Good day. Welcome to the Kilroy Realty Corporation second quarter 2019 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. 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.
Good morning, everyone. Thank you for joining us. On the call with me today are John Kilroy and several other senior members of our management team, who are all available for Q&A. At the outset, I need to say that some of the information we will be discussing is forward-looking in nature. Please refer to our supplemental package for a statement regarding the forward-looking information in this call and in the supplemental. This call is being telecast live on our website and will be available for replay for the next eight days, both by phone and over the internet. Our earnings release and supplemental package have been filed on a Form 8-K with the SEC, and both are also available on our website.
John will start the call with an update on conditions in our markets and a review of the second quarter, and I'll give you the financial highlights and discuss our updated 2019 earnings guidance. We'll be happy to take your questions. John?
Thanks, Tyler. Hello, everybody, and thank you for joining us. I'll begin today with a review of market conditions and follow with details of our recent leasing performance. I'll bring you up to date on our development and capital recycling activities. Conditions in our West Coast real estate markets remain very strong across a wide variety of industries. From Seattle to San Diego, the tight supply of available space, combined with significant demand for high-quality work environments, continued to drive rents, and Class A vacancy rates remain at frictional levels in all of our key markets. Technology continues to be a key driver. As I've said before, I believe we are still in the early innings of this new digital era. Advanced computing technologies, turbo-charged by artificial intelligence, continue to influence healthcare, finance, retail, and many other service industries that have proven difficult to disrupt in the past.
Another key driver of demand has been life science. U.S. spending on healthcare exceeded $3.5 trillion in 2018, more than 18% of U.S. GDP. That spending represents a huge opportunity for life science enterprises and is driving new investment, new businesses, and new collaborations. It is boosting demand and shrinking supply in traditional life science clusters from coastal San Diego to Seattle. We believe this growth story is still in the early stages. In addition, many of the measures we look to gauge the strength of the economic activity remain healthy. West Coast job growth continues to surpass the rest of the nation. VC funding is at all-time highs. U.S. healthcare venture fundraising reached a record $21 billion in 2018. Big Tech continues to buy little tech, which improves overall credit quality. The IPO market is providing strong liquidity.
On the ground, we're increasingly seeing a trend that the intersection of technology and life science is creating significant competition for office space in the same buildings across many of our markets. In San Francisco, we signed a lease with Dropbox, as you'll recall, for The Exchange. We had both tech and life science users competing for the project. You may also recall last year at our 360 Third Street project, a life science company established 136,000 sq ft presence in what was a traditional office building. In San Diego at our 9455 Town Center Drive development project, we have been in discussions with both tech and life science companies for all of the project. Now we're seeing it at Kilroy Oyster Point.
With the scarcity of new, large, state-of-the-art, highly amenitized work environments, we find ourselves negotiating more and more frequently with both tech and life science companies that are in competition for the same space. We expect this trend to continue. These conditions laid the groundwork for a terrific second quarter and first-half leasing performance at KRC. We signed more than 2 million square feet of space in the first 7 months of the year, putting us firmly on track for another year of record performance. That includes about 975,000 square feet in our development program, which scored more successes as Apple leased our entire project at 333 Dexter in Seattle, and Cytokinetics leased more than 35% of the first phase of Kilroy Oyster Point, just 4 months after commencing construction.
In our stabilized portfolio during the second quarter, we signed just under 900,000 sq ft of new and renewing leases at cash rents that were up 41%, and GAAP rents that were up net 69% from prior levels. Among the highlights, San Francisco tenants WPP and Sony both expanded their footprints in the city, signing up for 234,000 sq ft between them at cash rents that were up 75% on a GAAP basis, excuse me, 75% on a cash basis, and GAAP rents were up over 109%. WPP expanded its existing footprint by 70%, while Sony established a new presence in the city. In San Diego, two existing tenants expanded their space in our Del Mar portfolio by more than 90,000 sq ft in the aggregate, with cash rents that increased about 12%, and GAAP rents that increased 31% on a weighted average basis.
We ended the second quarter with our stabilized portfolio 97.2% leased. We estimate that in-place rents across our stabilized portfolio at the end of the quarter remained more than 20% below market, the highest level in company history. Now let's talk about the progress across our in-process development program. Starting in Seattle, we signed a long-term lease with Apple in June for all 635,000 square feet at our 333 Dexter project in South Lake Union. 333 Dexter is our first ground-up development project in Seattle, and its design, scale, and location, one of the city's most sought-after submarkets, attracted attention from a variety of organizations. It's a great example of how our development program creates substantial value. Our cost basis in this brand-new, state-of-the-art project is roughly 65% of where older product has recently traded.
