Kilroy Realty's (KRC) CEO John Kilroy on Q4 2016 Results - Earnings Call Transcript

| About: Kilroy Realty (KRC)

Kilroy Realty Corporation (NYSE:KRC)

Q4 2016 Earnings Conference Call

February 07, 2017 01:00 PM ET

Executives

Tyler Rose - EVP and CFO

John Kilroy - Chairman, President and CEO

Jeff Hawken - EVP and COO

David Simon - EVP, Southern California

Mike Sanford - EVP, Northern California

Rob Paratte - EVP, Leasing and Development

Analysts

Michael Bilerman - Citigroup

Craig Mailman - KeyBanc Capital Markets

Nick Yulico - UBS

Jamie Sullivan - BTIG

Michael Carroll - RBC Capital Markets

John Guinee - Stifel Nicolaus

Dave Rodgers - Robert W. Baird

Jed Reagan - Green Street Advisors

John Kim - BMO Capital Markets

Tom Catherwood - Cowen and Company

Operator

Good day, ladies and gentlemen, and welcome to the Q4 2016 Kilroy Realty Corp Earnings Conference Call. My name is Lauren and I will be your operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer. [Operator Instructions]

I would now like to turn the conference over to Tyler Rose, Executive Vice President and Chief Financial Officer. 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 website and will be available for replay for the next eight days both by phone and over the Internet. Our earnings release and supplemental package have been filed on a Form 8-K with the SEC and both are also available on our website.

John will start the call with a review of the fourth quarter and the year, Jeff will discuss conditions in our key markets. I'll finish up with financial highlights and review of our initial earnings guidance for 2017, which was published yesterday on our earnings release, then we'll be happy to take your questions. John?

John Kilroy

Thank you, Tyler. Hello everyone and thank you for joining us today. 2016 was another exceptional year at KRC. We delivered strong results across all areas of our business and continued to create value in our operating and development platforms that will drive future earnings and dividend growth. We are encouraged by the continued strengthening of our market as measured by low vacancy rates, increasing demand and rising rental rates. I'll start my comments today with a quick review of our 2016 accomplishments. We delivered strong leasing results in all of our stabilized portfolio driving occupancy to 96% and boosting our same-store cash net operating income by 14%. We delivered 1.1 million square feet of new office space that is 93% committed including space to Salesforce at 350 Mission Street, space to Dropbox at 333 Brannan Street, both in San Francisco and space to Viacom and Fender Guitars at our Columbia Square Project in Hollywood. We delivered our first residential project mid-year that is now over 60% leased. We signed a lease with Adobe for 66% of the office portion of 100 Hooper in San Francisco and just yesterday the lease was expanded to include all or 100% of the office space.

We commenced construction of the project in the four quarter. We secured entitlements on 2.3 million square feet of new office in mixed use development including one for sale where we just broke ground. And we expanded our Flower Mart development site with the acquisition of additional parcel. The site now aggregates seven acres. In a highly competitive acquisitions market, we remain selective but engaged. We acquired three properties with unique value add opportunities and one that expands our reach into life sciences. Throughout the year we maintained our commitment to financial strength and disciplined capital management generating $795 million in proceeds from non-strategic asset dispositions and a new venture and raising $775 million in new debt and equity including our January offering. We ended 2016 with a strong balance sheet, significantly a large capacity to finance our enterprise as we grow and the capital resources in place to fund the next leg of our development program.

Finally, we continue to focus on enterprise development. We expanded our relationships and deepened our access to multiple capital sources, we strengthened our overall management team bringing on experienced talent to lead our efforts in life sciences and our expanding operations of the Pacific Northwest. We enhanced our tenant relationship up and down the coast and we extended our industry leadership in sustainable development and property management practices. Now let me review the fourth quarter. It was a busy period for us with two value-add acquisitions, strong leasing performance and continued progress in our development program. I’ll start with our two acquisitions. The first transaction encompasses two buildings located in Stanford Research Park, one of the premier technology centers in the country. Current tenants in the area include some of the biggest names in the S&P 500 including Ford, Lockheed Martin and Dupont and some of the Valley's most innovative enterprises including Tesla, Nest and Google. We acquired the two buildings for total purchase price of $130 million. They are situated on 8.5 acres and like all properties of the park are subject to a ground lease with Stanford University which offered us a 51-year term, the maximum duration.

First property at 1701 Page Mill Road is essentially a brand new best in class office of life science building totaling 129,000 square feet. It's fully leased to Theranos. Second property at 3150 Porter Drive is a 37,000 square foot office building fully leased to the law firm Perkins Coie. We were attracted to this acquisition for several reasons. It is a well priced entry point for us into the Palo Alto market and an opportunity to expand our life sciences portfolio. Both buildings come with strong current cash flow and both represent excellent long-term value creation potential given current in place rents that are approximately 20% to 25% below market. In the near term the acquisition represents a low 5% cap rate we believe. We can grow this to north of 7% as we convert the below market rents to market and potentially adjust the tenant mix. Our second acquisition is known as the Sunset, 179,000 square foot mixed-use project with 420 feet of frontage on the iconic Sunset Strip. We paid approximately 209 million for the property which includes a ten storey 72,000 square foot office tower, a three building 107,000 square foot retail plaza and a four-level subterranean parking structure with five spaces per thousand square feet of office which is twice that of any neighboring structure. The property also has three fully leased billboards atop the retail buildings. Excluding the parking and billboards, we paid approximately $800 per square foot for the office of retail components of the property which are currently 87% occupied. Average in place rents are estimated to be 15% to 20% below market.

We believe we can unlock the property’s value in a number of ways to fully leasing office compounded debt market rent, repositioning and enhancing the retail compound and improving revenue generation from both the parking structure and the billboards. We expect these actions will boost our initial low 4% cap rate on the acquisition to the mid 7% range. Leasing was another big story for us in the fourth quarter. We signed leases totaling 663,000 square feet materially reducing our 2017 explorations and prompting us to move ahead with new projects in our development pipeline. In our stabilized portfolio we saw a new or renewing leases on 456,000 square feet at rents that were 12% higher on a cash basis and 33% higher on a GAAP basis. Among the biggest deals was a 12-year lease with Amazon for 273,000 square feet at our 320,000 square foot two building Westlake Terry Office project in the South Lake Union neighborhood of Greater Seattle. Amazon will occupy - its occupancy of initial 150,000 square feet following the expiration of existing tenants leases scheduled to expire in September.

