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Edited Transcript of KRC earnings conference call or presentation 27-Apr-17 5:00pm GMT

Thomson Reuters StreetEvents

Q1 2017 Kilroy Realty Corp Earnings Call

LOS ANGELES May 3, 2017 (Thomson StreetEvents) -- Edited Transcript of Kilroy Realty Corp earnings conference call or presentation Thursday, April 27, 2017 at 5:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* A. Robert Paratte

Kilroy Realty Corporation - EVP of Leasing and Business Development

* David Joshua Simon

Kilroy Realty Corporation - EVP of Southern California

* Jeffrey C. Hawken

Kilroy Realty Corporation - COO and EVP

* John B. Kilroy

Kilroy Realty Corporation - Chairman, CEO and President

* Michelle Ngo

Kilroy Realty Corporation - SVP and Treasurer

* Tracy C. Murphy

Kilroy Realty Corporation - EVP of Life Science & Northern California

* Tyler H. Rose

Kilroy Realty Corporation - CFO, EVP and Secretary

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Conference Call Participants

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* Craig Allen Mailman

KeyBanc Capital Markets Inc., Research Division - Director and Senior Equity Research Analyst

* David Bryan Rodgers

Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst

* Emmanuel Korchman

Citigroup Inc, Research Division - VP and Senior Analyst

* James Colin Feldman

BofA Merrill Lynch, Research Division - Director and Senior US Office and Industrial REIT Analyst

* John Kim

BMO Capital Markets Equity Research - Senior Real Estate Analyst

* John W. Guinee

Stifel, Nicolaus & Company, Incorporated, Research Division - MD

* Joseph Edward Reagan

Green Street Advisors, LLC, Research Division - Senior Analyst

* Nicholas Yulico

UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst- REIT's

* Robert Matthew Simone

Evercore ISI, Research Division - Associate

* William Thomas Catherwood

BTIG, LLC, Research Division - Director

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Presentation

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Operator [1]

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Good afternoon, and welcome to the Kilroy Realty Corporation First Quarter 2017 Earnings Conference Call. (Operator Instructions) Please note, this event is being recorded. I would now like to turn the conference over to Tyler Rose, Executive Vice President and Chief Financial Officer. Please go ahead.

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Tyler H. Rose, Kilroy Realty Corporation - CFO, EVP and Secretary [2]

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

At the outset, I need to say that some of the information we will be discussing are 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 8 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 first quarter. Jeff will discuss conditions in our key markets and I'll finish up with financial highlights and a review of our updated earnings guidance that was published yesterday in our earnings release. Then we'll be happy to take your questions. John?

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John B. Kilroy, Kilroy Realty Corporation - Chairman, CEO and President [3]

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Thank you, Tyler. Hello, everyone, and thank you for joining us today. We delivered a strong first quarter at KRC with market fundamentals remaining healthy in all of our West Coast markets. In our stabilized portfolio, we produced excellent results, including a double-digit increase in cash, same-store NOI and exceptional leasing at higher rental rates. In our development program, we expanded the Adobe lease at our 100 Hooper project in San Francisco to include 100% of the office space. We are moving forward with the multi-tenant leasing strategy at The Exchange in Mission Bay and it's seeing significant strong interest from both life science and technology tenants.

We stabilized the new office component of our mixed-use Columbia square project in Hollywood, and we are preparing to start 333 Dexter, our first ground-up development project in Seattle later this quarter. On the financing front, we continue to ensure funding for our future development spending with the addition of $560 million of new debt and equity capital. And we remain on track to complete $100 million to $300 million of dispositions this year.

Now let me review the quarter's highlights. Leasing was once again a terrific story for us. We signed new or renewing leases on more than 740,000 square feet during the quarter. 643,000 square feet of this was in our stabilized portfolio and rents that were 15% higher on a cash basis and 29% higher on a GAAP basis. The remaining 104,000 square feet was in our development portfolio at 100 Hooper. At quarter end, the stabilized portfolio was 94.1% occupied and 95.7% leased.

Included in our strong leasing results was a 112,000-square-foot extension with online travel services provider, Expedia, at our Skyline Tower in Bellevue. Cash rents were up 13% and GAAP rents were up 44% when compared to the prior rent levels. In San Francisco, M&A activity continue to play a role in market leasing activity, App/Dynamics recently acquired by Cisco, expanded its lease in our 303 Second Street building by 67,000 square feet and now leases a total of 150,000 square feet.

Cash and GAAP rents on the expansion space were up 33% and 45%, respectively, when compared to prior rent levels. In San Diego County, we signed multiple leases totaling 157,000 square feet of space in several different projects, including our recently completed Heights at Del Mar office property. Additionally, we signed a 50,000-square-foot early renewal with Qualcomm for a 5-year term in one of our Sorrento Mesa projects. And just this week, Riot Games signed an agreement to expand its lease at our Westside Media Center in Los Angeles by 120,000 square feet. The rapidly growing gaming and entertainment company is taking over space from Fandango and Connexity when their 2 leases expire later this quarter.

Cash rents were up 37% and GAAP rents were up 72% when compared to prior rent levels. We have also made progress in our development program. As you know, we have 3 projects under construction: One Paseo, 100 Hooper and The Exchange. At One Paseo in Del Mar, we commenced construction last quarter on Phase 1, which includes building the infrastructure for the entire 23-acre project along with 237 residential units and 96,000 square feet of retail space. We currently expect Phase 1 to be completed in increments beginning in the second quarter of 2018.

At 100 Hooper in San Francisco, as I mentioned earlier, all 314,000 square feet of office space is now 100% leased to Adobe. We remain on track to deliver the project in the third quarter of 2018 and expect 86,000 square feet of PDR space to be leased within 12 months of completion right on our pro forma. And at The Exchange on 16th, we are focused on a multi-tenant office and leasing -- life science leasing strategy. You will note that in yesterday's disclosures, we updated our cost, timing and square footage assumptions to incorporate the scope changes related to the building of state-of-the-art life sciences facility. We have strong interest in the project from a variety of tech and life science tenants and remain confident that The Exchange will be largely leased by warm shell completion in the second quarter of next year.

Moving to our near-term development pipeline. We now plan to commence construction later in the second quarter on 333 Dexter, our approximately 650,000-square-foot $370 million office project in Seattle, South Lake Union neighborhood. Given the strength of the Seattle market, we couldn't be better positioned to start the project. Seattle job growth has consistently outpaced the nation. There's a very positive supply-demand imbalance driven by the strong office absorption over the last 5 years. South Lake Union vacancy is 1.7% and currently has little new supply competing with 333 Dexter's time line. And our project has all the components of another successful KRC development, including access to key transportation routes.