We've now locked in an attractive revenue stream with a high-quality tenant for the long term. In San Francisco, during the second quarter, we added 100 Hooper, a 400,000 sq ft project, to our stabilized portfolio. We also delivered the first half of The Exchange on 16th, a 750,000 sq ft project. In Del Mar, the retail portion of our One Paseo mixed-use project is now 94% leased and 72% occupied. The office portion of the project, which delivers in mid-2021, is 68% leased and 81% committed. Rents for both retail and office are setting records for the Del Mar submarket and for San Diego County. The project's residential units will begin delivering towards the end of the summer, and phase 1 is already approximately 20% committed. Our success at One Paseo underscores the compelling attraction of the live, work, and play environment we have created.
In Hollywood, as previously announced, the office space at our On Vine mixed-use project is fully leased to Netflix. Both office and residential components of the project remain on schedule for a 2020 completion. Moving to life science, we have 2 projects underway totaling 820,000 sq ft. That's phase 1 of Kilroy Oyster Point in South San Francisco, 9455 Town Center Drive in the University Town Center submarket of San Diego. I'm happy to report that we are in active lease negotiations for the entirety of this sq ft. Just yesterday, we announced that Cytokinetics signed a 12-year lease for 235,000 sq ft at Kilroy Oyster Point, taking more than 35% of phase 1. In the aggregate, our $2.2 billion of projects under construction is two-thirds leased, excluding resi and retail.
Upon stabilization, the five projects will generate an estimated cash NOI of approximately $140 million, roughly 80% from office and life science and 20% from residential. Before turning to the development pipeline, I'd like to recap our development track record in this cycle. Since 2013, we have delivered over $2 billion of projects at cost, 90% of which was office and 10% residential, with a cash return of roughly 7.7%, generating more than $165 million of stabilized NOI. On the leasing front, three-quarters of the projects were started spec and 95% were leased prior to completion. Obviously, we're pleased with this performance. Now moving to the development pipeline. On July 18th, we received unanimous approval from the San Francisco Planning Commission for our Flower Mart project. The next and final step is for the Board of Supervisors to approve the project's development agreement this fall.
On the acquisition front, we continue to evaluate opportunities that could add immediate cash flow and other opportunities that would replenish our development pipeline. While we have not been large-scale buyers of operating properties in the past two years, we are seeing a few select properties in our key markets that could offer growing yields and other attractive metrics, including below-market rents and meaningful discounts to replacement costs. In our capital recycling program, we completed the disposition of a small property located along the 101 corridor in Westlake Village for $18 million and have a second asset currently in the market. Westlake, together with the Calabasas sale earlier this year, means we've now exited the 101 corridor completely. We now believe that other asset dispositions we are evaluating are likely to happen next year. With the new timing, we expect our total dispositions in 2019 to be about $150 million.
I'll wrap up my comments with five key takeaways. Market conditions are the best we've seen in some time, and we are capitalizing on this across the portfolio, driving rents, and increasing value. While we continue to believe development is the best way to create value, and we believe 333 Dexter is another good example of that, we are underwriting acquisitions of existing assets with favorable valuation metrics. More to come on that. We remain disciplined in evaluating new development starts, replenishing our pipeline, and pursuing other strategic opportunities.
We continue to place balance sheet strength and financial flexibility at the core of our business strategy, and we have a highly experienced and talented management team up and down the West Coast that is well-positioned to continue to create significant value for our shareholders. That completes my remarks. Now I'll turn it over to Tyler for review of the financial results. Thank you, Tyler.
Thanks, John. FFO was $0.95 per share in the second quarter, which included the earlier than forecasted commencement of the first half of The Exchange. Same story, NOI in the quarter grew 4.7% on a GAAP basis and declined 5.6% on a cash basis. GAAP NOI growth was helped by a net $0.05 charge from bad debt in the prior year period. As we've discussed on earlier calls, cash NOI in the first half of the year has been impacted by a handful of large expirations, which have been largely re-leased but require some downtime for TI's. We expect cash NOI to resume growing in the second half and to be roughly flat for the full year. At the end of the second quarter, our stabilized portfolio was 93.8% occupied and 97.2% leased.
