Kilroy Realty Corp

NYSE:KRC

Earnings Call Transcript 2018-Q3

[Operator]

Good afternoon, and welcome to the Kilroy Realty's Third Quarter 2018 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded.

I would now like to turn the conference over to Tyler Rose, Chief Financial Officer. Mr. Rose, please go ahead.

[Tyler Rose, executive]

Good morning, everyone, thank you for joining us. On the call with me today are John Kilroy, Jeff Hawken, Steve Rosetta, Heidi Roth, Tracy Murphy, Rob Paratte, Eliott Trencher 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 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 third quarter, Jeff will discuss conditions in our key markets and I'll finish up with financial highlights and a review of our updated 2018 earnings guidance that was published yesterday in our earnings release, then we'll be happy to take your questions. John?

[John Kilroy, executive]

Thank you, Tyler, and hello, everyone. Thank you for joining us today.

Operating conditions remained strong in our West Coast markets, and this was reflected in our third quarter results. We signed new or renewing leases on 335,000 square feet in our stabilized portfolio at rents that were up 16% on a cash basis and 35% on a GAAP basis. And so far in October, we signed an additional 415,000 square feet of leases, which brings our year-to-date leasing total to 2.6 million square feet. We're on track to have our best leasing year ever.

We commenced revenue recognition on the entirety of our 312,000 square foot office space at our newly completed 100 Hooper project in San Francisco. We increased retail leasing at our under construction One Paseo mixed-use project in Del Mar to approximately 85%. We agreed to terms on approximately $375 million of asset sales that we expect to complete by year-end. And we continue to earn the highest awards for our sustainability programs.

Now let's get into the details. Strong demand and limited supply are driving leasing activity across our markets, with a wide variety of high-quality tenants actively seeking large blocks of space. The pace of negotiations and decision-making continues to quicken. New supply, especially in prime locations, is quickly absorbed, and loan rates are hitting new highs.

Our recent experience includes several transactions that demonstrate the strength of the markets. In Seattle, we signed new leases with Facebook during the quarter at our Skyline Tower and Key Center properties in Bellevue that total 85,000 square feet of space. Cash and GAAP rents were up 25% and 47%, respectively, from the prior leases. This completes the re-leasing of the former Valve space at our Bellevue properties, which are now fully leased.

In San Francisco, we signed 193,000 square foot lease with a technology company for its future corporate headquarters at 303 Second Street. Even though we are currently fully leased in this project, we were able to assemble various future explorations to create a cohesive workspace for this tenant that they will take sequentially as it becomes available between 2019 and 2021.

On a cash and GAAP basis, rents were increased 56% and 102% from prior leases. This transaction demonstrates how tenants are having to make commitments now to secure space multiple years out.

In Los Angeles, we completed a 92,000 square foot renewal with a tenant located in El Segundo. Cash and GAAP rents were up 11% and 30%, respectively. And in Del Mar, we are achieving significant leasing success. We executed an 80,000 square foot renewal with FICO at Kilroy center Del Mar. Cash and GAAP rents were up 26% and 45%, respectively. At One Paseo, as we mentioned, we were approximately 85% leased in our retail with the balance in documentation. The apartments will start delivering in the middle of next year in a very strong market. And demand for high-quality office space, approximate to the amenities that today's workforce demands and that we are delivering at One Paseo, continues to increase.

Strong market fundamentals are also positively impacting our development pipeline. We have 3 projects currently in process, 333 Dexter in South Lake Union submarket of Seattle, the office and retail portion at Academy on Vine in Hollywood and the retail and residential components at One Paseo in Del Mar. Together, they represent a total estimated investment of 1.1 billion.

In Seattle, the demand for blue chip technology companies or front dip blue chip technology companies is driving rents higher and we expect 333 Dexter to capture these strong economics with lease agreements in place, well before delivery at the end of next year.

In Los Angeles, disruption in media and content creation is creating opportunities for both traditional media companies like Time Warner and Disney and newer ones like Netflix, Amazon and Hulu. And Apple recently announced an initial commitment of $1 billion to launch its global streaming program. Against this backdrop, we believe the office and retail components of Academy on Vine are also extremely well positioned to be leased as part of delivery in 2020. And in the same project, given the strength of the high-end residential market in Hollywood, we are evaluating a start on Phase 2 of the Academy, 200 high-quality residential units by the end of this year.