We also had 500,000 square feet of LOIs outstanding at year-end in our stabilized portfolio including a 160,000 square feet either executed this quarter or close to being complete. GAAP and cash rent levels on the LOIs were 41% and 20% higher than prior leases respectively. We also made progress on our development program. As I mentioned in November we signed a 13-year lease with Adobe for 207,000 square feet of office space at 100 Hooper, our 400,000 square foot office and PDR project in SOMA district. And just yesterday they signed on for another 107,000 square feet of office space in the project. We are now 100% leased on the office component which will generate 88% of the overall project NOI. As far as the PDR space goes, we expect to make leasing progress on this component as we near completion of the project. We commence construction on 100 Hooper in November with an expected delivery date in the third core of 2018. At the Exchange on 16th, our approximate 700,000 square foot office life science project in the city’s Mission Bay neighborhood, negotiations are well underway and now focused on a long-term lease for the entirety of the project coupled with a perspective to making a significant equity investment in the project and thereby taking a minority ownership position.

As I mentioned earlier, we also commenced construction on our once a sale project after eight years of entitlement purgatory, the community of Del Mar including former antagonists to the project and the Mayor helped us break ground last month. One Paseo will transform the neighborhood into a world-class live/work/play destination bringing abundant retail to a market scarce of modern dynamic options as well as premier residential units where vacancy has been at a frictional rates over the past years where no new computing supply is currently planned. You will recall that we received final entitlements to this 1.1 million square foot mixed-use project last summer. We've now begun the first phase of construction which includes site work and overall project infrastructure, approximately 237 residential units and 96,000 square feet of retail space. We estimate incremental spending for phase one will be somewhere in the $150 million to $200 million neighborhood with deliveries beginning in mid 2018. To summarize our active and potential new development moving into 2017 we now have three projects under construction. The Exchange, 100 Hooper and the first phase of One Paseo totally 1.4 square feet and representing a total estimated investment of approximately $980 million dollars.

We also have three projects in our near-term development pipeline that are fully entitled and ready to start subject to market conditions. These include 333 Dexter in South Lake Union, the Academy in Hollywood, in phases two and three at One Paseo. These three projects total just under 1.9 million square feet and represent a total estimated investment of approximately $1.2 billion. On the life science front, among a number of initiatives we continue to work on entitlements for a five-storey 150,000 square foot life science project on the side of our existing 9455 Towne Centre Drive office building in San Diego. Demand in the area for this type of property is strong and growing. Lastly, I'd like to reiterate how powerful our development program is and it continues to provide us with substantial NOI grow. Since 2013, we have delivered nine office projects and one luxury residential tower. They now generate more than $120 million of NOI on an annualized basis. In addition, we expect to generate another $65 million to $75 million of NOI on an annualized basis over the next two years from the projects we have under construction. In the aggregate, this NOI represents a 60% increase over our total company-wide NOI for 2013 [ph] and doesn't include any NOI from our near term or future pipeline.

Let me finish by commenting on our West Coast market trends. We see a fundamental evolution, it will constitute to high tech company. Health care, transportation, auto, defense, entertainment, lodging, retail and even travel services are now being profoundly impacted by technology. This change is producing a meaningful result in all of our markets Fortune 500 companies informally stayed industries are acquiring technology startups in order to stay relevant. GM’s $1 billion acquisition of Cruise Automation is just one example, mature tech companies are using their massive cash flows to acquire new companies with potentially game changing ideas to move into faster growing spaces and to gain access to increasingly scarce talent. A whole range of new companies are being drawn to centers of high tech innovation including our west coast market. And the increase in M&A activity has enhanced the credit profile of our portfolio with transactions like Microsoft buying LinkedIn, AT&T buying DIRECTV, Adobe absorbing Livefyre and most recently Cisco acquiring AppDynamics. We believe this trend will continue and even accelerate in the years ahead. And this evolution will continue to drive demand for work space in dynamic urban centers to deliver the live/work/play convenience and amenities that attract young creative talent. This is the 21st century version of locating your production or the raw materials and transportation resources you need to succeed.

Companies continue to address rising cost issues by seeking out real estate partners that are flexible, forward looking and innovative in their thinking and who are accountable in the timely delivery and quality of their products. We see a rising bar for property efficiency for sustainable practices and for work environments to promote human creativity and enterprise productivity. From a real estate fundamentals perspective as Jeff will outline later, our markets continue to improve and while we may not see the same level of growth that we saw a few years ago, we don't see any signs of a correction. Finally, in a year that was filled with many surprises, we remain true to our core business principles, financial strength and discipline, a fully integrated operating platform capable of developing, acquiring, repositioning and managing our own assets and a high-quality well located property portfolio that we continually update to maintain its relevance and value. I have no doubt that our commitment to these principles drove our success in 2016. They remain the bedrock for our plans moving into 2017 and our ability to build value for our shareholders over the long term.

That completes my remarks. Now I’ll turn the call over to Jeff for a closer look at our markets Jeff?

Jeff Hawken

Thanks John. Hello everyone. Let me start in San Francisco where the office market posted a record 26 consecutive quarter of positive absorption. Fourth quarter leasing volume reach 1.6 million square feet and net absorption for the year was 860,000 square feet. Leasing demand both for large blocks and otherwise continues to target quality built out spaces on a direct and sublease basis. This can be seen with a high demand for low to mid rise development projects that are well leased and command a rent premium over market rates. Rental rates increased slightly over the prior quarter bringing annual growth to 7.1% from year-end 2015. Class A direct vacancy was 3.2% in San Francisco SOMA District, 5.5% in the South Financial District and 3.9% in Mission Bay. Silicon Valley Class A direct vacancy was 6.8%. We are currently 98.4% leased in the Bay Area and are in place rents for the region are approximately 32% below market.

The Seattle Bellevue markets continue to experience tremendous demand from large tech companies including what is now known as the GAFA; Google, Amazon, Facebook and Apple that are adding employees and needing more space in the region. 2016 was the fourth straight year the market experienced north of 2 million square feet of absorption. Populous sub markets like Bellevue and South Lake Union are attracting the greatest attention. Class A direct vacancy in Bellevue stands at 11.5% and South Lake Union it is 5.5%. Our Seattle portfolio is currently 97.6% leased and in place rents were approximately 7% below market. Growth in the San Diego market has been driven primarily by health care and life sciences, and both industries continue to expand. The market had positive net absorption in the quarter of 920,000 square feet. The largest single quarter on record largely driven by city of San Diego, Alumina and Renovate America. The year-to-date total was 1.8 million square feet which represents almost two times the level of the past five year average.