In addition to 333 Dexter, we have 2 mixed-use projects in our near-term development pipeline. They include our mixed-use Academy project in Hollywood and Phases 2 and 3 at One Paseo in Del Mar. Decisions concerning start dates for The Academy and additional phases at One Paseo will be made over time based on the company's overall leasing progress in market conditions. Let me finish up with a few comments on general market conditions and our expectations for the year.

Our experience in the first 4 months of 2017 is that the West Coast markets where we operate demand remains healthy that rental rates for top-quality properties continue to rise and that a broad range of industries, including technology, life science and entertainment, continues to expand in our markets. We also believe that our focus on high-quality well-located work environments, designed for maximum efficiency and long-term sustainability remains a winning formula that will drive earnings and dividend growth over time. That said, we are also aware of the cyclical nature of our business.

We continually balance our enthusiasm for growth opportunities with a firm commitment to financial stability and balance sheet strength. We will continue to support both goals with a disciplined approach to development, a rigorous capital recycling program, prudence when it comes to managing our leverage and a clear focus in our decision-making process as we continue to drive long-term shareholder value.

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

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Jeffrey C. Hawken, Kilroy Realty Corporation - COO and EVP [4]

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Thanks, John. Hello, everyone. Let's start with San Francisco. The market posted 1.6 million square feet of leasing activity in the first quarter with 6 leases greater than 100,000 square feet signed by Uber, Adobe, Google, Accenture, Slack and Cruise Automation. This compares to 9 deals greater than 100,000 square feet signed in all of 2016. We view these strong leasing metrics as more relevant to current market conditions than a slightly negative net absorption posted during the quarter. Conditions on the ground remain healthy based on the number of tours and negotiations we are having with tenants, including the leases we have recently signed.

Class A direct vacancy was 3.2% in San Francisco SOMA district, 6.3% in the South Financial District and 3.9% in Mission Bay. In Silicon Valley, Class A direct vacancy was 6.2%. We are currently 97.4% leased in the Bay area and our in-place rents for the region are approximately 30% below market. As John said, the Seattle office market is very strong, arguably the best market in the country right now, with big tech and new companies continuing to expand their footprints.

Since 2015, 6 million square feet of office space has been delivered with 75% is preleased by the time of completion. The strength of the market is further evidenced by the trend in vacancy rates. Class A direct vacancy in Bellevue stands at 7.4% down from 11.5% last quarter and in South Lake Union it is 1.7% down from 5.5% last quarter. Our Seattle portfolio is currently 97.2% leased and our in-place rents were approximately 9% below market.

San Diego remains steady and solid characterized by positive net absorption, continued diversification of tenants and limited supply of large, quality space. In addition to the technology and life science, we are once again seeing defense grow and add jobs. In Del Mar, Class A direct vacancy was 14% and Sorrento Mesa, 2-storey corporate office vacancy was 5.8%. Our San Diego portfolio is currently 94.2% leased and our San Diego in-place rents are approximately 8% above market. Los Angeles continues to be a healthy segmented market with growth driven by technology and media centers of the Westside markets, Hollywood, West Hollywood and Beverly Hills.

SnapChat's successful IPO should help drive expansion and tech in migration to the market. Further, the L.A. markets continue to attract a range of capital sources from foreign funds to REITs by offering industry diversification and continued growth from the convergence of technology and entertainment. Class A direct vacancy in West L.A. was 6.5%. West Hollywood was approximately 10% and then Hollywood is approximately 7.1%.

Our Los Angeles portfolio is currently 93.9% leased with in-place rents approximately 13% below market. Across our portfolio, estimated average in-place rents remain 16% below market. Rents on a remaining 2017 expirations are also approximately 16% below market. Finally, as we discussed last quarter, our occupancy declined approximately 200 basis points from year end 2016, driven by approximately 290,000 square feet of first quarter move-outs. Roughly 1/4 of the space is already leased at rents that are 24% higher on a cash basis and 46% higher on a GAAP basis. That's a snapshot of our markets, now Tyler will cover our financial results in more detail. Tyler?

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Tyler H. Rose, Kilroy Realty Corporation - CFO, EVP and Secretary [5]

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Thanks, Jeff. FFO per share was $0.81 in the first quarter. That includes a noncash charge of $0.04 per share for the original issuance cost of the Series G preferred stock we redeemed during the quarter. It also includes a little less than $0.01 of net lease termination fees and finally, it includes a little more than $0.01 of bad debt expense right across a few non-technology tenants in the portfolio. Same-store NOI growth remains strong, driven largely by higher rental rates and tenant reimbursements, cash same-store NOI was up 10% in the first quarter, GAAP NOI rose 3%, adjusted for the lease termination fees I mentioned, cash same-store NOI was up 8% and GAAP same-store NOI was up 2%.

Turning to the balance sheet as John mentioned, we completed a number of transactions during the quarter. In January, we completed a 309 million common stock offering at $72.75 per share and the sale of a San Diego building for $12 million, realizing a gain on that transaction of roughly $2 million. In February, we drew down the full $250 million of private placement notes originated last September and in March, we redeemed our 6.875% Series G preferred stock at par for total repayment of approximately 108 -- $100.8 million in cash. This transaction generated the $0.04 noncash charge FFO that I mentioned earlier.

Taking all these transactions into account, we currently have no outstandings on our $600 million unsecured line of credit and approximately $365 million of unrestricted cash on hand. In our debt to annualized EBITDA ratio at the quarter and -- stands at approximately 5.9x and 4.7x net of cash.

Now let's discuss our updated 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 reflects information and market intelligence as we know it today. Any significant shifts in the economy, our markets, tenant demand, construction costs and new office supply going forward could have a meaningful impact on our results in ways not currently reflected in our analysis. Projected revenue recognition dates are subject to several factors that we can't control, including the timing of tenant occupancy.

With those caveats, our updated assumptions for 2017 are as follows: as always, we don't forecast any potential acquisitions or acquisition-related expenses. From an accounting perspective, we have adopted the new FASB standard that amends the accounting for the acquisition of operating properties under which we will now capitalize acquisition-related costs, so going forward, we won't have acquisition-related expenses hitting the income statement. We anticipate remaining 2017 development spending on our projects under construction to be approximately $200 million to $275 million. We continue to project same-store NOI growth to be between 2.5% to 3.5% for the year. As expected, our first quarter results came in higher than this average, from higher rents and free rent burn-off of development leases. Growth will moderate as the year progresses, given the lower average occupancy from the move-outs we discussed.

We are maintaining our projected occupancy assumption for year-end 2017 in the 93.5% to 94% range. As previously noted, the decline from year-end 2016 is driven largely by the group health space in Seattle, already released to Amazon and smaller move-outs elsewhere in the portfolio. This range assumes that the life science tenant that came into our portfolio as part of an acquisition late last year, remains in the building through the end of the year.