The dynamics are just as compelling at our One Paseo mixed-use project in Del Mar. This affluent residential community and its office users have been underserved from a retail and F&B perspective for decades. With the retail component of our project now largely leased and all the residential units completing through the second half of next year, we have seen unparalleled pre-leasing at record-setting rents for the 285,000 square foot 2-building future office component of One Paseo. We have executed leases and are in advance discussion of about 50% of the project. We expect to commence construction on these 2 buildings by year-end.

On the life science front, the health care and biotechnology industries are colliding with technology to create strong market fundamentals. South San Francisco, where our Kilroy Oyster Point is located, is seeing strong demand, and with vacancies in the market hovering around 2% and competitive projects effectively all leased, we are evaluating the start of Kilroy Oyster Point's first phase.

Lastly, with respect to the Flower Mart project, based on the tremendous leasing success we have had at our Brannan Street properties and the significant lack of available space in the market, we are extremely well positioned on this project.

In summary, our pipeline represents many of the best development opportunities available in the most desirable markets of the West Coast. And we remain encouraged in our ability to lease up our existing development projects in advance of delivery.

As with all our new development, we have assembled this pipeline with a careful eye on project cost, development flexibility and market suitability, and we'll move forward with projects if and when market conditions support the decision.

In closing, there are 5 key messages I want to highlight. One, fundamentals of our market remain strong, frankly the strongest we've ever seen, driving robust demand for real estate for both tenants as well as buyers. This year, we are seeing pricing in the $1,500 per square foot range in San Francisco, over $1,000 per square foot in Seattle and Los Angeles and $700 per square foot for a 15-year-old product that's not comparable to ours in Del Mar.

Secondly, we remain strategically focused on the development of the best means of increasing earnings and creating long-term value. On a stabilized basis, our 2 recently completed projects, The Exchange and 100 Hooper, will increase our current cash NOI by more than 15% by the end of 2020.

Three, today's tenants want workspaces that are thoughtfully designed and efficient to operate. Our flexible contemporary properties are ideally suited to fill that need.

Fourth, sustainability is increasingly an important factor for our tenants in their decision-making and a critical component of our culture as we strive to be good stewards of the earth.

And five, we remain committed to managing the risk inherent in our business, pursuing our development program and operating our enterprise in a disciplined and financially conservative manner. That completes my remarks. Now I'll turn the call over to Jeff.

[Jeffrey Hawken, executive]

Thanks, John, hello, everyone. As John noted, our West Coast real estate markets continue to strengthen in the third quarter. Broad-based economic growth and the growing importance of technology to a multitude of industries is expanding the number of companies competing for space and talent. California alone has created more than 350,000 jobs over the past 12 months. Unemployment is at a 42-year low. And in Seattle, employment grew at a pace 2x higher than that of the nation.

Let's take a look at fundamentals across our individual markets. In San Francisco, Class A office rentals hit record highs in the third quarter, surpassing the previous peak reached 18 years ago. There were 7 deals greater than 100,000 square feet signed since the second quarter, bringing the year-to-date total to 14, of which 4 were KRC deals.

This dynamic is reflected in vacancy rates. In San Francisco SOMA, South Financial and Mission Bay districts, Class A direct vacancy rates were 1.8%, 5.1% and 0.6%, respectively. In South San Francisco, the life science vacancy rate was 2%. In the Silicon Valley, Class A direct vacancy was 7.1%.

All significant San Francisco development projects slated to deliver through 2022 are fully leased, limiting near-term leasing volume. We are currently 98.3% leased in the Bay Area, and our in-place rents for the region are approximately 34% below market.

In the Seattle region, we are seeing economic expansion in both Seattle and Bellevue. Similar to San Francisco, brokers reported increasing rents in an ever-tightening market. Class A direct vacancy in South Lake Union is 1.4%, and in Bellevue, it's 5.9%. Our Seattle portfolio is 96.7% leased. Our in-place rents are approximately 9% below market.

In San Diego, improving market conditions drove positive results in net absorption, rent growth, vacancy rates and demand. Leasing activity was diversified across higher category tenants, life science and technology. Del Mar, our major submarket in this region continues to command the highest Class A asking rents. And as John pointed out, we are seeing record-breaking rents with pre-leasing at our One Paseo office project.

Class A direct vacancy in Del Mar was 14.1%, with competitive project vacancy at approximately 7.7%. Our San Diego portfolio is currently 94.2% leased, and our San Diego in-place rents are approximating market. And I'm really happy to report this is the first time in 40 quarters that our San Diego rents have not been above market.

