six months into the peers over VC funding, concerns over tech and financing for tech. What would you say is different today in terms of tenant activity, the kind of space you were looking for that the size of the leasing pipeline? Now that the dust has kind of settled here, would you think feel different and what should we expect going forward?

Mike Sanford

Jamie, hey, its Mike Sanford, I start in San Francisco. I think for the most part, the space I looking for is much of the same, it's exactly what we've been talking about for a number of years. Beyond all the statistics we've talked about demand being VC fundings trending in the right direction, all of those things sub lease space is down. I'd say the best I can tell you is down on the street there's just more activity, more tenants coming to the buildings, looking for space and then boots on the ground feels pretty to us.

Robert Paratte

And this is Rob, Jamie, I'd eco what Mike said in other regions we are in Seattle, has great activity. San Diego had one of its best quarters this Q1 and we're seeing a lot of interest from the lot of different industry type, so thing seem good on the West Coast up and down.

Jamie Feldman

Okay. And then, just finally looking at the expiration schedule for the rest of the year in 2017, any large spaces we should be aware?

Jeff Hawken

Hi, Jamie, this is Jeff. As I mentioned in my comments, we have a pretty light [Indiscernible] this 4.1% in 2017, 9.9%. We have one lease that up in Seattle third quarter, that tenant is going to vacate. We're actually already talking with the couple of folks for that space only today.

Jamie Feldman

Third quarter 2016.

Jeff Hawken

No. This would be 2017.

Jamie Feldman

2017, okay.

Jeff Hawken

2017.

Jamie Feldman

And what's the square footage?

Jeff Hawken

About 183,000.

Jamie Feldman

All right. Thank you.

Operator

Your final question comes from Steve Sakwa with Evercore. Please proceed.

Steve Sakwa

Thanks.

Mike Sanford

Steve, are you on a headphone or something because about every other words is coming through.

Steve Sakwa

Sorry, is that better.

Mike Sanford

Yes. That's far better.

Steve Sakwa

Okay. I guess most of my questions have been asked, but I guess John, big picture, as you just sort of having discussions with tenants whether it would be for exploration later this year or even in the 2017, 2018, just trying to figure out the dynamic, are tenants coming to you sooner wanting to try unlock in or you kind of holding of, I mean what are sort of the dynamic today and when those tenants are coming to you and having discussions, what is sort of the maybe percentage looking to expand kind of stay where they are or contract. Let me just trying to figure out where we are in that kind of contraction phase?

John Kilroy

Well, you're always having a portfolio of our size, you always going to have some people expanding some people contracting. By in large most I think what our comment about how much? Its 75%, leasing is been expansionary, so that continues to be the case. On the same hand we have a little tenant that [Indiscernible] has got themselves into trouble that their lease comes up at a couple of years and we already have a tenant that want some of the space they like sub lease, so that’s pretty strong.

We've seen a couple of tenants pause to figure out what their big requirement, their consolidations could be in two or three years rather than go out and just make a – one of dilemmas that people have is that they just do incremental expansions that in a strong market like we have they have to 10 year terms and then they want a new facility; consolidated facility two or three years from now than they've got all these properties, they've got to figure out what's to do with. So we have a couple of tenants that have said hey, we're going to try to crowd people in while we figure out what the right solution is a couple of years down the road. In terms of people coming to us early, Rob, you want to comment on that?

Rob Paratte

I think -- and just in San Francisco, we are seeing particularly from the larger tenants an interest in talking about 2018, 2019 space because of growth they have.

John Kilroy

We also have -- and just in the last two or three weeks, we had a Senior Management meeting earlier this week in just in the last, we will call it the last 30 days, we have about a million and a half square feet which is a handful of tenants of new requirements for about two or three years out, up and down the portfolio where they want to talk to us about build-to-suit. So, what we are seeing is very strong demand from tech and entertainment. We continue to see very strong demand, particularly the matured tech. And you are going to see some other companies moving in the San Francisco that are not there today.

Steve Sakwa

Okay. And then just to circle back on the large JV potential. Town’s promising I guess, is that something that would be sort of a phased closing or is it something that will sort of happen all at once? I’m just trying to think through the desire to fully fund future development at the risk of taking kind of a big earnings dilution and how do you sort of trade that off or is it something that you can phase over time to maybe minimize near-term earnings dilution?

John Kilroy

Yes. We are sort of looking at -- is it a third and fourth quarter?

Tyler Rose

Yes.

Mike Sanford

Two assets, one in the third quarter, one in the fourth quarter this year, towards the end of the fourth quarter. So there would be a little dilution, order of magnitude type.

John Kilroy

On the dilution or…?

Rob Paratte

Yes. It depends which one we elect.

John Kilroy

No, we are not ready to comment on that yet. Yes.

Steve Sakwa

Okay.

John Kilroy

We have $500 million in our current numbers as a midpoint of our guidance. $250 million is not even completed and that other $250 million is spread out through the, generally the third and fourth quarter. So, this will be larger than that number but it would be also spread out through the third and fourth quarter.

Steve Sakwa

And Tyler, just to be clear, is the $650 million the total gross value of the two assets or that would be the share of the gross value that they would be purchasing?

Tyler Rose

$650 million was our previous guidance range.

John Kilroy

High range.

Tyler Rose

High range for our guidance. It doesn’t have anything to do with the joint venture transaction. What we said is our range for the year, excluding the JV was $350 million to $650 million with a midpoint of $500 million. So the $650 million isn’t related to the joint venture. If we did the joint venture we would exceed the $650 million that we are saying.

Steve Sakwa

Got it. Okay. Thanks for the clarification.

Tyler Rose

Yes.

Operator

I would now like to turn the call over to Mr. Rose for closing remarks.

Tyler Rose

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

Operator

Ladies and gentlemen, thank you for your participation. This concludes today’s conference. You may now disconnect. Have a great day.

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