For our Columbia Square residential tower, we expect occupancy by year-end to be in the low 80% range. Our recurring CapEx budget is approximately $75 million, which resulted in a 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 as we approach meeting our minimum distribution requirements.

In terms of capital recycling, we continue to project 2017 dispositions in the range of $100 million to $300 million, with a $200 million midpoint. Lastly, we continue to plan for the redemption of our $100 million 6.375% Series H preferred stock, callable in mid-August. As with the Series G redemption, this will be accretive from an economic perspective, but will generate a noncash charge related to the original issuance costs. This noncash charge is not included in our guidance.

Last quarter, we provided initial earnings guidance for 2017 of $3.40 to $3.60 per share with the midpoint of $3.50 per share. Taking all of our updated expectations into account and considering all of our prefunding activities, we're effectively maintaining and tightening that guidance level with the $0.04 adjustment for the noncash charge incurred in March. So we're now providing updated guidance of $3.38 to $3.54 per share for the midpoint of $3.46 per share. This excludes any potential noncash charges related to future preferred redemption.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from Craig Mailman at KeyBanc Capital Markets.

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Craig Allen Mailman, KeyBanc Capital Markets Inc., Research Division - Director and Senior Equity Research Analyst [2]

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On the Riot Games, please could you just give us expected commencement timing on that? And if there is -- how much of the FFO falloff you're expecting from Fandango and the other tenant that are moving out?

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John B. Kilroy, Kilroy Realty Corporation - Chairman, CEO and President [3]

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Jeff, do you want to start with that one in terms of the timing of when they're expecting to move in?

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Jeffrey C. Hawken, Kilroy Realty Corporation - COO and EVP [4]

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Well, the Fandango and Connexity, they're going to be moving out in the second -- Q2 and Q3, so it will be 3 months or 4 months after those move-outs before they actually take occupancy.

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Craig Allen Mailman, KeyBanc Capital Markets Inc., Research Division - Director and Senior Equity Research Analyst [5]

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So we really shouldn't expect anything till basically first quarter?

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Tyler H. Rose, Kilroy Realty Corporation - CFO, EVP and Secretary [6]

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That's probably right, I think.

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Craig Allen Mailman, KeyBanc Capital Markets Inc., Research Division - Director and Senior Equity Research Analyst [7]

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And how much falloff from the FFO perspective for Fandango and the other tenant?

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Tyler H. Rose, Kilroy Realty Corporation - CFO, EVP and Secretary [8]

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Well, the Riot Games lease has a higher rental rate than the Fandango. So once they reoccupy, the rent -- the income will go up. I think we mentioned that in the...

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Craig Allen Mailman, KeyBanc Capital Markets Inc., Research Division - Director and Senior Equity Research Analyst [9]

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Right. I guess, I'm just looking for the drag until the Riot Games commences. Is it material? Or is it not?

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Tyler H. Rose, Kilroy Realty Corporation - CFO, EVP and Secretary [10]

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Yes, we can follow up with you after the call on the specific income analysis.

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Craig Allen Mailman, KeyBanc Capital Markets Inc., Research Division - Director and Senior Equity Research Analyst [11]

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Okay. And then just lastly, on The Exchange. The extra 50,000 square feet, is that already entitled? Or do you guys have to do anything with the city on that?

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John B. Kilroy, Kilroy Realty Corporation - Chairman, CEO and President [12]

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Well, no. This is John speaking. We didn't need to do anything with the city on that. We have -- the way they measure and the way we measure is -- the way we measure meaning BOMA is different. So we're just complying with BOMA and the building measure ought to be quite bigger, so we're happy about that.

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Operator [13]

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Next question is from Manny Korchman at Citi.

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Emmanuel Korchman, Citigroup Inc, Research Division - VP and Senior Analyst [14]

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Maybe speaking to The Exchange, John. What's the yield impact of increasing the footage, increasing the cost, delaying the timing and then going to do 2 -- potentially 2 different tenant types?

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John B. Kilroy, Kilroy Realty Corporation - Chairman, CEO and President [15]

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Yes, okay, so let me give you this as simply as I can. The cost went from 485 to 560. That's a 15.5% increase in cost. The new cost is 746,000 -- or $746 a square feet because the square footage is 750, so we have a 7.2% increase in square footage, a 15.5% increase in cost. The new cost per square foot is roughly $746 a square foot. That's a $54 a square foot increase per square foot, but the rents have gone up substantially since our original underwriting, so we believe we still end up at 8% or better. So we end up with another comment about that is that if you think about the $746 a square foot, for the product, for a brand-new, state-of-the-art life science. Life science generally is about $100 a square foot more than the -- than office spaces, but we already embedded into the 485,000 quite a bit of the life science-ready cost, so the added increment, you can see from what I've mentioned. In terms of the cost structure, at $746, if you compare that to recent sales here in San Francisco of Class A, newer product. It's been well north of $1,000 a square foot, $1,100; $1,200 or more. We think we have a pretty great cost structure and well below what are the things we're trading at. And the last comment I'll make, just so for everybody here is that The Exchange has about 700 parking spaces, which is unique. That was a carve-out when they developed the parking guidelines and so forth for Mission Bay. Compare that with, as an example, Park Tower, which is being built here in the North end. It's a high-rise -- rather the east end of the Transbay. It's 750,000 square feet and has almost no parking. The value of that parking or at least the cost that parking at The Exchange is about $30 million, $35 million hard cost, and of course, that was embedded in that first 485. So I hope that clarifies things.

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Emmanuel Korchman, Citigroup Inc, Research Division - VP and Senior Analyst [16]

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Great. And then maybe just more generally, a lot of your 1Q and April leasing was with existing tenants that were expanding. Can you just talk a little bit about new tenants in the market and how they're thinking about needs in San Francisco?

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John B. Kilroy, Kilroy Realty Corporation - Chairman, CEO and President [17]

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Do you want to take that, Rob?

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A. Robert Paratte, Kilroy Realty Corporation - EVP of Leasing and Business Development [18]

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Manny, it's Rob Paratte. Q1 was really an active quarter for a lot of technology tenants that are pretty new to the market. What we're seeing is coming in as not so new is the auto tech, meaning automated driving that sort of thing. Uber recently taking one of their subsidiaries out at Pier 70. We're also seeing robotics, artificial intelligence and a lot of smart homes/consumer-related technologies. So it's all about kind of those various areas and then kind of the last, last component of it is health tech, which is sort of the melding of life science and technology.

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Tyler H. Rose, Kilroy Realty Corporation - CFO, EVP and Secretary [19]

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Manny, this is Tyler. And just on your point about a lot of it was with existing tenants. Actually, of the roughly 900,000 square feet through April, more was new leases -- about 500,000 was new leases and 400,000 was renewal leases. So it's about a 50-50 mix on that.

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Operator [20]

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The next question is from Nick Yulico at UBS.