In Los Angeles, the dramatic transformation within the entertainment industry has created a marketplace that demands an equally dramatic work environment. Specifically, big tech has also become big media with Apple, Amazon, Google and Netflix, transforming the submarkets in which they operate.

Class A direct vacancy in West LA was 6.1%, West Hollywood is 8.1% and Hollywood was 8.7%. Our Los Angeles portfolio is currently 95.9% leased, in-place rents are approximately 10% below market.

On a portfolio-wide basis, our estimated average in-place rents are approximately 19% below market, which compares with 16% last quarter. We have made excellent progress on backfilling our major 2018, 2019 and now 2020 expirations. Year-to-date, we have backfilled nearly 80% of the major 2018 expirations and have only one lease greater than 75,000 square feet remaining in 2019. We expect leases for 95% of the 2018 expirations that have been backfilled to commence by year-end. The average commencement date for the 2019 expirations that have been backfilled is the third quarter of next year. As John mentioned, our renewal with FICO further reduces our 2020 expirations, and we have only 3 leases greater than 90,000 square feet remaining to address. That's a snapshot of our markets. Now Tyler will cover our financial results in more detail. Tyler?

[Tyler Rose, executive]

Thanks, Jeff. FFO was $0.90 per share in the third quarter. FFO included a net $0.005 of lease termination fees, reflecting $0.02 of gross fees in other income that was offset by $0.015 from the write-off of deferred rent related to the lease terminations.

With regard to the tenant issue we discussed last quarter, we continue to monitor the situation and have seen an improvement in the company's credit, but have not adjusted the reserve level at this point.

Same-store NOI continue to show solid growth. For the third quarter, same-store GAAP NOI rose 2.3%, while same-store cash NOI increased 2.4% driven by strong rental rates. This was partially offset by the known 300,000 square foot San Diego move-out as well as onetime property -- a onetime property tax benefit in 2017. For the first 3 quarters of 2018, GAAP NOI grew 3.1% and cash NOI increased 4.1%.

On the funding front, we continue to pursue conservative strategies that match funding to our development needs, providing timing flexibility and minimize market risk that is why we raised $360 million of equity in August. We completed the public offering of 5 million shares of common stock in a structure that allows for sale by August of next year at an established price of $70.10. We delayed dilution, locked in a price at which our ongoing development is accretive and increased our flexibility to start new projects. We effectively locked in certainty in uncertain times.

We also remain strongly committed to our capital recycling program as a key source of funding. We expect to complete approximately $375 million of asset sales by the end of the year. These assets are located in 3 of our 4 markets, Greater Seattle, Northern California and Greater Los Angeles.

And earlier this month, we drew down the proceeds from the final tranche of our delayed draw private placement -- private debt placement completed in May. This final tranche was for $200 million of 8 year 4.35% unsecured senior notes.

We currently have total capacity under our credit facility of approximately $1.2 billion. That includes approximately $600 million of availability under the revolver and $600 million under the accordion feature.

Taking all these transactions into account, our net debt to EBITDA at quarter end was approximately 6.6x. Adjusted for the equity offering, it would be 5.7x.

Now let's discuss our updated 2018 guidance provided in yesterday's earnings release. 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 supply going forward could have a meaningful impact on our results in ways currently not reflected in our analysis. Projected revenue recognition dates are subject to several factors that we can't control, including the timing of tenant occupancies.

With those caveats, our updated assumptions for 2018 are as follows. We anticipate remaining 2018 development spending to be approximately $125 million to $150 million. We commence revenue recognition from our Adobe lease at 100 Hooper early in October. We continue to expect no FFO contribution from the Dropbox lease at The Exchange in 2018. Dropbox is expected to take occupancy in 3 phases starting mid next year into 2020.

Given continued strong core results in the third quarter, we are increasing our projected 2018 same-store cash NOI growth range by 1 point to 2% to 3%. Our forecast for year-end office occupancy is between 94% and 94.5%. And we don't expect to draw down proceeds from the equity forward in 2018.

Given these set of assumptions, we are raising our annual guidance. Last quarter, we provided updated earnings guidance for 2018 of $3.47 to $3.57 per share with a midpoint of $3.52 per share. Given continued better-than-expected operating results, coupled with disposition timing now in the fourth quarter, we are increasing this range to $3.54 to $3.61 per share and increasing the midpoint by $0.06 to $3.58 per share.

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

[Operator]

[Operator Instructions] First question today comes from Craig Mailman with KeyBanc Capital Markets.

[Craig Mailman, analyst]

Tyler, can you give us a sense of the drawdown expectations on the forward equity in '19?