In Del Mar, Class A direct vacancy was 12.3% and Sorrento Mesa two story corporate office vacancy was 5.8%. Our San Diego portfolio is currently 94.4% leased and our San Diego in place rents were approximately 9% above market. Los Angeles is in the midst of an urban renaissance, the city is encouraging more residential options creating and improving amenities and has plans to further expand public transportation options. The effort is attracting large numbers of new urban residents. Many of them young creative talent and employees to – employers, entertainment, media, fashion and technology venture seat. The West side and Hollywood remain two of the most populous sub markets. Class A direct vacancy in West LA with 7.8%, west Hollywood was approximately 3.8% and Hollywood is approximately 8.6%. Our Los Angeles portfolio is currently 96.8% leased and our in place rents there are approximately 17% below market. Across our portfolio today, we estimate average in place rents remain at 17% below market. Looking across our 2017 expirations, we have substantially reduced the 1.1 million square feet of space rolling this year. Adjusted for approximately 315,000 square feet of signed leases including Amazon's lease and another 166,000 square feet of LOIs, we have just under 600,000 square feet of expirations to address. For the remainder of the year with no single expiration larger than 50,000 square feet. In place rents of our 2017 expirations are approximately 21% below market. Amazon is scheduled to take occupancy of the Westlake Terry space at the end of the first quarter of 2018.

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

Tyler Rose

Thanks, Jeff. FFO per share was $0.87 in the fourth quarter which includes a $0.01 of acquisition-related expenses and was $3.46 for the year representing a 7% year over year growth rate when adjusted for onetime items. same-store NOI continued to show substantial growth in the fourth quarter driven by higher rental rates and higher average occupancy. Cash same-store NOI was up 9.1% and for the year it grew 14.3%. GAAP NOI rose 6.7% in the quarter and 4.6% for the year. Turing to the balance sheet, we completed a number of transactions during the quarter. In November, we completed the second tranche of our Norges venture which generated 262 million. Also in November we completed a ten-year 3.57% $170 million secured mortgage after paying off a $65 million maturing mortgage, the loan added 105 million to our cash position. Across the fourth quarter we raised 32 million of equity through our ATM program. Then in early January we completed a public offering of just over 4.4 million shares of our common stock generating net proceeds of approximately 309 million. And last month, we completed the sale of a small office property in San Diego for net proceeds of 12 million. These transactions coupled with a $250 million of private placement debt we will draw later this month, and the dispositions we completed last year have provided sufficient capital to complete our two December acquisitions, fund development spending through 2017 not only for the three projects under construction. but also the potential two new projects and meet all of our debt refinance for stock redemption needs in 2017 while ensuring a strong and stable financial position and the dry powder to ash on unplanned opportunities when they arrive.

Including the drawdown of the private placement notes in two weeks, we will have $485 million of cash on hand. We expect our full capacity of our bank line at year-end 2017 and we retain significant additional debt capacity. Our debt to market cap is in the mid-20s, our debt to EBITDA is under six times, we have a large unencumbered portfolio and we have no floating rate debt except for a moderate term loan. Now let’s discuss initial guidance for 2017. To begin let me remind you that we approach our near-term performance forecasting with a high degree of caution given all the uncertainties in today's economy, our current guidance reflect information and market intelligence as we know it today. Any significant shift in the economy, our markets sentiment, construction cost and new office supply going forward could have a meaningful impact on results in ways not currently reflected in our analysis, projected revenue recognition dates are subject to several factors that we can control including the timing of tenant occupancy. With those caveats, our initial assumptions for 2017 are as follows. As always we don't forecast any potential acquisitions or acquisition related events.

We anticipate 2017 development spending on our projects under construction to be approximately $300 million to $350 million. We project same store cash NOI growth between 2.5% and 3.5% given we are fully leased. First quarter same-store results are expected to be higher with growth moderating throughout the year. We expect straight line rent of approximately 36 million for the year, approximately 50% of this is attributable to development projects. We expect operating margin to be about 70.5%. We expect year-end office occupancy to be in the 93.5% and 94% range. The decline from year-end 2016 will be driven largely by the group health space in Seattle and move out to Santa Monica and Orange County properties. We also expect approximately 300,000 square feet of moveouts in the first quarter with almost a quarter of this space already committed. For residential tower, we expect occupancy by year end to be in the low 80% range. Our recurring CapEx budget is approximately 75 million which would result in an FAD payout ratio of approximately 70% assuming everything else stays the same. The board will continue to evaluate the dividend regularly but we anticipate a larger dividend increase in 2017 potentially in the 20% range as we approach meeting our minimum distribution requirements.

In terms of capital recycling, our current range for disposition are between $100 million to $300 million with $200 million midpoint. Lastly, our current plan is to redeem $200 million of preferred that are callable at the end of March and in mid-August. While this would be accretive from an economic perspective, it will generate a non-cash charge related to the original issuance cost, this non-cash charge is not included in our guidance. Taking all these expectations into account and considering all of our prefunding activities, we're providing initial earnings guidance for 2017 of $3.40 to $3.60 per share with at midpoint of $3.50 per share. As I said, this range excludes the non-cash charge related to the preferred redemption.

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

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Manny Korchman, please proceed.

Michael Bilerman

Hey it's Michael Bilerman, good morning out here. John I'm curious, you have now I guess it’s about 130 predominate tech companies have signed the immigration ban letter that went to Trump, a number of which, many of which actually are your tenants, four actually your top tenants. I’m just curious your views on the impact to the San Francisco and West Coast markets that this could have and how you either individually or as a company plan to get involved?

John Kilroy

Well I don't we plan to get involved, Michael. I think that we like to think that we have a voice compared to Apple and Microsoft and Facebook and Google and et cetera et cetera, I think those combined voices are probably a little bit clearer and stronger than ours. Obviously, there's a lot of things coming out of Washington, coming across some of the products that these people develop, Twitter and so forth, who knows what the implications will be. I think you just have to look at the calmer heads here. Obviously the President has said that his top priority is to stimulate growth and get people working and expand the economic pie. No industry provides growth that tech does and no industry helps the US maintain its competitive edge greater than technology does. I can't say what the President’s view is going to be in the future. I bet on the - it's not just the tech industry, this affects everything, automobile, every industry relies upon technology. So I can't - I can only - I could only speculate but I don't have obviously the crystal ball that permits me to give an accurate answer to that question. Reinforces my view that I've long held that I hate politicians.