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Nicholas Yulico, UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst- REIT's [21]

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On Dexter, can you just talk a little bit more about the plans to fund the development spending there that you're now -- you're started and also why you decided to -- I think previously you said you're going to do some more leasing Exchange or other projects before starting Dexter and what changed your mind?

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John B. Kilroy, Kilroy Realty Corporation - Chairman, CEO and President [22]

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This is John. Let me deal with the latter part of your question and Tyler can talk about the funding. I think we could not ask for a better environment to start a building than what we're seeing in South Lake Union. That 1.7% vacancy, we deal with a lot of people in NDAs and so forth, so we can't get into specifics, but let's just say we think we are uniquely and ideally positioned to have a home run on that project. Tyler, you want to deal with the funding?

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Tyler H. Rose, Kilroy Realty Corporation - CFO, EVP and Secretary [23]

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Yes, I mean as I mentioned in my comments, we have about $200 million to $275 million of expected development spending through the remainder of this year. That includes Dexter, and we have $375 million in cash and plenty of debt capacity. So we're well-funded to pursue that project.

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Nicholas Yulico, UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst- REIT's [24]

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Okay. And then on the prefers, I guess, I think you have some more prefers that are culpable this year. I mean, is there another potential charge coming for those? And then also for another item that maybe could affect guidance at some point is Theranos and what happens there? What are they -- you got a lease term fee or not or there are some other situation there? What -- can you just give us some thought on how those 2 issues could affect the numbers later this year?

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John B. Kilroy, Kilroy Realty Corporation - Chairman, CEO and President [25]

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I'll deal with Theranos first, okay. Theranos, we're assuming they stay in occupancy and pay rents through the end of the year. We believe that building is leased at well below market. It's an outstanding building, and I'm not going to get in to what happens if they move out or otherwise because that's inappropriate for us to comment on. But we think we're in a very good position with regards to that market, that asset and there's perspective upside potentially if something should happen to them. Tyler, you want to hit the other part?

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Tyler H. Rose, Kilroy Realty Corporation - CFO, EVP and Secretary [26]

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Yes, and just a follow-up on Theranos. One other comment was we're reserving the straight-line portion of their rent, so we're only booking the cash rent component of that rent, so that protects us a little bit if something were to happen. On the preferred, yes, we have one other preferred, $100 million preferred sitting out there that's culpable in mid-August. As I also said, the plan is currently to redeem that. That would have a charge of another $0.04 roughly, which is not in our guidance. The $0.04 is not in our guidance, but it's likely that we will do that, but we haven't committed to doing that yet, so more to come on that.

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Operator [27]

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The next question comes from Jed Reagan with Green Street Advisors.

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Joseph Edward Reagan, Green Street Advisors, LLC, Research Division - Senior Analyst [28]

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So just -- I guess, on Dexter. So would you be -- just to be clear, would you be starting that on speck? And then how would you characterize where you stand today in terms of tenant pre-leasing discussions? And then, is it possible to give an early read on yield expectations for that project?

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John B. Kilroy, Kilroy Realty Corporation - Chairman, CEO and President [29]

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Yes, this is John. I don't want to get into where we stand on discussions and so forth. It's a highly competitive market, and we think we do ourselves an injustice when we put out there publicly. We're backing off at talking about LOIs. We've always tried to be as forthright as possible with regard to when we have LOIs. I'm not sure if it's totally serves us well. So we're going to talk about when we have things leased, but we are very comfortable with where we are in that market and with the demand that's in that market, which is just extraordinary.

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Joseph Edward Reagan, Green Street Advisors, LLC, Research Division - Senior Analyst [30]

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Okay, and so you don't need to have a pre-lease in hand to kind of break ground there?

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John B. Kilroy, Kilroy Realty Corporation - Chairman, CEO and President [31]

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Well, it's always nice to have one, but I don't think we need one and when we look at what we're doing elsewhere throughout the portfolio with regard to develop it and with regard to the core, we're very comfortable in adding that to develop -- to current development.

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Joseph Edward Reagan, Green Street Advisors, LLC, Research Division - Senior Analyst [32]

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Got it. And then anything you can say about yield expectations at this point?

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John B. Kilroy, Kilroy Realty Corporation - Chairman, CEO and President [33]

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I don't want to get into that. That influences frequently negotiations and whatnot that we have going on. So I just don't think that's appropriate.

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Joseph Edward Reagan, Green Street Advisors, LLC, Research Division - Senior Analyst [34]

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That's fair. And then just on The Exchange. So I want to clarify -- so is that likely to end up being mostly or entirely life science then? Or is that kind of 50-50 lab and office? And then any comments you can give about kind of -- sort of a tempo of conversations there, the size of tenants you're speaking with?

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Tracy C. Murphy, Kilroy Realty Corporation - EVP of Life Science & Northern California [35]

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Jed, its Tracy. It's kind of consistent with the discussions, I think, you and I had last time. But we have -- there's a new budget you saw the ability to accommodate life science across the project, but the demand remains healthy and consistently split across life science and tech. So the tempo is pretty upbeat. We have a healthy uptick into activity as a result of the vertical nature of construction at this point, but we feel good about it in our ability to accommodate either user group is well positioned within that market based on what we're seeing.

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Operator [36]

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The next question is from John Guinee at Stifel.

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John W. Guinee, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [37]

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John Guinee here. A couple of quick questions. First, David Simon, development on the Westside of L.A. doesn't seem to be much of it. At the same time, my understanding is there was a push for transit-oriented development. Any update on that? And then John Kilroy, 2 questions. One, $550 a foot for 333 Dexter seems like a relatively low per square foot development cost. If you could elaborate a little bit on that and what you're actually building there. And then three, asset recycling has been a major component of your strategy the last 3 or 4 years, but doesn't seem to be so this year. If you could discuss those 3 questions.

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John B. Kilroy, Kilroy Realty Corporation - Chairman, CEO and President [38]

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Yes, David, do you want to go first on Westside?

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David Joshua Simon, Kilroy Realty Corporation - EVP of Southern California [39]

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Yes, sure, I'll go first. Hi, John. L.A. in general, Westside, as you know, extremely difficult to build and develop and put new projects up. There's a feud going on, as you're aware of, the Factory; stuff down in Playa. With regard to the transit-oriented stuff, related to the Expo line coming up, very important from Santa Monica's perspective and the other cities that it attached to kind of define the community plan areas where that development can happen. So there is a push by the community and the city to build those kind of projects in those transit-oriented markets, John, with the right balance of products, whether it's residential, retail or office. But overall, continues to be difficult in L.A., in general, to build and specifically difficult on the Westside.

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John B. Kilroy, Kilroy Realty Corporation - Chairman, CEO and President [40]

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On Hooper -- or rather on...

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John W. Guinee, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [41]

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Dexter.