[Tyler Rose, executive]

Yes. We aren't providing guidance yet for '19. It probably will be midyear, but it will depend on our capital needs. Given the drawdown of the private placement and the capacity in our bank line, we won't be doing it probably in the first quarter, but more to come. We haven't really decided exactly when that will happen.

[Craig Mailman, analyst]

Okay. And then, I know you guys kind of pared back your dispositions for this year. I mean given -- I know you're not giving guidance again. But just given kind of the development pipeline for next year, given what you have on the equity side with the forward, do you guys foresee that $125 million reduction for this year coming in backfilled next year? Or do you feel like the equity kind of just eliminated the need for that dispositions?

[Tyler Rose, executive]

Yes, I think it did in the short run, probably reduced the need for dispositions. But we always have an ongoing disposition program and we're going to continue that. We are still working on a smaller disposition that's in process now that could close next year. So we're not going to necessarily slow down dispositions, but the equity did -- will allow us to not need the money in the near term.

[Craig Mailman, analyst]

Okay. And then I know split rolls are not coming on until 2020 potential in the ballot, but have you guys started to do any work about what the potential liability could be for Prop 13 if it does pass?

[Tyler Rose, executive]

Yes, it's a complicated question because it depends on if it gets passed, and then -- and how long it takes for the assessor's office to start reassessing properties, which could take a couple of years. And so that could push to 2022 before it's really in effect. And then it really depends on what properties you own at that time. So depending on our dispositions, it could impact that number. But if you took our properties today and assume that the split roll went into effect, it'd be about $0.03 to $0.05 a share.

[John Kilroy, executive]

Yes, I'll add to that, Craig. Remember that Kilroy's portfolio, before we complete the developments we have underway right now, has an average age of 10 years. So much of what we have done is new and is much more closely aligned with current assessed values than a lot of the legacy properties that others might have.

[Craig Mailman, analyst]

That's helpful. And then just lastly, any rumblings or appetite for any of the Vulcan assets if they come to market in Seattle?

[John Kilroy, executive]

No comment.

[Operator]

The next question comes from Nick Yulico with Scotiabank.

[Nicholas Yulico, analyst]

Just first question on Oyster Point. You talked about the activity there in the market. It seems very strong, I mean, based on what HCP has done so far. And, I guess, just talked that BioMed's close to a lease for most of its project underway there, too. So it seems like you're in a good position. Just hoping to get an update there on how you're thinking about when you might start that, expected rents, and whether you'd be willing to start that on spec or pre-lease the first phase.

[John Kilroy, executive]

Yes. The first phase, about 600,000 feet if we build all 3 phase -- 3 buildings within that phase concurrently. We're going through that right now. As I said in my comments, we're looking to sort of the end of the year as it is the first probable decision point. Tracy can comment on demand and whatnot. But you're quite right. If -- it's kind of like if you wouldn't build in this market, when would you ever build?

[Tracy Murphy, executive]

Yes, Nick. I'll shed a little market color for you. But we have seen a recent uptick in demand. Tenants are out earlier. We are seeing a continuation of sort of the big pharma consolidation in that market. On average, the requirements are also a little bigger. But from a supply standpoint, the under construction Class A or competitive set is 90% leased. So we feel like the delivery of our project is well in line with sort of what looks like a lull in the supply going forward.

[Nicholas Yulico, analyst]

And in terms of rents, I mean, is that like a high $5 triple net per month type of rent? That's -- or do you think that's where the market is right now?

[Tracy Murphy, executive]

Yes. That's about right.

[Nicholas Yulico, analyst]

Okay. I appreciate it. And then just, Tyler, I have a question on interest expense. I'm just wondering whether that changed at all with your FFO guidance. And also, the capitalized interest benefit in the third quarter went up, and your construction progress went up. So trying to figure out how this is going to work heading into 2019, whether Exchange, 100 Hooper delivering. Do those fall out of CIP next year? Because if they don't, it seems like you have this kind of big capitalized interest benefit that keeps getting better as you're going through next year.

[Tyler Rose, executive]

Yes. Well, the third quarter impact was related to the acquisition of the KOP land in Oyster Point. So that's why capitalized interest was up in the third quarter. It should be relatively flat into the fourth quarter. And then you're right, as 100 Hooper completes, that will drop out of CIP. Dropbox, The Exchange will take some time. As I mentioned, they're taking the building in phases, so that will reduce over time. So that will lower capitalized interest but over time. And then it just depends on future starts and what we're building. So more to come in '19. But if the capitalized interest number -- if we do start more projects, it will probably creep up in '19 as well.