Michael Bilerman

But I guess the premises that if all these companies believe that it impacts their hiring or their ability to recruit talent into the West Coast markets, doesn't that have some knockdown effect on the marketplace if you have to be concerned about and does that get you thinking about diversification at all [indiscernible] dramatic impact given the number of employees that these companies hire from foreign nations.

John Kilroy

Well, you could - it's not just - if it were to happen, it's not just going to affect the West Coast, it’s going New York and Chicago and Austin and Denver and Detroit, it’s going to affect everybody market in the country because the backbone of all of us is technology. And so, yeah I hear you, the fact is we have tremendous credit, we have long term leases and with the four or five unicorns we have, we have huge letter of credit. So I'm not sanguine about it, I guess one of the reasons we have the balance sheet we have is because you've got to navigate through whatever the potential macro implications are of that policy or wars or whatever, we were not isolated nor is any company nor is any REIT. But in terms of diversification so far, I don't really want to get into on this call, obviously we are always looking at what else we should do. But it's a real issue, I mean the fact is we don't chart out enough brilliant people, scientists, mathematicians and so forth in the United States. And if you take a look at whether financial companies or hedge funds or the brainpower and I guess a lot of American industry not only technology, a lot of those folks I don't know what percentage but a lot of those folks are not US nationals, they're here on visas. So it's a huge issue for the entire country.

Michael Bilerman

And then second question is just on the exchange, I think you mentioned early in the call of some single tenant that would also take an interest in the project. I’m just wondering how we should think about A, your total capital commitment. That 485 at your basis relative to what sort of level of interest does tenant would take into the project as we start thinking about A, the return on capital but also the amount of capital you have to outlay for the specific project if someone is coming and taking some of it away from you.

John Kilroy

Well, obviously if we end up with them being a venture partner as well it's going to reduce our capital outlay depending upon the amount of interest they have. Their base is going to be a lot different than our bases. I don't really want to get into too many specifics because we are in the midst of a negotiation and the venture part of it came about as a result of their looking at the long-term strategic nature of this asset and long-term lease commitment and then ongoing what are going to happen in various lease accounting changes and so forth. And so they have decided to say really like to have maybe 30% to 40% equity investment in the property.

Operator

Your next question comes from the line of Craig Mailman, please proceed.

Craig Mailman

John, just maybe a follow-up on The Exchange. Is this tenant that you are negotiating with now, was this an LOI that was part of the batch that you guys kind of talked about back in October or is this one new?

John Kilroy

No, it’s the one we've been talking to. This has been a long negotiation related to the same time.

Craig Mailman

Okay. That's helpful. Then I'm just curious. In guidance, Tyler, are you guys assuming anything related to Theranos in terms of vacating the property? Or are they just assumed to be in all of 2017?

Tyler Rose

Yeah, the underwriting is they will be into ’17.

Craig Mailman

Okay, and then just lastly, do you have the G&A and interest assumptions for guidance?

Tyler Rose

GAAP interest is 47 million or so. GAAP interest is spread out throughout the year by $47 million. G&A we expect to be on top of maybe slightly higher than the overall 2016 number. The fourth quarter was a little bit high for various one-time reasons. So the run rate is not for fourth quarter, it will drop back down, but the overall amount for 2017 will be roughly the same or slightly higher than 2016.

Operator

Your next question comes from the line of Nick Yulico, please proceed.

Nick Yulico

Just going back again to The Exchange. John, I thought you said it was an existing tenant that you are talking to. Did I hear you correctly?

John Kilroy

No, if I said that I misspoke, I don’t think I said that, but if I did, I misspoke. It’s the same tenant we’ve working with for some period where we had a detailed negotiation with regard to the terms of the lease and going through all the work letters and all that. So it’s you know as I mentioned a few moments ago, their desire now is to have a long-term lease because of the strategic nature of it, but to end with an equity position because that helps them and the way they account for the lease accounting costs so forth.

Nick Yulico

I just wanted to be clear this wasn't -- this is not a situation where you are moving an existing tenant in your portfolio.

John Kilroy

No that's not the case. I can just mention on everybody’s behalf with regard to the Exchange. Just the nature of the market here in San Francisco for this kind of product could not be stronger as you've seen we started, we announced in November the deal with Adobe, we started construction in December, we announced today that the balance of that office space has gone. There is nothing in this kind of product that is available in both life science and office demand for this kind of product is so strong right now that we're very, very comfortable where we are with the exchange. We hope to make a deal that we're working on and if we don't then you know back up that we're very comfortable with.

Nick Yulico

Okay, and so is the thinking that you want to first get this finalized before you start thinking about Dexter and Seattle and the Academy Project in Hollywood?

John Kilroy

Yeah, I had a feeling that question might come up. As I said about Dexter and the Academy what not that our focus was the Exchange and 100 Hooper and that we'd have to do some significantly leasing in those know projects or significant enough to get comfortable to start spec either the Academy or Dexter, I don’t see starting both of them spec. It's just there's no need to do all that at once. The thing that’s really happened is just really been phenomenal since we all talked in - about Seattle. There was 1.5 million square feet under construction spec in three different projects in Bellevue and we thought that was going to have an impact on us as we re-leased property in the Skyline, where we've got a couple hundred thousand feet coming up next year. Rob Paratte with regard to that 1.5 [ph] million square feet in Bellevue right now, how much of that is leased and how of it is kind of LOI?

Rob Paratte

We think there is 500,000 feet remaining and it’s basically committed as of some of the conversations we’ve heard about in the last couple of weeks.

John Kilroy

So essentially Bellevue is cleaned up. South Lake Union has nothing, nothing available of any consequence, plus Google took 700,000 or 800,000 feet on a build to suit. Facebook took 400,000 square foot on a build to suit. You could not be better positioned than Kilroy is right now and we have big, big interest and lots of tours going on. So more to come on that. It's really been amazing to see the acceleration of leasing in the movement of rental and the ongoing demand in that market. So I'm feeling pretty good. The politicians always scare the hell out of me, but I’m feeling pretty good when I look at our markets.

Operator

Your next question comes from the line of Jamie Sullivan. Please proceed.