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John B. Kilroy, Kilroy Realty Corporation - Chairman, CEO and President [42]

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333 Dexter, thank you. If you compare that to Hooper, Michelle, what's our cost on 100 Hooper?

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John W. Guinee, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [43]

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675.

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Michelle Ngo, Kilroy Realty Corporation - SVP and Treasurer [44]

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About 675.

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John B. Kilroy, Kilroy Realty Corporation - Chairman, CEO and President [45]

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Yes, and thank you. John, you know it better than I do. The -- it's about $100 or so just in the cost of FAR. FAR trades at a much lower number in Seattle than here, but you get lower rents there than here. Meaning here, meaning San Francisco. So you get about $100 just in that, and then it's a very efficient building. And the costs down -- up there are less, less city extractions and so forth. Here, we have -- well, they have extractions up there. It's much higher here with regard to contributions towards affordable housing, and all the other things that happens. But in terms of the quality of the project, it is -- it's a platinum, ground-up, higher parking ratio than the other buildings in the area. It's got all the bells and whistles. It's absolutely first class in every way. With regard to asset recycling, if you look over what was it last year, I think we said it was sort of $300 million when we came out with initial guidance then we sort of said it was $300 million to $500 million, as I recall. And Tyler, between asset recycling and the venture we did close to $900 million?

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Tyler H. Rose, Kilroy Realty Corporation - CFO, EVP and Secretary [46]

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$800 million and something.

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John B. Kilroy, Kilroy Realty Corporation - Chairman, CEO and President [47]

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Yea, $800 million and something. So more to come, John. We try to give appropriate guidance as we see it early in the year. And then sometimes we accelerate it. We'll see what happens this year.

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Operator [48]

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The next question is from Jamie Feldman of Bank of America, Merril Lynch.

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James Colin Feldman, BofA Merrill Lynch, Research Division - Director and Senior US Office and Industrial REIT Analyst [49]

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I guess, John, just to take a step back here, you've been through cycles before as a developer. Can you just talk us through kind of where you're headed in terms of starting new projects. What gives you comfort on Dexter? And just where you think we are in the development cycle, given the stocks won't be -- these projects won't be delivering for a good 1.5 years, 2 years?

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John B. Kilroy, Kilroy Realty Corporation - Chairman, CEO and President [50]

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Yes. I mean, I have been doing this probably longer than anybody. As long as anybody in the industry probably and maybe longer than anybody in the office industry.

Certainly from a development standpoint, I've been through multiple, multiple cycles. I always start with the premise, you want to have a very conservative balance sheet because you want to be able to weather any storm that comes your way. I am, as you know, always concerned about the macro environment with regard to things that might go on, but as you drill down into, as an example, 333 Dexter, I just don't think I've seen a better environment to build a building with what the -- what's happened over the last couple of years, what's happened over the last 6 months, what's happening, I think will happen over the next 6 months, and I think what will happen over the next couple of years. Think what's happened there. You have some big technology companies and other companies that have been growing tremendously in the city that are headquartered there. You've seen major moves in by Facebook and major new expansions by Facebook. You've seen the same thing happened with Salesforce. You've seen the same thing happened with Google. And if you look at the number of job postings and so forth there, Rob, if you could comment on that for a second.

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A. Robert Paratte, Kilroy Realty Corporation - EVP of Leasing and Business Development [51]

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Right now, Jamie, there are about 15 to 20 companies that are actively recruiting over 19,000 jobs in the Pacific North in the Seattle region, specifically, technology jobs. So it's a very robust market in terms of employment and these companies are having to plan their growth over the exact period you talked about.

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John B. Kilroy, Kilroy Realty Corporation - Chairman, CEO and President [52]

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So I'm very comfortable with the product, with the location. It also so happens the big birth of the dig that goes under the city, is going to be done concurrent with our building that's all happening, and therefore, the streets that intersect Dexter, which go East and West that don't go East and West now will be done. So I think we hit the perfect timing with regard to the demand-supply imbalance with regard to the transportation improvements, with regard to the type of product and with regard to visible and expanding demand. So I'd like that. Now that market here in San Francisco, we don't have anything else that we can start. I mean, it's going to be a couple of years before we're able to proceed with The Exchange and we'll have to evaluate that and, of course, that's not a decision we have to make today. And fortunately, we have a very good basis there. If we look down at Los Angeles, and we look at The Academy, which we have not pulled the trigger on, we're going to see what -- where we are with regard to the other development that's going on before we pull that, and I'm very comfortable with the negotiations we're having and the level of interest we have with regard to The Exchange. And then down at San Diego, Phase 2, which is of One Paseo, is all apartments, another 300 -- another couple of hundred apartments. They'll probably follow the first phase and then the final phase there is another couple of hundred apartments and roughly 285,000 square feet worth of office space, and that's a number of years down the road. So I think we -- it feels pretty good what we're doing, and I tend to be very conservative, but when there -- when you see the timing is right, this is what we do.

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James Colin Feldman, BofA Merrill Lynch, Research Division - Director and Senior US Office and Industrial REIT Analyst [53]

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Okay, that's a good answer. If you do -- if you end up leasing The Exchange to more tech than life science, does that lower the yields, that 8% you mentioned?

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John B. Kilroy, Kilroy Realty Corporation - Chairman, CEO and President [54]

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I don't think so. Because what we've had as I went through the math earlier with someone, the fact is, we've had a cost increase, which averages $54 a square foot and we've had a little timing extension because we have to do the warm shell for the life science, which takes considerably longer. But the reality is that the rents we originally underwrote were considerably lower than what we're -- than what we have today in San Francisco. So I still think we end up roughly at 8% ROC up on stabilization.

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James Colin Feldman, BofA Merrill Lynch, Research Division - Director and Senior US Office and Industrial REIT Analyst [55]

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Okay. And then just finally on both projects, what do you view as the competitive set for people would be considering for The Exchange...?

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John B. Kilroy, Kilroy Realty Corporation - Chairman, CEO and President [56]

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For The Exchange?

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James Colin Feldman, BofA Merrill Lynch, Research Division - Director and Senior US Office and Industrial REIT Analyst [57]

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Yes, and for Dexter.

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John B. Kilroy, Kilroy Realty Corporation - Chairman, CEO and President [58]

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Well, Tracy, what's the competitive set for the -- that has a similar time line for The Exchange?

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Tracy C. Murphy, Kilroy Realty Corporation - EVP of Life Science & Northern California [59]

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Yes, Jamie, I guess I'd answer that. In Mission Bay, it really is the only game. I think if you probably seen this, you've visited us. Mission Bay is totally spoken for or committed to, either by way of UCSF and other users that the vacancy is like sub 3% and the sublease that hit via the Medivation, Pfizer, M&A activity was gobbled up almost immediately. So there's nothing in Mission Bay and the next competitive option will be whatever comes in South San Francisco, but it's years away. So it remains to be completely tight on the supply side.