[Operator]

The next question comes from John Guinee with Stifel.

[John Guinee, analyst]

Just, Tyler, clarification. When you said $0.04 to $0.05 per share, did you mean per quarter or per year on 2020 split roll Prop 13, et cetera? And then probably the more important question is you had given some soft guidance of maybe hitting an annualized FFO per share number of $4.50 by late 2020, assuming all your developments delivered. Could you elaborate on whether you still think that's a good number or not?

[Tyler Rose, executive]

Yes. On the first question, what I said on Prop 13 was $0.03 to $0.05, and that would be an annual number, again, depending on what we owned at that time. So that's -- it's a little -- it's very premature, but that -- you could use that as a number if it were to occur today. So we'll see what happens in the future. And then what we have said on FFO growth was that, on an annualized basis, by the end of 2020, all things being equal, not including the lease accounting change and those kinds of things, our FFO growth would be in that range. I don't know if we quoted the exact dollar amount, but it was roughly a 25% increase. So that's -- we still think that, but obviously, it depends on future starts, it depends on dispositions, all sorts of things.

[John Guinee, analyst]

Okay. And lease accounting change, how does that affect your G&A for next year?

[Tyler Rose, executive]

Well, what we said last quarter, which is still the case, is we think it's in that $0.07 to $0.10 range, and we're still refining that and thinking about how that's going to work. It's a complicated process. But again, it's a noneconomic impact, and it actually will help our returns a little bit on the development. But it's in that range from an FFO perspective.

[Operator]

The next question comes from John Kim with BMO Capital Markets.

[John Kim, analyst]

I'm just trying to compare your leasing press release from yesterday versus Page 16 of your supplemental leases executed, so the press release, that 2.2 million square feet [ signed in ] third quarter versus roughly 1.95 million in the supplemental, is there a definitional difference?

[Tyler Rose, executive]

The 1.95 million or the 2.0 million is stabilized, and there was a couple hundred thousand square feet of development that took the 2 million to 2.2 million. So that included the PDR space and some retail at One Paseo and so forth.

[John Kim, analyst]

Got it. Okay. So also, the cash leasing spread of 15% in the press release versus 11% in supplemental would suggest the October leasing was roughly 30% leasing spread. I just want to make sure that math is correct.

[Tyler Rose, executive]

Yes, that's the difference between what we did in October and what we did in the third quarter.

[John Kim, analyst]

Got it, got it. On the '19 expirations, I know you've made some progress on it. But can you just discuss any major known move-outs at this point and what we should be expecting as far as renewal rates?

[Jeffrey Hawken, executive]

Yes, this is Jeff. As I mentioned in my earlier remarks, we only have 1 transaction that's 75,000 square feet or larger that's not been dealt with. And we believe, at this point, we'll most likely renew that tenant. So everything else is going to be below that 75,000 threshold. So some tenants will obviously move out. Some will stay. We'll continue to work through that as we move through the year here.

[John Kim, analyst]

You also mentioned in South Lake Union, the vacancy rate is 1.4% now. How much of that impacted your asking rents at 333 Dexter?

[Jeffrey Hawken, executive]

We're above pro forma.

[John Kim, analyst]

Do you have an expectation as to when you will find a lease?

[Jeffrey Hawken, executive]

I said well before. I said the last couple of quarters. And I will reemphasize, well before the project is done.

[Operator]

The next question comes from Jamie Feldman with BoA Merrill Lynch.

[James Feldman, analyst]

I just wanted to get your thoughts on underwriting tenant credit for kind of pre-IPO tech companies versus post-IPO. Press reports are saying it's DoorDash that you just signed a big lease with 303. And we've seen a pullback in the tech market. So just kind of wondering what your thought process is and what we should be thinking going forward.

[John Kilroy, executive]

We can't comment on what tenant it is. We have an NDA with regard to the question on credit. Tyler?

[Tyler Rose, executive]

Yes. I mean, we -- I mean, obviously, we're in a market that has a lot of new companies and existing companies. And we do an underwriting on all of them, and we evaluate the credit. And we do look at the -- what's going on in the market, but we also get big letters of credit when appropriate. And so nothing's really changed. And we can't control what's going on in the stock market. The fundamentals continue to be strong, but we do our due diligence as best we can.

[James Feldman, analyst]

Okay. So what's like your typical tenant credit for either one?