Jamie Sullivan

Great. Thank you. Tyler, when you walked through the guidance, you mentioned several move-outs, can you just walk us through the big pieces in the guidance for ’17 and when you think when the move-outs happen and when do you think they get back further or the leasing prospects if they’re not backfilled?

Tyler Rose

Yeah. So the big one obviously is in Seattle, which I mentioned which the move-outs in September and they won't. We don't expect the new tenant to move in Amazon until the next year. So that won't come back in, in 2017. The other two I mentioned are in Santa Monica and Orange County and I think the, Jeff, you maybe help me on this in terms of the expectation of when those will be backfilled. I don't think it's closer to the end of the year on both of those square footages.

Jeff Hawken

Yeah. That's correct. It's spread through the year, but back loaded to the end of the year.

Jamie Sullivan

Okay. So it’s just the three.

Jeff Hawken

Well, those are three bigger pieces, yeah.

Jamie Sullivan

Okay. And then can you guys just provide generally more color on Silicon Valley itself in terms of the leasing pipeline and then maybe talk through some of the competitive supply that’s coming up in the market and how you're thinking about the competition and leasing prospects.

Mike Sanford

Hey, Jamie. It's Mike. Good morning. So I think the Valley remains extremely strong. As you heard in the comments, prior to the question and answer period here, 6% vacancy rates, historical lows. Demand for tenant remains very strong in the marketplace. As you mentioned, there is some supply coming on in the market there. From our perspective, all of our products in the valley is long term leased. We don't have really any material role coming up in Silicon Valley proper, as we have a lot of long term leases in place in that marketplace. So in general, we feel very good about our product and we've been, as you know, playing in that market for a while now and projects like Box in Redwood City where we did deals in the mid-4s and now ran through in the $7 range. LinkedIn deal, so on and so forth. So we've gotten in that market early. I think we've done well, we've executed long term leases. So from our perspective, our portfolio is well protected from any sort of future movements in the market, but in general, that mark remains very strong. The big three are growing weekly, monthly in that marketplace. So we think that there will be some have and have nots that’s implied to quality and some of the products that’s coming out, but in general I think all signs down there remain pretty strong.

Jamie Sullivan

Okay. And then have you seen any leasing delays based on the H1B discussions or the decisions on hold?

John Kilroy

No.

Jamie Sullivan

Okay. And then finally, just back to the three big expirations you mentioned, can you talk about the mark to market on those leases.

John Kilroy

Do we want to get into that or -- I mean on the Amazon thing, I don't think we can talk about the lease rates. And David can maybe comment on the Santa Monica.

David Simon

Yeah. So hey, Jim. David here. As you know, MTV part of Viacom, they were in our 2016 rate, about plus or minus 50,000 square feet that consolidated moved to Columbia Square. It’s probably about an 80% increase plus or minus of rental rate that is available for us in that project. As we work through repositioning them and bringing it back out to the market.

Jeff Hawken

Yeah. The Orange County is probably in the 25 plus increase in rents.

Operator

Your next question comes from the line of Michael Carroll. Please proceed.

Michael Carroll

Yes. Thanks. Can you guys highlight how you're thinking about acquisition activity going forward? Did to the company already complete the deals that they kind of highlighted or you guys were eyeing last quarter or are you still seeing opportunities out there?

John Kilroy

Yeah. This is John. We’re kind of zero base budget for acquisitions, because we're going to be opportunistic as you've seen. If you look at that graph where we bought plus or minus 800 billion in ’10 and ’11 and ’12 and then I don't have it before me that dip down to I think zero the next year and then it was a couple of hundred million. And this year, it's been roughly tighter, 300 million or so, 350 million in three different buys. The two I mentioned in the call that covered land play in Sunnyvale earlier this year or not Sunnyvale, sorry. We’re going to be opportunistic. I don't see it being happening in scale. It's just to, the market is -- you just can't find things, there is so much money looking to buy stuff that it's compressing the cap rates.

I've been surprised to see how the cap rates have compressed in some of what I would call tertiary markets or for product that you really wouldn't own, not long term, but there's so much money looking for stuff. That I just don't think you're going to see Kilroy being a big buyer. Having said that, if we find something that we think we really can turn into -- we improve it through some value add component like we see in the deals that we just did, then we'll act on it. With the balance sheet we have, we're prepared to go with development when it makes sense. We’re prepared to acquire when it makes sense as we've said we're going to dispose of things as it makes sense. We're going to stay in a very conservative range.

Michael Carroll

Okay. Great. And then can you talk about I guess your life science portfolio, I know you kind of highlighted that on your prepared remarks, do you want to grow this exposure and if so I guess what's the strategy of growing that?

John Kilroy

I'm not going to get into the strategy because you know and I know there's other people in this industry and they would love to know what we're thinking. So I'm not going to get into that, but just say that we’re in three of the four biggest markets, Boston being the biggest, the Bay Area being the second, San Diego being the third, Seattle being the fourth and if you look at the three that we’re in, there's a lot of demand for class A product, the vacancy rate like here in San Francisco for the South San Francisco is 3%, Mission Bay, it's essentially zero. There have been some big deals done, Merck and AstraZeneca and Boston Scientific here in the Bay Area. If you look at San Diego, it's been area that's been more robust life science and so forth. And Seattle again very tight. So it's -- we're very good developers, we’re very good at executing.

With hiring Tracy and she would be on this call except for she's got the disease that everybody seems to be getting and by that I mean sore throat, you can't talk, sick and I don’t want her in the same room as the rest of us. She could go on and on about the strength of the market. And so we don't see acquiring a lot of this stuff, because it's also pricing at a pretty healthy thing. Theranos, healthy of course was, it’s not that big, but that was a product that probably the best building in the research park. Kind of plug and play for anybody else. If they stay, then great. If they move, that’s probably even better, but I don’t kind of wish anything on anybody. We just, we like it, the deal that we're doing and hope to complete at the exchange is life sciences, so that's going to be a big contributor. I think our life science healthcare in the company as a component of NOI today, Tyler is kind of 15 percent-ish.

Tyler Rose

Yeah. That’s right.

John Kilroy

With the exchange and a little building 150,000 footer down in San Diego. Assuming we don't sell anything, don't buy anything and just kind of develop the stuff we're developing, I think it goes to high teens or something, maybe 20, that kind of feels good.