With our strong leasing activity through the first seven months of the year, we've effectively addressed all 2019 lease expirations with just 1.5% remaining. Over the next 15 months, we only have one expiration greater than 100,000 sq ft to lease. As John mentioned, we estimate that our portfolio-wide average in-place rents remain 20% or more below market. By region, in-place rents for San Francisco are approximately 31% below market, Los Angeles and Seattle's are 11% below market, and San Diego's are about 9% below market. Also, during the quarter, we increased our regular quarterly cash dividend by 6.6% to $0.485 per share or on an annualized rate of $1.94 per share. This represents close to a 30% increase over the past three years. Let's move to the balance sheet.
We drew down all the proceeds on the sale of 5 million shares of equity we had placed last August on a forward basis and used the roughly $350 million to pay down our bank line. The roughly $90 million of forward equity placed in the first quarter under our ATM remains undrawn at this time. We have substantial debt capacity and flexibility. We have $690 million of capacity under our bank line and an incremental $600 million under the accordion feature. We have a large unencumbered portfolio with only two mortgages, very little floating rate debt, and no significant maturities until 2022. Our debt-to-market cap at quarter end was approximately 25.5%, and our debt to EBITDA was approximately 6.1 times, adjusted for the equity forward transactions.
Given favorable credit market conditions and our choice to defer some anticipated asset disposals into next year, we're reviewing options to accelerate the timing of issuing new debt. Now let's discuss our updated guidance for 2019 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 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 occupancies. With those caveats, our updated assumptions for 2019 are as follows.
As John noted, we now expect dispositions for 2019 to be at approximately $150 million. We forecast accelerating our next bond deal by a quarter, given the lower dispositions target. We forecast remaining 2019 development spending of $250 million-$300 million. Our forecast for year-end office occupancy remains at 94%-95%. We continue to expect 3%-4% growth in GAAP same-store NOI for the full year and flat results on a cash basis. Taking all these assumptions into account, we are increasing our 2019 earnings guidance range to $3.67-$3.78 per share with a midpoint of $3.73 per share. The midpoint increase of $0.02 is primarily driven by the earlier than forecasted commencement at The Exchange. That's the latest news from KRC. I'll be happy to take your questions. Operator.
Thank you. We will now begin the question-and-answer session. To ask a question, you may press star, then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then two. At this time, we will pause for a moment to assemble our roster. Our first question today will come from John Kim of BMO Capital Markets. Please go ahead.
Thank you. Congrats on the Apple lease at 333 Dexter. It looks like the stabilization date was moved back a couple of years, and I was wondering if you could discuss the timing of the FFO contribution of the asset.
Yeah. The projected, it's going to be taken down in three phases starting the second half of 2020 into 2022. We'll be providing more detail on that in the coming quarters.
Do you stop capitalizing interest when the occupancy takes place on the different phases?
Yeah.
At the Flower Mart, it looks like there's some conflicting news items whether or not the Flower Mart is going to decide to stay at the project after you complete it. Can you just provide any further clarity you have on that? Yeah. This is John. Yeah. The Flower Mart came to us and the city and said that with all the buildings that are going on, us, ARE, everybody else in Central SoMa, that it's going to be change the character of the area from industrial to much more upscale.
We think maybe it would be better for us to go over to the Produce Mart that's going to be built. Would you accommodate us? We talked to the city, they said, "Fine with us." You still get credit for saving the Flower Mart for the project, all the rest. They may very well move there. They have the option to do that. That's been approved by the city in all its different components, including the Supervisors, in terms of supporting it. We don't know whether they'll come back or not. It doesn't cost us any more money, because the money was already there. In fact, it would increase our leasable office square footage slightly if they did not come back. More to come on that.
As far as the total costs, looks like similar projects that you have around the $850 range per square foot. Is that a good benchmark for the Flower Mart? Can you also provide an update on the litigation at the project?
I can't talk about litigation. There's a variety of other than to say that people are endeavoring to negotiate a successful completion. We're hopeful that'll happen. I can't, because it is litigation, I can't get into specifics of that. In terms of the cost, let's just say that we're going to have a very favorable cost basis, but we are in negotiation with a lot of different people for the Flower Mart, and I don't want to talk about what the cost is.
Understood. Thank you.
It's going to be favorable.
Got it. Thanks a lot.
The next question will come from Nick Yulico of Scotiabank. Please go ahead.