[Tyler Rose, executive]

What do you mean when you say tenant credit? Do you mean...

[James Feldman, analyst]

Like the letter of credit. I mean, does it differ or is it pretty much the same?

[Tyler Rose, executive]

It differs. I mean, obviously, it's a big existing large credit. AAA-rated company is not going to provide much letter of credit, but we can get up to a year -- a year's rent. In certain cases, that's for a tenant that we need a bigger letter of credit on.

[James Feldman, analyst]

Okay. And then can you just talk about the change in the asset sale guidance? Did a deal fall out of bed or you guys just decided you didn't need to sell as much?

[Tyler Rose, executive]

Well, no. I mean, we've been working on transactions throughout the year. As I said, we're still working on another one. With the equity offering, we didn't need to do as much, given that we've basically funded with the equity, with the private placement, our -- all of what we've got under construction through the next couple of years. But as I said earlier, we're not slowing down dispositions. We're always going to have a disposition program to continue to fund our growth.

[John Kilroy, executive]

Yes, I'd add to that, Jamie. One of the assets that is fairly sizable that we looked at potentially putting in that pool for this year, circumstances change very favorably in that situation with regard to the market and whatnot. And we decided that it's going to be a high performer. One of the things we look at when we're evaluating this is, are things strategically important to the portfolio? And those are obvious ones if they're not to spin out. And then other -- then we also look at whether we think the likely upside is, from here forward, within a reasonable period of time. And so those dynamics are changing all the time with regard to specific tenants.

[James Feldman, analyst]

Okay. And then can you give an outlook for net effective rent growth? I know you guys talked about market rent growth, but on a net effective basis, how things are looking.

[John Kilroy, executive]

I mean, that's really hard to say. I mean, Rob can comment on general rents and TI packages. But...

[A. Paratte, executive]

Yes. I mean, Jamie, I would say that, as we've said on previous calls, in the markets that we're operating in, rent growth continues to outpace what we predicted. We tend to be conservative in our outlook in that vein. But I would say, for the most part, it's continued, and in some markets like Seattle, it's actually expanded quite a bit. So I'm not giving you specific numbers. But the landlords are able to push rents in the markets we're in, and we're doing that.

[John Kilroy, executive]

If you take a look at -- this is John again. If you take a look at what the brokers are saying, I'm not going to mention individuals, but if you talk with the various brokerage firms, I think everybody's of the opinion that San Francisco and Seattle, the couple of markets that we're in, Seattle, are likely to see pretty significant rental increases, given the demand and supply imbalance. So we've seen that on some of the deals that we've recently done. You've heard some of the mark-to-market we had in our recent transactions. And we mentioned that in our last conference call with some of the deals that we've done on the Brannan Street. We're now seeing rents on a triple net effective basis in our portfolio ranging from $65 to $85 per square foot triple net in San Francisco.

[Operator]

Next question comes from Blaine Heck with Wells Fargo.

[Blaine Heck, analyst]

So, John, you talked about 2 new starts by year-end with Academy's residential and One Paseo's office. I guess it sounds like One Paseo office has good activity in pre-leasing, but the Academy resi adds more spec development to the pipeline, with 333 Dexter and Academy still unleased. So did additional starts and the speculative leasing they come with have any effect on your decision to go ahead with some of the others in the shadow pipeline, namely Flower Mart and Oyster Point? Or at this point, given how strong the markets are, do you see them as kind of like completely separate decisions?

[John Kilroy, executive]

Well, it's a good question, and I'll tell you what I think about it. And it's -- I probably should have canned this speech maybe a couple -- 8 quarters ago, because I feel exactly the same. You saw us with The Exchange, that we said we weren't going to start Hooper until we either had significant leasing at The Exchange, or we had significant pre-leasing at Hooper. And we went with significant pre-leasing at Hooper, then we did The Exchange. We started 333 Dexter. We got The Exchange completed, and we started the Academy. I feel that any of these starts onto themselves are warranted, given the market demand, the supply-demand imbalance and the strong rents and returns. But in the context of spec development, I think you guys should all think about some of the spec stuff that's out there right now. Roughly 1 million square feet between Dexter and Academy is likely to go in the lease column. I'm not going to tell you exactly when, but we're not going to get over our skis on spec development. Just think kind of some of the stuff that's out there is going to get leased, and we're going to start some other stuff.

[Blaine Heck, analyst]

Okay, that's fair. And then, Tyler, the year-end occupancy guidance was lowered. Sorry if I missed this. But is there a move-out in Q4 that you guys hadn't previously anticipated or a move-in with delay? Just any color on that would be appreciated.