Operator

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

John Guinee

That might be John Guinee. I'm not sure. John, with the exception of 333 Dexter, which looks like you're delivering it about or your total budget is about $550 a foot, it looks like everything else is about $700 a foot. Can you talk a little bit about Flower Mart? I think you mentioned a astounding seven acres. I might have misheard that. But what's the magnitude and the total cost of Flower Mart based on your current projections?

John Kilroy

Okay. Well, the flower Mart is going to be somewhere in the neighborhood of 2.2 million to 2.3 million square feet, made up of 150,000 square foot market hall, 125,000, 130,000 square feet of Flower Mart and roughly 2 million square feet of office space. First phase of the project, don't hold me to this exactly because it's going to move around a little bit. But it's going to be -- the whole project is the better part of 2 billion, call it 1.750 billion or something. The office, if you look at the FAR costs we have on that project, again, this is the order of magnitude, it's about low $70 in FAR foot cost, but when we bought the last parcel, we bought, we made it significantly less expensive to do all the underground work associated with a fair amount of parking so that if you put that, if you put that savings if you will against the FAR, it takes us down to roughly a mid $50 FAR cost in a market that's trading for a heck of a lot more than that.

The yields we projected for the project and again starting Mike in like 2020 or something, wherever it was and completing the first phase in 2022 or thereabouts is north of a -- well north of 8% and that's based upon rents that we've blown past since we forecasted. So we think we've created many, many, many, many hundreds of millions of dollars of net worth just acquiring the land and you're right, it's roughly seven acres, it's all contiguous, it's between fifth street and sixth street, funding on Brannan, which is the brick and timber street, one block from the fourth in Brannan, central someway terminal which hooks up market street, which is on the BART and Caltrain, which is down south and then it goes beyond Market Street out in the Chinatown.

So it's the next, it's the next enlargement of Soma. It's going to be the place where all the growth occurs, going out with the exception of some of the high rises here in the Transbay area and the product that we're developing is, we have the super floors like we have at the exchange, we have up to 15-foot clear, we have four acres of roof top decks. We have everything and anything at all tech companies, we’re working with some of our big tech clients and getting consultation from them as well as the auto people on driverless cars and how we accommodate that, how we accommodate off street shallow parking, all the kind of areas and then bells and whistles that they need. I think we're going to have an extraordinary winter in that project with our basis, I like to think the cycle continues and we can develop it in this cycle, but if we have to wait, our basis is so favorable that we’re in great shape.

John Guinee

Mike, just one last question, how does the magnitude of Flower Mart compare to Embarcadero Center?

Mike Sanford

Acreage or square footage, I mean it will be the second largest land assemblage in the city next to Embarcadero Center. Obviously, they will have a high rise there, so they've got a lot of square footage, but scale wise, it's right up there with the top couple in the city for sure.

Operator

Your next question comes from the line of [indiscernible]. Please proceed.

Unidentified Analyst

Hey, guys. Just wondering if you could comment on your thoughts or internal policies around starting construction on the three near term projects, is it going to kind of be the same path you took where you wait to have at least one signed lease or is it kind of based on a percentage of leasing?

John Kilroy

Yeah. It’s -- I've tried to answer this Rob a lot of times, so I’m probably going to repeat myself. We're not going to get over our skis, I can see starting 333 Dexter. Now that we've done this, so don't be dealing with what’s going on with the exchange. If we do the big deal with the exchange we've been talking about, I could see maybe doing 333 Dexter, the academy, but I don't know that we need to do both. We've got very good demand. Rob Paratte has been working with and Dave has been working with some big entertainment companies with regard to the academies. The thing that is interesting is that in Seattle, it's historically a non pre lease town. 4 million square feet or thereabouts, those were in construction a couple of years ago, it was all started spec and it's all leased, either upon completion or near completion or well before completion. So, you couldn't ask for better timing.

We’re the only one that can start in the next year of any materiality in a market that’s just absolutely, you need the space. The exchange or the academy, we think we've hit the ball out of the park in the Columbia Square with what we've done there. It's kind of a redo of the same, a little bit smaller, instead of 500 million, it’s 400 million or thereabouts. But we're not going to get, I'm 68 years old. I hate death. I hate -- I'm a risk averse kind of guy. Having said that, having the balance sheet we have allows us to take some development risk and we should be taking that when we look at the yields we're getting. On the 100, bear with me for a second, on a 1.6 billion development that we've recently completed and so forth, it’s -- we're getting a 7.5% return and 10% of that is resi. On the -- or the 980 million, which is the exchange 100 Hooper in Phase 1 of the lump sale, with 25% of it being resi, we’re in the early 7% going in ROC. If you're off a little bit, it’s still a hell of a lot better than buying stuff although there's a strategy for both, but we're not going to get over our skills.

Operator

Your next question comes from the line of Dave Rodgers. Please proceed.

Dave Rodgers

Hey guys. Just a couple of follow ups for me. Good morning out there. I guess first David in Hollywood, can you talk a little bit about the remaining space that you have at Columbia Square, I know it's not a lot, but separately residential kind of what's the appetite and activity there. And then on the office side, kind of what's that traction telling you about kind of what the Academy should look like going forward?

David Simon

Sure. So couple on Columbia, we had, Viacom is opened and operating there and Legend 3D is in there. We’re in the tenant grouping stage for Global Brands, which has about 40,000 feet. So a plus or minus 10% left and with base planning a couple of tenants, we have some more activity happening this week and last week, we feel pretty good about the ability to lease the last two floors in El Centro, we have signage available for them too. So pretty confident that shortly, we should have that committed. The overall market for the office, LA and Hollywood and I’ve always said this is very fragmented, if solid. You have fits and starts of activity, activity comes, it’s either consolidations that Hollywood attracts which comes from Burbank in the west side, way which was evident with Viacom, the potential for doing something pre lease at the academy as John mentioned.

There are some big users, entertainment users, looking to consolidate similar to what Viacom did and ones that are looking to grow from within. So we continue to talk to them. Any tenant that’s under 100,000 feet doesn't plan three years in advance. Any tenant over 100,000, 125,000 feet, maybe 150,000 starts thinking about it. So most of the tenants in that market are typically smaller than 150,000 feet. So pre-leasing doesn't happen as much as it does in Northern California. Viacom was a perfect example. They came after we were about ten months into this, into the construction. So we think there is going to be good -- there continues to be good traction so to speak with the mid-sized tenant, 20, 30, 50,000 foot of entertainment media companies, technology companies and things like that. So all looks solid in that market.