Thanks. Just following up on Flower Mart. I guess, can you give us a feel for where you think demand is like in the city right now, and where have Class A market rents for new construction in the city risen to?
Yeah. Well, I don't think I've ever seen demand any stronger. As you've seen us announce over the past year's worth of conference calls, we've been leasing space at record rates for space that isn't contiguous or space that may not be available other than in tranches over the next couple of years. That's in older buildings like 303 and 360 and 201 and so forth, at 101st. Rents in the Brannan Street corridor for quality product is, let's just say north of $80 triple net, and I think moving higher.
Okay. That's very helpful. Going back to the Oyster Point lease. Cytokinetics did file some information about it, and based on that rent, it looks like the project is already yielding over 7%. Assuming you got similar rents for the rest of the space, how should we think about potential rent growth in that market and then also, like future phases of construction costs? Is this a development that's going to get closer to an 8% yield over time?
I'm not going to put my neck out there because every time I do, you guys want to chop it off because something happens. We think that the phase 1 will exceed our pro forma expectations that we've talked about before. Future phases we think rents will grow tremendously in that market. You've heard us say before that the same types of tenants and many of the same names lease space in Cambridge, lease space in South San Francisco for the similar kinds of properties and operations. If you take a look and draw a little bit of a forward-thinking to where rents might go in South San Francisco, look at where they are in Cambridge. We think we're going to see big rent increases over the next number of years, and we think rents will escalate significantly in the future phases of KOP.
Just one last question on the lease that was signed. It looks like the tenant doesn't pay rent on the full amount of the square footage in the first year, pays a piece of that, and I wasn't sure if that was because they're not taking all the space or if that was built into some additional free rent component.
Tyler, you want to handle that? Michelle, go ahead.
Yeah. No, I think they're taking the $160 in the first 12 months, and then the remainder over time, in the second year. The total $235.
Okay, thanks everyone. Nice job.
The next question will come from Craig Mailman of KeyBanc Capital Markets. Please go ahead.
Hey, guys. Tyler, just one quick one on guidance on the bond deal. What should we think about size and timing on that one?
Yeah. We're still working on it. 350-400 maybe on size, and timing maybe September-ish kind of thing. Still working on it.
Okay. That's fair. John, just going to your comments that you're seeing more acquisition opportunities. Could you just kind of juxtapose that with the good development pipeline you have with Flower Mart and others and kind of having to fund all this with where the equity is, maybe doing more mix, more debt and dispos, kind of how the mix of capital allocation could go in the next 12-24 months?
Just on dispositions to begin with, we gave guidance early in the year. I think everybody remembers of between $150 and, was it $350, Tyler? Yeah. We're at the lower end, and we explained before that some of the assets we thought we'd be selling, we think we can create some significant value by repositioning them before we sell them. That means we'll probably do more dispositions next year. In terms of acquisitions, I don't want people to go out and think that we're going to become massive acquirers. We're not. We are seeing a couple assets that we think are extraordinarily well-positioned for huge increases in the future, that are currently accretive, and if we can be successful in acquiring those, then we think that's a good play for shareholders.
Tyler, if you want to talk more about funding, I think that was the second part of your question.
Yeah. In terms of the funding of the existing needs, 2019 is effectively taken care of with the dispositions that we're still doing and the ATM four that we drew down in the first quarter. 2019's checked off. For 2020, as we just talked about, we're looking at a potential bond deal that would pre-fund some of the 2020 development spending. To the extent we do acquire something or decide to do more development, then we'll evaluate the other alternatives that we've always used, which is dispositions, debt, and equity. We have a lot of debt capacity, and there's also the joint venture alternative.
Okay. Then just, John, I know because you don't want us to think you guys are buying too much. Just order of magnitude, maybe, of what you guys think you could take down, and maybe the spread between those type of stabilized yields versus what you're getting on your developments?
Obviously, you're not going to get on anything you buy to reposition or that gets repositioned through the course of time. You're not going to get anywhere near the development yields. I don't want to get into specific yields because we have deals in discussion, and I just think that's inappropriate to talk about because people do listen or read these scripts that are competitors, and I just feel uncomfortable talking about it. Yeah, it is definitely safe to say that you're not going to go out and acquire high quality, best in class assets and have them be anywhere near the yields that Kilroy's been able to achieve in this cycle, including currently in our development. There's probably 250 basis points, ±, possibly more of a spread.
What I'm looking at is if you can end up with something that is slightly accretive, that can become massively accretive a few years down the road, I like that.