[Tyler Rose, executive]

Not really. We just narrowed the range. It was 94 and 95 before, and we tightened the range on the lower end. But there was nothing specific to it.

[Operator]

Next question comes from Manny Korchman with Citi.

[Michael Bilerman, analyst]

It's Michael Bilerman here with Manny. John or Tyler, I just wanted to go back to sort of the dynamics late this summer when you issued the equity. And arguably, you're, in a forward basis, limiting the current dilution because you only need the money next year. But the asset sale at least at the high end of the range if $750 million would have been executed at NAV. And you arguably sold your stock at a pretty meaningful discount to NAV. And so what -- walk us through the dynamics of those 2 things and the interplay between raising common equity at a discount versus selling assets that you've been very committed to doing, which arguably would have given you the proceeds today, right? It would have been a little bit more dilutive today versus going out to '19.

[John Kilroy, executive]

Yes. Well, I'll take the first crack of that, Michael, and thanks for being on our call. The thing that we're seeing on some of the assets that we're looking at selling is the -- we think that the rents are so below market now that we want to recover some of that. So there's never a perfect answer to this. Obviously, if our stock was at an NAV, we wouldn't be having this discussion of the interplay. But I got to tell you, we're seeing rents move up so tremendously that we want to make sure that we harvest as best we can for our shareholders the increased value associated with that. And, Tyler, more specifically, if you want to get into the -- why we structured it this way.

[Tyler Rose, executive]

Yes. Well, I think the other point is it wasn't a massive equity offering, but we've always said we're going to use different sources of capital to fund our growth and we're going to be conservative at the same time. And so this is an opportunity to lock in a modest amount of capital to help fund our growth. And while it is below NAV, it's still is accretive for the projects we're working on. And so it's a funding strategy that we're going to continue to do down the road.

[Michael Bilerman, analyst]

Right. I'm just trying to figure out if you really didn't need the money until next year. And you had a lot of confidence coming to this year in terms of disposition pipeline being $250 million to $750 million. Now it's cut back to $375 million, making the decision to raise equity at $72 when I think your belief, given where you think cap rates are or where rents are going, NAV is meaningfully higher. The value of the assets is meaningfully higher. Why not just chug along for the 6 months and sell the assets rather than raising $500 million of common equity? Something appears to have changed in July for you to pull that trigger to doing common equity.

[John Kilroy, executive]

No. I think you're making this too complicated, Michael. I'll tell you where I come from. We got a lot of crazy people running the world. And I don't know what's going to happen in the market. My attitude is we're going to go -- we're going to be conservative. And notwithstanding the fact that we sold stock at what you were saying is a significant discount, we're going to make a lot more money on that trade than we might have calculated that we lost by selling at $72. That's the decision we make. It was the right decision, in our opinion.

[Michael Bilerman, analyst]

Right. Tyler, just following up on the sort of 2020 4Q sort of run rate growth that you're going in. In relation to John's question, John Guinee's question, you said it doesn't account the Prop 13 potential changes and dispositions. I just want to understand what sort of funding cost or funding do you have in there for that. And I wasn't sure whether the dispositions. Does that mean the next $375 million that you're targeting -- can you just elaborate a little bit on what's embedded to fund all that stuff from a Prop 13 perspective?

[Tyler Rose, executive]

No. Sorry if I said that. If I said that, that's incorrect. This does include funding assumptions to fund the growth to get to that number. So it doesn't exclude dispositions. It's the Prop 13 and the lease accounting things that are uncertain at this point that it excludes. I don't think I said dispositions, but if I did, that was a mistake.

[Michael Bilerman, analyst]

Yes, you said -- you said it doesn't include dispositions, and I -- it sort of caught me by surprise. So what cost of capital have you embedded in to get to that growth rate? Because, obviously, equity costs one thing, debt costs another, asset sales cost another. Is there a blend that you put into in terms of that expectation?

[Tyler Rose, executive]

Yes. We usually fund -- we usually run our numbers leverage-neutral, so keeping our [ target of ] enterprise value effectively the same.

[Michael Bilerman, analyst]

And then the timing of the $375 million in the fourth quarter, I mean, we're sitting here in late October, so when should we expect that to occur?

[Tyler Rose, executive]

Right in the middle of the quarter, mid-November.

[Operator]

The next question comes from Steve Sakwa with Evercore ISI.