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John B. Kilroy, Kilroy Realty Corporation - Chairman, CEO and President [60]

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Was the same question applicable to 333, Jamie?

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James Colin Feldman, BofA Merrill Lynch, Research Division - Director and Senior US Office and Industrial REIT Analyst [61]

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Yes, please.

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John B. Kilroy, Kilroy Realty Corporation - Chairman, CEO and President [62]

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Yes, okay. Well, up in that market, right now, you have there's people talking about building a 56-story building in downtown. We don't think that's really the same kind of project as ours, different kind of tenant perhaps. And other than that, you've got Vulcan, which has a 400,000 square foot building that they can build on one of their sites, but they're -- the better part of the year behind us, if they were to pull the trigger. So I think it's the ideal timing for us vis-à-vis our -- what others can do as well.

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Operator [63]

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The next question comes from John Kim of BMO Capital.

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John Kim, BMO Capital Markets Equity Research - Senior Real Estate Analyst [64]

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There are some estimates that Amazon is looking to take about 15% to 20% of the Seattle office market over the next few years. And I'm wondering if you agree with that figure. And generally speaking, what do you think about a market with such high concentration to one tenant?

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John B. Kilroy, Kilroy Realty Corporation - Chairman, CEO and President [65]

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We are not going to get into talking about companies with whom we have NDAs with and so forth. We just can't. So what's out there in the general market, you can find, but we can't give you any color beyond that.

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John Kim, BMO Capital Markets Equity Research - Senior Real Estate Analyst [66]

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It sounds like from your commentary, there are multiple tenants looking to grow in Seattle, so I'm just wondering if you thought it's more diversified than the 15% to 20% figure.

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John B. Kilroy, Kilroy Realty Corporation - Chairman, CEO and President [67]

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Well, yes, I mean, it's -- like I said, if you look -- don't hold me to this exact time frame, but within the last year or 2, you've seen Facebook go from 400,000 feet -- they went in with 17,000 feet and now I think they have like 100,000 feet. And then they took 400 some thousand feet, then they've recently announced they're taking another 400,000 square feet and a build to suit and another 107,000 square foot or 200,000 feet on another build to suit. You've seen Google expand and whatnot. And there's the Vulcan announced that they're doing a big deal, I think it's 700,000 or 800,000 feet on a build to suit there. You've seen Salesforce go in. They rent a Key Center in 10,000 or 11,000 feet. We couldn't accommodate them. They thought they needed 100 and they took a lot more. You've seen Amazon jump over to Bellevue as well. You've seen Microsoft renew and Bellevue and so forth. I mean there's a variety of companies that are out there. Obviously, Expedia has been growing, SAP grew in Key Center and there are a variety of other companies that are growing and have big growth plans, so we're pretty comfortable with the market. And yes, Amazon is the gorilla in the market. I remember, you know, I mean -- I think most of you know, I started my career dealing with aerospace companies and you had 5-year, 10-year contracts with the government. At the end of the program, if it didn't get renewed, you can have a big hole in your building. You look at what Amazon is doing. I mean, I think it's probably one of the greatest companies in the world in the diversity of their products and their expansion and so forth. So that's about all I can say, John. I'm not going to get in and breach agreements we have with others.

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John Kim, BMO Capital Markets Equity Research - Senior Real Estate Analyst [68]

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Okay. On a related topic, there's a recent survey that almost half of the millennials in the Bay Area are planning to leave due to affordability, and I'm wondering when you have discussions with other executives how concerned are they about affordability for that generation?

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John B. Kilroy, Kilroy Realty Corporation - Chairman, CEO and President [69]

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Well, you're going to hear a lot of surveys. Remember, they were doing that survey saying that 50% of the people wanted to leave and a bunch of people have left, but then they did the other survey, which showed that more than that number of people moved in. So I thought I've got to comment -- there's a lot of whack jobs that write articles and I'm not in that business. All I know is that as is the case is with the Flower Mart. We have -- we're just now finalizing the selection, and we'll be announcing -- around up, I guess, within the next month or so, the brokerage team that we put together, which we think is going to be formidable and without even having any formal plan. And I mentioned this on prior calls, we've got more than half a dozen major technology companies that are wanting presentations, wanting detailed information on some of which we've met with in connection with their long-term plans, which we think will be -- the Flower Mart will be a big part of that. So I don't know. I read all the stuff and then when I see what's going on, you look at the expansion that we're seeing within our portfolio, companies like App/Dynamics as an example, Climate Corp. and all these different companies have just keep expanding. It feels good.

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John Kim, BMO Capital Markets Equity Research - Senior Real Estate Analyst [70]

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Last question for me is I know you talked a little bit about renewals this period and you mentioned Qualcomm, but I was wondering if you can provide some more color on the decision-making process for a companies choosing to renew at this time?

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John B. Kilroy, Kilroy Realty Corporation - Chairman, CEO and President [71]

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I'm sorry, I'm not sure I understood that question.

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John Kim, BMO Capital Markets Equity Research - Senior Real Estate Analyst [72]

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With supply coming into the market, more -- you signed a lot of tenants than are renewing at this time. I'm just wondering if you can provide some color on that or maybe also if they're outstanding...

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John B. Kilroy, Kilroy Realty Corporation - Chairman, CEO and President [73]

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You mean why they're renewing? I don't understand the question.

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John Kim, BMO Capital Markets Equity Research - Senior Real Estate Analyst [74]

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The amount of leasing you've done on the renewal side, I just want some more color on it.

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John B. Kilroy, Kilroy Realty Corporation - Chairman, CEO and President [75]

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I think as Tyler said, of the roughly 850 or whatever it is thousand square feet that we've done in the first through this period of the year, Tyler roughly, 60% of that was new tenants and 40% was renewals, some of that was, of course, Adobe. People continue to want to have great space, and I think we own a lot of it.

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Operator [76]

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Your next question is from David Rodgers of Baird.

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David Bryan Rodgers, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [77]

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Maybe for David Simon, just with regard to what you have left to lease at the Columbia Square on the commercial side of the equation as well as the Sunset and marketing The Academy. Can you talk a little bit about kind of the activity that you're seeing, and any type of stabilization date in your mind for the remainder of those -- the small amount of space you have left?