What do you think, how much would you spend on this? Just wide kind of goalposts.
Well, it'd be a fraction of what we do from a development standpoint. What do we have, Tyler, right now? $2.2 billion, $2.5 billion of development underway, and I'm not talking about anything that approaches even half of that.
Just one last one from me. I think in the past you said that even though you're going to get approvals on the Flower Mart, you still wouldn't start until kind of the lawsuits are settled. I'm just curious if that's still the case, just how it's looking from kind of a phased perspective. I know in the past you said maybe it'd be two phases. Is there enough demand out there to just do it all at once? Just kind of thoughts around that.
Yeah, I think there's enough. First of all, the entitlements that we have will be entitlements for what we call phase one, which is everything but the Gateway building, which is roughly 350,000 sq ft worth of leasable space. We think it's likely that we will start-- It gets staggered a little bit between the Blocks building and the Market Hall building, because the Market Hall building doesn't take as long to start. It all doesn't technically start at the same time, but I think it will finish at the same time. In terms of demand, there's very strong demand by major companies for all of it. I'm talking about all of it, where there's companies that want all of it for themselves.
Wow. Okay, great. Thanks.
The next question will come from Steve Sakwa of Evercore. Please go ahead.
Thanks. Good morning out there. John, I guess to kind of follow up on that point about the demand, just help us understand how you sort of decided on Cytokinetics. I realize it's a little bit more of a smaller biotech company, has a couple of drugs. It's not traditional household name. It's certainly not Apple from a credit perspective. How did you guys go about sort of evaluating that company, kind of giving them part of phase I, given the kind of demand it sounds like that's behind that?
I think it'll become very clear in our next conference call.
Okay. All right. Thank you.
Our next question will come from Jamie Feldman of Bank of America Merrill Lynch. Please go ahead.
Great. Thank you. I want to talk a little bit about rent growth. Can you just talk about across your major markets, what you're seeing in terms of net effective rent growth, and maybe how does it feel versus last year?
You want to cover that, Rob?
Sure. How you doing, Jamie? This is Rob Paratte, by the way. Starting with Seattle, we just see continued pressure on rents. Again, based on what brokers are forecasting for the year, for the remainder of this year, I wouldn't be surprised to see it in the double digits again, in terms of net rent growth. The Seattle Puget Sound area added over 43,000 jobs in the past 12 months.
There's, I think, this pent-up demand with a lot of employees in the area, plus people moving in. The FANG tenants up there are pushing a lot of this rent growth as well as just occupancy. In San Francisco, I think, again, it will likely be, brokers are predicting, especially for larger transactions, that it will be in the double digits again. Whether that's 10% or 12%, hard to say right now, but based on the demand we're seeing and the number of tenants that are in the market, it's looking like it will be at least as good as last year. Your question was, I'd say up and down the coast, how do the markets look? How did rent growth look? I'd say they look, in every case, better than they did last year. It's a very dynamic time right now.
In Los Angeles, probably just again, depending on the submarket, I think in the west side of L.A. and Hollywood, you could start getting into double digits, but it's probably more, I'd say, safer to say 5%-8% rent growth. San Diego has really started humming well, just in terms of the amount of activity that's going on with tenants that are in the market, but also tenants that haven't yet come to the market that are looking. We're seeing, particularly in San Diego, in the right submarkets, whether it's our Del Mar area where One Paseo is or for example, our Little Italy project, we're starting to see different types of tech. I think rent growth, again, probably won't be in the double digits, but could certainly be in the mid-single digits.
All right. That's very helpful. As you think about, we keep seeing more and more news coming out of San Jose and Silicon Valley. I get Silicon Valley occupancy improving and San Jose, a lot of investment in housing and mixed-use. What are your thoughts on what's happening down there and your appetite to get even more involved?
In San Diego?
No, Silicon Valley, Peninsula, San Jose.
I think San Jose's got a lot of people that are assuming there's going to be tremendous growth. In my mind, I like San Jose. I think it's a wonderful place. We've looked at it very thoroughly. We've reviewed a lot of properties, some of which have been bought by some of our peers. There's no limitation on what you can build. Rentals don't justify new construction. That doesn't mean that rents won't get there. If you need 1 million sq ft, there are probably eight or nine people you can talk to for that 1 million sq ft. The scarcity factor, the demand-supply balance is not to our liking at this point. That could change.