[Steve Sakwa, analyst]

John, I was wondering if you could just maybe update us on the Central SoMa Plan. My understanding was that, that was going to get voted on this month, but I'm hearing that may get delayed. So I'm just curious what your thoughts are, when that may get approved. And what does that mean for sort of Prop M allocations?

[John Kilroy, executive]

Well, as I said before, they can't provide Prop M allocations to projects in the Central SoMa. They're covered by the Central SoMa Plan until it's adopted. And you're right, the board of supervisors, they're still working on some amendments of the plan. That's what we've been told by them. But they still expect to approve it sometime in the fourth quarter. So that's the latest update. I mean, you're dealing with cities and politicians, and they're trying to get it right.

[Steve Sakwa, analyst]

Right. So it sounds like maybe it was early -- in early fall. Maybe now it's late fall. I mean, does that just sort of back up the timing a little bit on these projects and these allocations?

[John Kilroy, executive]

Well, we've always said that we thought we would get the Prop M allocations one side or the other at the end of the year, and that seems to be still on track. I mean, obviously, they've got to approve the Central Plan. And the Planning Department -- Planning Commission, rather, did their recommendation unanimously. You might recall that there were 3 or 4 people that filed an appeal. They had to go through a very careful process. So they've delayed what they thought was going to be, I think it was a July, a vote to September, October. August, nothing happens. And then they've now since delayed it again, because what we're told, as I said, is the supervisors are working on some amendments to the plan. And I don't know how significant those are, but they tell us that they expect to vote on it and approve it by the end of the year. So that then would provide the city with the ability to make the Prop M allocations to projects in the Central SoMa district.

[Steve Sakwa, analyst]

Okay. I know on the ballot coming up, there's a Prop C initiative. I'm just curious sort of your thoughts. And if it did get approved, what does that do for tenants and businesses? And are you kind of worried at all that, that might slow growth down?

[Tyler Rose, executive]

Well, I can cover the comment on the impact. I mean, it's unclear exactly how it will be passed through. But I think we talked about this last quarter where the worst case for us for '19 was $0.015. But we actually think it might be less than that based on the way the structure of the Prop is being written. In terms of slow growth, I mean, Rob can comment on that.

[A. Paratte, executive]

Steve, it comes down to this continuing race for talent and race for the right product to house that talent. And so if you look at the markets we're in, San Francisco, Bay Area, Seattle, those are the 2 markets nationally where companies want to be, and that's where their employees want to be. So in conversations with different tech companies, they have pretty explicitly said they're not going to let taxes or legislation impact real estate decisions that they need to make in order to run their business.

[Operator]

The next question is a follow-up from John Guinee with Stifel.

[John Guinee, analyst]

Dealing with Seattle, one thing that we found interesting was Amazon just signed a 430,000-square-foot lease in Bellevue. And I think you just signed a big deal with Facebook in Bellevue. Do you see a shift east or a shift away from the more urban core to that location in the cards for Seattle?

[A. Paratte, executive]

John, it's Rob. It's really interesting. It's a great question. And if you -- one thing I'd say is if you look at Bellevue specifically, it, in itself, is very urban. So it has -- it's got light rail. It's got a lot of restaurants and that sort of thing. It's not as suburban as other suburban markets, number one. Number two, as we've said on previous calls, what these companies are doing is making it frankly easier for their employees, right? And the easier they can make it in terms of commutes and where they're located, the easier it is for them to attract that talent. So that Bellevue growth is not coming at the expense of South Lake Union or downtown Seattle. In fact, it's kind of the reverse. It's happening in all 3 of those submarkets. And it's, I think, frankly, a really strategic move on the part of these companies in this race for talent.

[John Kilroy, executive]

Think about it, John. It's just like what's happening here in San Francisco, Silicon Valley, is that all -- even like the Facebooks that weren't here up until 1.5 years ago, now 1.2 million square feet in the city, you've seen many others do the same. They're just going to lose the people that live in San Francisco if they're going to force them to bus the better part of a couple of hours, 2x a day, to go down to the valley. And the same thing is exactly as Rob said. If you have a bunch of employees on the east side and you're Amazon, why force them to go over the bridge and to drive into the city? Go to them. And then we're seeing the exact reverse as well. Some of the big Bellevue tenants are now talking about significant presence in South Lake Union, downtown Seattle, because they've got employees over there and they don't want them to go work for Amazon. So -- or whomever it might be. So it sort of -- it actually makes all the sense in the world, and it's pretty terrific for Kilroy.

[Operator]

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

[Tyler Rose, executive]

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

[Operator]

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