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David Joshua Simon, Kilroy Realty Corporation - EVP of Southern California [78]

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Sure, sure. So let's start with Columbia Square. As you know, Viacom is in and operating, Fender Guitars is in and operating; we're finishing the build outs for Global Brands. We have 2 floors left in El Centro, about 32,000 feet, about 10,000 scattered in the Viacom building. All of that square footage we have -- we're trading paper on all of it at rents and rates at our pro forma numbers and feel pretty good that over the course of the next quarter or so, we feel like we can button it all up. All entertainment, media companies growing individual companies, organic growth out of Hollywood. So we feel pretty good about that. With respect to West Hollywood and the Sunset, we have the vacancy in the -- in the office tower. Again, we have paper trading. We have a tenant or 2 for all of that vacancy in that office tower. We feel pretty good about that as well. That West Hollywood market is really tight. There's a lot of tenants that are up and down that corner from 9200 Sunset up to our building 8560. Again, media, entertainment focused but feel pretty confident over the course of the next several months, we're going to have that buttoned up as well. And on The Academy, The Academy is such a unique projects, very similar to Columbia's square with respect to what we're doing, creating another environment, another great sense of place, another project that doesn't exist out there. It's going to be very complementary, that's what's in the market, and we're getting a lot of interest and we're putting on a lot of pitches. You know in L.A., you don't have a lot of big preleasing markets. You don't have a lot of tenants that prelease and you think about what we did in Columbia Square and you look at Netflix over down the road, those big tenants came after the projects got started and what followed in that market was a lot of tenants that work with them and a lot of organic growth. So I think Academy will follow a similar path, but we continue to go out and pitch very proactively, and we've got a lot of incoming in both on the retail as well there. So very stable, very good and good activity all through those markets.

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David Bryan Rodgers, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [79]

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John, maybe on The Exchange, I know we've talked about it quite a bit on the call. But is there something the way the building sets up today that didn't work for the tech tenants? I think you had said or Tracy had said that there are tech tenants in demand at that space and that you felt comfortable you do some tech deals, that wouldn't be life science, but does that not set up today for them to be able to just kind of move in as you were set for completion here in the next couple of quarters?

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John B. Kilroy, Kilroy Realty Corporation - Chairman, CEO and President [80]

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I think it works very well. The floor plates and the floor heights and the amenities, and all the rest are exactly, I think, 10 out of 10. Vertical construction has been -- you know -- you now can see it before it was sort of surrounded by UCSF campus and whatnot and if you were to come out and see it today, it's above the freeway. When do we top out, Tracy?

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Tracy C. Murphy, Kilroy Realty Corporation - EVP of Life Science & Northern California [81]

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27th.

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John B. Kilroy, Kilroy Realty Corporation - Chairman, CEO and President [82]

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And that's on the 12 stories as well?

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Tracy C. Murphy, Kilroy Realty Corporation - EVP of Life Science & Northern California [83]

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Yes.

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John B. Kilroy, Kilroy Realty Corporation - Chairman, CEO and President [84]

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Yes. We now have something you really can see and understand, so I don't think there's been anything wrong with it. From our standpoint, we had not wanted to break it up originally other than for big tenants. We don't want to do 25,000- and 50,000-square-foot tenants. It just that in our view that is not the way that building should be occupied. So it will be multi-tenant. It will be a combination of life science and technology, but the smallest tenant, Tracy, would probably be what?

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Tracy C. Murphy, Kilroy Realty Corporation - EVP of Life Science & Northern California [85]

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Probably 75. I wouldn't see anything smaller.

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John B. Kilroy, Kilroy Realty Corporation - Chairman, CEO and President [86]

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75,000 feet, 60,000 feet something like that. So the -- we've been in a situation where we've been unable to take -- to move anybody in immediately because it's not done for another year plus or year about, and that's kind of what's going on. We thought we're going to do a couple of big deals, as you know, and we announced those LOIs and whatnot. That didn't work out for various reasons unrelated to us. But I think we're going to end up with a real home run there.

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Operator [87]

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The next question is from Rob Simone at Evercore ISI.

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Robert Matthew Simone, Evercore ISI, Research Division - Associate [88]

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Kind of a nuanced follow-up to The Exchange and your other pending developments. Is it a fair statement to make today that unlike Dexter that, that was more market driven, as you mentioned, that Academy and One Paseo are kind of no longer behind The Exchange gatekeeper so to speak, but those decisions will be made independently? And then as a follow-up, can you guys maybe expand on any -- some of the larger move-outs beyond this year and '18?

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John B. Kilroy, Kilroy Realty Corporation - Chairman, CEO and President [89]

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Yes. On the first one, I mean, I was -- what I always said to look at is how is the core and is there great momentum there? Are you moving -- renewing or moving is the case of Riot Games. We couldn't accommodate Fandango's expansion. And Riot Games wants all their space and Connexity space and so forth. That buttons that up. And we look at that kind of across the board not only in each market, but across the platform, how we feel about the core? How do we feel about what's going on with regard to our develop and stuff? And then finally, what's happening in the individual markets? So you use the term gatekeeper, I'm not sure I'd quite use that, but I think we have -- we're going to start 333 Dexter, we're going to kind of take a good hard look before we start other things. It's -- you deal with the information you have and the information changes, okay? So I -- there's no way we can know that we're going to be 100% right or 90% right until it's done. We treat this as a very serious business. We're not in the business you've seen. We've been very disciplined with regard to acquisitions and whatnot. We're not trying to be bigger just to be big, we have no interest in that. We're trying to do the right thing to create the maximum value for our shareholders. And we think it makes sense, given the dynamics that I spoke about before on 333. With regard to The Academy, the market is very good, but we're not going to start everything at once. I'll give you an idea right now, development as a percentage, Tyler, of the enterprise is what -- and when you add 333, what does it become?

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Tyler H. Rose, Kilroy Realty Corporation - CFO, EVP and Secretary [90]

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That's 11% of enterprise value today. And if you add 333 Dexter, it grows to 14%.

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John B. Kilroy, Kilroy Realty Corporation - Chairman, CEO and President [91]

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And back in previous times, we've been as high as 20% or so. So that's not necessarily an overriding metric, but it's one we look at.

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Robert Matthew Simone, Evercore ISI, Research Division - Associate [92]

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And then just the other follow-up was, I think if you guys can talk on -- if you're able to any of the larger expirations you might have beyond this year, maybe in early '18?

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Jeffrey C. Hawken, Kilroy Realty Corporation - COO and EVP [93]

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So this is Jeff. So for 2018, we've got a pretty light role, 9.3% of the portfolio. We got 4 expirations that are 100,000 square feet or more, 1 in Seattle, 1 in San Francisco and 2 in San Diego.

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Operator [94]

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The next question is from Tom Catherwood at BTIG.

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William Thomas Catherwood, BTIG, LLC, Research Division - Director [95]

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Quick question on acquisitions. I know there's none in the guidance, but if we go back 2 quarters, John, you had mentioned that the acquisition market was looking more appealing and obviously, you did a few deals in 4Q. How do you deal -- view the acquisition market now? And are there any specific markets that look more appealing than others?