With respect to the residential, things are going well. We’re over 60% leased. We have the short term, we have the long term. Both are about 60%, 62%. The rates are where we want them to be and again the hiring in the market and the quality of product and the quality of credit and tenant that is moving in there is far superior than what is in a lot of the surrounding products. So we feel pretty good about the profile and the demographic of the people coming to the building. And by the end of the year, as we projected, we should be at 80% and we feel pretty confident about that going forward and continuing to grow that tenant base in that demographic, bringing those people that would normally live in Hollywood live in Hollywood with Netflix, Viacom and all these corporate tenants coming, the demand for upper scale housing and apartments continues to grow.

Dave Rodgers

Great. Thanks for that. Tyler, maybe just one question on guidance for FFO. The exchange, do you have anything in your guidance for leasing or monetization for 2017?

Tyler Rose

No. The project won’t be ready for augment until next year. So there’s no potential for that.

Dave Rodgers

Got it. Okay. Thanks. And last, maybe just to John you talked about the health of San Francisco and obviously you proved that out with the developments and the leasing that you've done. When you sit back and look at office employment growth trends and clearly San Francisco slipped from the top now near the bottom. You don't seem to be worried about that and obviously you don't have a lot of risk in that market, but is that something where you're physically kind of in the market seeing a shift and maybe the same kind of reverse up to Seattle. Right. Seattle's accelerating, San Francisco is decelerating. Are you feeling that in the market at all?

John Kilroy

Well, I think I said in the last call maybe at any rate, I don’t expect San Francisco to grow at the rate it’s been growing at, because there's frankly no place, very few places for people to go right now. So Seattle, what it’s got is, it doesn’t have these prop in things and all the rest. So they’ve got a process, which is pretty exact in knowing what you can for cash which you can get in a year. You don't have a big drama to get entitlements and of course, the standard of -- cost to living in Seattle is lower than it is here in the Bay Area. So that's attractive and you're seeing companies go to where they can get employed and the kind of employees they want and some markets, it’s a different kind of employee, but nevertheless important one which you see in this area is a lot of the engineers and so forth that are key and vital to the long term success of the products and what they want to aggregate here. LA, a few years ago wasn't growing at all. Now, it's growing.

San Francisco was kind of kicking everybody's tail and it's still doing very well, we've seen good -- fairly good mid to high growth this year in San Francisco. In the fourth quarter of ’16, San Francisco grew at 1.9%. The 2017 forecast is sort of 3%. But again that's across the market, the higher quality stuff, the stuff South of Market has been growing at far greater rates. Silicon Valley in fourth quarter ‘16 grew at roughly 3.5%. The forecast is sort of right around 3 or whatever. Seattle grew at 3.6% in the fourth quarter and the 2017 forecast is again sort of low to mid-single digits. I personally think we're going to blow by that hugely at Seattle because of the demand at a positive product. So excuse me, I was giving at job growth, I misspoke. San Francisco forecast for ’17 is 3% to 5%. Seattle's 4% to 6%. Los Angeles is kind of 5% to 8% on the west side, 10% in the Hollywood and West Hollywood. San Diego is sort of 3%. I misread, I was showing you or speaking of job growth before. So we're seeing good job growth, we're seeing good revenue growth, we're seeing good demand. There's just not any product. The thing that people were thinking was a big bogeyman here of six months ago or nine months ago, it was sub lease space. Well and it went up to 2.5 million square feet. It’s back down to 1.7 million, 1.8 million square feet with only three spaces bigger than because 50,000 feet. There's no place for anybody to go. So you're not going to see the growth in San Francisco for one reason, maybe others and that is, there's no place for them to go. That's why I love the Flower Mart. Flower Mart is going to be the killer project in the last 30 years in San Francisco. And I can tell you that every sovereign wants to venture that with Kilroy. I don’t know about every, but a lot.

Operator

Your next question comes from the line of Jed Reagan. Please proceed.

Jed Reagan

Yeah. Good morning, guys. That's actually a good segue for me. I was just going to ask about the entitlement process at Flower Mart, if there's any update there when you hope to have some resolution, potentially.

John Kilroy

So Jed, as we’ve said before and you know Flower Mart was in the central Soma area plan, which is progressing. I know projects get approved with more density until that plan moves forward. The city has recently come out. They finally did release the draft EAR end of last year and they've recently said, they're expecting that to be certified sort of in the Q3-ish timeframe plus or minus 2017. We've seen those things move a little bit, we’re more assuming sort of Q4 plus or minus. So we're tracking along with that. We're doing all the things we need to do to run concurrent with the area plan processing and we’ll be ready for it. So once that goes through, there will be some other specific zoning requirements that will happen over the next quarter or two, so it's probably not until that late 2018 timeframe when you could really just start to submit for permits and move forward. So I think it's much of the same as you’ve heard from us. The good news is that the city is moving the process forward and we're working concurrently with them.

Jed Reagan

Okay. That's helpful. And maybe just another timing question, just as far as the ongoing discussions at The Exchange. Can you give a sense of when you expect those negotiations could conclude or is it just too early to kind of peg that?

John Kilroy

Well, it wasn’t a curve ball per se, but assuming we do the deal with the tenant, we’re talking about, we’ve now introduced a venture which wasn’t part of letter of intent. So we’re working through that. We have a number of meetings with the very senior people, important members on it. So it is not an entity that moves at speed the Kilroy does. There aren’t many entities that do that. We've said before that we thought we get board approval on the deal assuming they were going to prove it, which would be toward the end of the first quarter or even second quarter. I think of think that’s probably kind of still as good as any. We'll know more as we -- we've been meeting to go through this venture stuff and with lease accounting and the commitments they're making and the strategic nature and all the rest, and the fact that they've got cash on hand and all the rest, they just decided they should own a piece of it and it works out for great for us, assuming we do the deal that we want to do and more to come.

Jed, I got to tell you is if I go back to when we were dealing with DirectTV and they were in possession of part of the space and they needed it to sell for and everybody and all the board members and everybody else, it’s really important, it’s really strategic to us. We want to really move quickly and it took 2.5 years. This isn’t going to take 2.5 years. We’re not going to wait then. We're going to end up with all the necessary things you look for, pulse, smile, eye contact, body motion, documentation, all the stuff that you kind of interpret as being positive towards a conclusion as quickly as we could do it or we’re going to go different direction and I got to tell you that a lot of people talking about Hooper, they got no place to go because they're not going to go in a high rise. There are a lot of people like high rise, a lot of people that don’t. We've got all the products I think in the market right now that's not high rise.