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John B. Kilroy, Kilroy Realty Corporation - Chairman, CEO and President [96]

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Yes. I think what I said, it was appealing in the sense that we found some things that made sense from us -- for us. It's hard to find things in scale in the markets we want to be that there's a kind of quality or whatever where we can get the kind of yields we want. Those are few and far between. And if you take a look at the purchases we've done, spend $50 million here, $80 million there, $100 million, $200 million, there haven't been any huge projects, and I don't see that happening right now. Now having said that, maybe that will import something, we'll have an opportunity that I didn't know existed. I don't see acquisitions as being a big, big thing for us in '17. Will things change in '18? I don't know. But we do like the markets we are in, and we do like it where we can find something that is -- that we can fix. Occasionally, we find something that is stabilized and for one reason or another, it might make sense for us, but you haven't seen us out there buying stuff at 2% and 3% and 4%, unless there was a real opportunity to move it up through value add. And I think that's probably going to be the way. Value add can come in different things. It can come like some of the stuff we bought in the Stanford Research Park. There was a story there that we could buy it, and it had some issues with regard to some of the tenants and probably helps us move yields up and you've seen us do cover land place, where there's a big development component downstream. In the meantime, we get a decent yield that's accretive. Those are kind of things that are more likely to see. We do have a couple of folks that we're dealing with that are either corporations or wealthy individuals that we're talking to with regard to a variety of things, which is way too early to start announcing that stuff. So we're going to be opportunistic. We're going to make sure our pencils very sharp and that we're very disciplined.

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William Thomas Catherwood, BTIG, LLC, Research Division - Director [97]

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Got it. I appreciate that. And then Tyler, just a quick one on the bad debt provision this quarter. What drove this? And do you have more tenants on your credit watch list now than you did at, say, this time last year?

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Tyler H. Rose, Kilroy Realty Corporation - CFO, EVP and Secretary [98]

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Yes, we've been pretty forward for over the last many years, where we really haven't had much bad debt expense at all. And this quarter, as I mentioned, there's a handful of tenants that are generally nontech, actually, that we've taken reserves on, no bankruptcies but reserves. And we don't think it's a market trend. We don't anticipate that, but it's growing. We don't -- we haven't seen that -- more company-specific issues that some of them are having, including that one I mentioned, which was related to that acquisition. So we don't see it as a sort of market issue at this point.

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Operator [99]

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The next question is from Jed Reagan with Green Street Advisors.

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Joseph Edward Reagan, Green Street Advisors, LLC, Research Division - Senior Analyst [100]

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It looks like L.A. area, job growth has been slowing down a little bit and there's been some chatter that Westside L.A. fundamentals maybe cooling off a touch. Just curious if you're seeing any shifts in demand dynamics? And then what type of rent growth you're seeing in the market at this point?

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David Joshua Simon, Kilroy Realty Corporation - EVP of Southern California [101]

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Jed, it's David. There are a couple of big move-outs, but with the entertainment, things like that, that's skewed the numbers a little bit. I got to tell you, I mean, I'm on the ground day in and day out here, both from a leasing activity standpoint and acquisition activity and talking to capital that's wanting to come into the market. And it's been pretty steady over the last couple of quarters and activity comes from the leasing side in fits and starts. And it's always been a little bumpy here because the market is so fragmented, and there's a lot of options. But overall, I don't see anything diminishing on the fundamentals. I think rent growth is in the 3% to 5%, 8% depending in which market you're in, but as I've always said when I meet with you, the quality product with the environments and the workplace space that we create and then we own as an example of 6255 in Hollywood, the building continues to have a lot of activity. Tenants want to expand, and that's what we're seeing with our portfolio and in the market set that we're in. So I still feel really good about everything we have and the things we've got on -- in the pipeline.

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Joseph Edward Reagan, Green Street Advisors, LLC, Research Division - Senior Analyst [102]

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Okay, that's helpful. And I think we were probably pushing 10%-type rent growth a year or 2 ago. Is that -- I mean, fair to say you've seen downshift on that to some degree?

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David Joshua Simon, Kilroy Realty Corporation - EVP of Southern California [103]

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Jed, I think it just depends where. I think it's a little overboard. I mean, it could be as high as 8 to 10 in some of the particular markets, depending on the sub-line demand dynamic at any one particular time or what tenant needs at that specific time. But I think the trajectory is in the right direction, and continues to go in the right direction, whether it's a couple of basis points higher or lower. I'm not that good, but I think we're moving in the right direction.

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Joseph Edward Reagan, Green Street Advisors, LLC, Research Division - Senior Analyst [104]

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Okay. And then just sticking with L.A., there were some media reports that a pretty big, Century City asset is trading handily, so a stake of that is through a private buyer. Just curious if that's one that you guys take a look at, and if you have any color on maybe initial yield on that type of deal.

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David Joshua Simon, Kilroy Realty Corporation - EVP of Southern California [105]

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Jed, Century City hasn't been a market we haven't been focused on for a variety of reasons we talked down the path, so we didn't take a hard look at -- we know what's going on in the market, but we didn't take a hard look at that.

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Joseph Edward Reagan, Green Street Advisors, LLC, Research Division - Senior Analyst [106]

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Okay, market cap rate, color, any idea?

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David Joshua Simon, Kilroy Realty Corporation - EVP of Southern California [107]

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I don't.

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Operator [108]

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The next question is from Jamie Feldman of Bank of America Merrill Lynch.

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James Colin Feldman, BofA Merrill Lynch, Research Division - Director and Senior US Office and Industrial REIT Analyst [109]

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I just wanted to follow up on a 2018 expirations question. Were you saying those were known move-outs? Or those are just your largest leases expiring?

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Jeffrey C. Hawken, Kilroy Realty Corporation - COO and EVP [110]

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Jamie, this is Jeff. Those are the largest leases expiring. So the one up in Seattle most likely will not renew. The one in San Francisco, we're in negotiations with a tenant and probably stay in a portion of the building. Down in San Diego, one of the tenants there will not renew and the other one we're negotiating with. So it's a little bit of a mixed bag between the 4.

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James Colin Feldman, BofA Merrill Lynch, Research Division - Director and Senior US Office and Industrial REIT Analyst [111]

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So it sounds like -- if it's 400,000, it's maybe 200 that are staying? Is that the right way to think about it?

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John B. Kilroy, Kilroy Realty Corporation - Chairman, CEO and President [112]

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I don't know if it equates to that -- I mean, I guess you can believe it that way, but it's too early to tell, Jamie. We always have some move-outs, and we will always have some extension. So more to come on it. We're working with all these folks as we always do and more to come.

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Operator [113]

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This concludes our question-and-answer session. I would like to turn the conference back over to Tyler Rose for closing remarks.

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Tyler H. Rose, Kilroy Realty Corporation - CFO, EVP and Secretary [114]

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

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Operator [115]

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The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.