Jed Reagan

Okay. Appreciate that. And can you just talk a little bit about the concession environment in your markets? Are you seeing any upward or downward pressure on TI packages in your markets?

Rob Paratte

Hey, Jed. This is Rob Paratte. I’d really say there is no change. I mean demand is up, but as John said earlier, there is just not a lot of supply. So I think landlords in general have little bit of wind behind their back. But we’re not pieces in CapEx and that kind of thing and frankly a lot of these tech companies are sitting on so much cash, they're putting a lot of their own money into this space.

Jed Reagan

Okay, great. And then just last one for me, if I can. In terms of the West Hollywood acquisition, do you see that as likely a one-off investment in that submarket? Or do you think there's an opportunity to build some real scale there?

David Simon

It’s a small market, Jed. I don’t know if you’re familiar with it. When you think about that West Hollywood market, you got a mile and a half on Sunset Boulevard and probably the best strip of Sunset with Beverly Hills border on one side, LA on the other. Only about 600,000 square feet. There is a couple of really quality buildings, our project being one of them, 9200 Sunset. It would be great to acquire some of these other ones, because it's been historically high occupied office market, given the affluence in the hills and all the adjacencies around there, it’s pretty sought after. I find it unlikely that we'll be able to pick off a lot of stuff in that market, but we like it and we're going to stay very close to it. We know it really well.

Operator

Your next question comes from the line of John Kim. Please proceed.

John Kim

Thanks. Good morning. I wanted to ask a couple of questions on your return requirements for acquisitions. It sounds like, on the recent ones, you can get to a 7% yield. I'm just wondering how much CapEx and time it takes to get there. And second of all, to get to that 7% yield, does that mean that the -- you can get to a similar IRR as you can on ground-up developments?

John Kilroy

Well, who the heck knows on the GAAP side of it? On 7%, I mean, this is not easy stuff. This is booked, the first one that we opened, West Hollywood one, they did what they could within resources they had and so forth. This was in a private equity group that was a fund, that was I think the last asset or one of the last assets to be sold. And they were going to put more money into it. Therein lies the opportunity, because it needs to be, we brought in retail consultants and David's working with them and his team to reposition retail to signage, the parking, et cetera, the office space. So we think we get there. Does it take three years, does it take five years, we’ll see, because this is hard stuff. This is the hard stuff to do. Okay. The deal up in Page Mill, it's the fact that the rents.

I mean you have a fabulous product, you've got what the bigger of the two buildings, so fair enough and I got to comment about that, but the buildings we've bought are well below market, there is a lot of demand in the research park, a lot of our tech people and others want to be their life science, wants to be there, the Theranos building is the best building in the park. I have no question about that. It's got all the kill right magic and all the quality stuff and finishes and sealing ice in all the rest and Tracy says, you don't like the perfect plug and play for somebody in the life science industry or you can do because about 20% percent lab isn’t mine. So that's just an opportunity an arbitrage essentially between the current market rent and the -- current rent that we're getting and the actual market rent. Of course, you've got to get to the building, the smaller of the two. I think it comes up in three years and only the renewal repositions, so that will move up. And that's roughly 25%, Tyler, the revenue, I can't recall, 20%, something like that. And then the Theranos thing, we’ll see what happens.

John Kim

Okay, on the tenant incentive side --

John Kilroy

By the way, whole GAAP thing, I mean obviously we do a development deal and you do a long term lease, your GAAP rents are generally going to be pretty good, because just the nature of 3% or 4% per annum compounding, right. And when you other leases that are five, six, seven years, you have more opportunity to play in the market, whether that’s good or bad, depending upon when leases expire, but you don’t have that GAAP impact you have by the longer leases.

John Kim

Understood, okay. On tenant incentives, I understand the market is not moving that much, but on your metrics on what you reported this quarter, it did go up significantly for you on a per annum basis, and I'm wondering if this is related to a particular market or perhaps a tenant type where this would increase.

Jeff Hawken

Yeah. This is Jeff. So it is primarily driven by one transaction to Amazon 12 year deal up in Seattle. So we have prior space was admin and so we’ve converted to creative space, so that’s where the TS are a little bit higher, but consistent with the 12 year lease we felt really good about the data points.

John Kim

Got it, okay. And then, one of your office REIT competitors recently acquired a development site in Oakland, albeit on the multifamily side, but can you provide an update on how attractive that market is for you and where it is on your radar screen?

John Kilroy

It isn’t.

John Kim

Do you want to elaborate or?

John Kilroy

No. I think that’s pretty firm.

Operator

Your next question comes from the line of Tom Catherwood. Please proceed.

Tom Catherwood

Thanks. Quick one from me. As you guys look to expand your life science platform, how do you think or approach building out or supplementing your underwriting program as it relates to the life science tenants and their notoriously kind of volatile drug development pipelines?

John Kilroy

Yeah. That's a really good question, Tom and that's the reason we asked at thankfully and successfully brought Tracy Murphy aboard. As I said earlier, she's got a terrible cold and a strep throat and all the rest. So she she's far more qualified to speak to that than we are. But we brought in folks that she's worked with for a long time that are top notch in underwriting and the analysis. There's obviously, when know we talk a bit to a lot of the tech crowd, we’ve show them the four place, we show them the environment, we show them all this stuff. When you talk to like science crowd, you can show that stuff. You talk about MEP and you talk about and you talk less stuff and it’s a total, it’s -- the Greeks speak a language and so do the Englishman.

It's just that they can't understand one another. And that's a little bit, being a little bit dramatic, they’re a little bit too black and white, but we've brought in the resources that we think are necessary on the construction, on the design that obviously the vendors and whatnot that we work with are all specialists to life science and the underwriting capability and then of course the leader all is executive vice president, Tracy Murphy and I think we've done the things that are necessary to make sure that we're delivering product that has life beyond tenant, it's not ultra-specialized that has the appropriate bells and whistles and so forth and frankly she's been very helpful with regard to the exchange and we said that building up to go life science to begin with, but she's brought with her in her tool box, a bunch of tools that we didn't have. So I hope that’s not too long answer, but I hope it answers your question.

Operator

I would now like to turn the call back over to Tyler Rose.

Tyler Rose

Thank you for joining us today and we appreciate your interest in KRC. Bye-bye.

Operator

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect and have a great day.

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