Okay. Tyler had mentioned one expiration over 100,000 sq ft over the next 15 months. Can you talk about that lease and your prospects to either renew it, or if you think it's a move-out?
Yeah. It's gonna be a move-out, and I think we'll move the rents up considerably by repositioning it, but it'll take a little time. That happens to be in a property that we were thinking about remodeling anyway, and so it's part of a larger development of multiple buildings. They are moving out, Jamie.
Where is it?
It's Kilroy's I think we call it Kilroy Center, Long Beach.
You'll plan to keep the asset, not sell it?
I don't want to talk about what we might be doing with any particular asset. Until we announce it, we don't talk about it.
Okay. Just bigger picture, it looks like you're very comfortable growing more in life science. What are you thinking on the regulatory environment and drug pricing and how that might impact the sector?
It's hard. If you knew that, I wouldn't be in the real estate business. I'd be making that bet and making zillions of dollars. I don't mean to be flippant, but I don't know that anybody can make a call on that. I think what you have to look at is the fact is our population is getting older. We've got massive problems with diabetes and Alzheimer's and a variety of other things that would bankrupt the country if we don't find new protocols to deal with it, new drugs to deal with it. I think that we're gonna find this area continue to expand. I think its technology is gonna bring prices down and develop new remedies and whatnot. I think it's pretty well baked that it's gonna grow. Will drug prices tamp that down a little bit?
I don't know how to predict that, Jamie.
Okay. I appreciate your thoughts. Thank you.
The next question will come from John Guinee of Stifel. Please go ahead.
Oh, well, you guys have been busy out there. Man. Question for you. DirecTV probably getting down below 10 years on the lease. Is that lease appreciably above or below market? I noticed that your residential deal on Vine is costing about $1 million a unit. Can you talk about what kind of yield you can get on a $1 million-a-unit residential deal?
Yeah. I'll let Steve talk about resi, but let me talk about the DirecTV. The rent is very, very, very significantly below market.
That's all we need to know. Okay.
Steve, you wanna talk about the resi?
Sure. John, on yields on our resi buildings are in line with what other developers are delivering projects at, and we're not reporting those yields, breaking them out. They are competitive, they are accretive, and they add an important value to these mixed-use projects.
Are you going vertical with steel and concrete in Hollywood and then doing a podium building in Del Mar? Is that what my guess is?
Yes.
Okay, thanks.
Our next question will come from Derek Johnston of Deutsche Bank. Please go ahead.
Hi, everyone. How you doing? I know we touched on funding briefly. I want it to be pretty direct. What are the funding plans for Flower Mart, specifically?
Well, we've talked about that before, and we have a lot of different ways of thinking about that. It's just a bigger project, but it's exactly the same as we've talked about with others. That is, we could venture it, we could add debt, we could add equity, any comp, we could do dispositions. We're totally flexible. Right now, I think we'll end up with a significant lease in due course, and then we will address our capital plan concurrently with announcing any lease.
Great. Just secondly, and lastly, what do you have left to lease in San Francisco this year, given the truly full occupancy? Really, is there much juice left to squeeze out of this orange in San Francisco in the second half of 2019? Thank you.
Tyler?
Yeah. As I mentioned in my comments, there's very little left in 2019 in the Bay Area to lease. We're basically full. Rents are below market in our San Francisco portfolio, about 31%. We can't capture too much of that as you're getting at, in 2019.
Our next question will come from Blaine Heck of Wells Fargo. Please go ahead.
Thanks. John, you talked about acquisitions. I think you were referring mostly to operating properties and value add type deals. I guess, how are you thinking about your land holdings at this point? Obviously, you've got a lot of wood to chop with regards to Oyster Point and Flower Mart. Are you guys still actively looking for other sites for development down the road?
Well, yeah, we are. We look at everything, Blaine. As I think we've said multiple times over the years, we literally look at everything, even whether it's a potential development, whether it's a potential acquisition. Part of that is market knowledge. Part of it is what are others doing? What do they see that we don't? Sometimes we act on it. Specifically, with regard to development sites, there are some sites that we like because they are right in our wheelhouse, and they check all the boxes. Whether or not we'll be successful over time in acquiring some additional sites remains to be seen. With regard to the two big projects you mentioned at Oyster Point and the Flower Mart, first of all, Oyster Point, we have entitlements for another couple of million square feet at Oyster Point.
You have to go through a precise plan process, which takes about a year. We'll be submitting the precise plan for the subsequent phases at Oyster Point. We'd be hard-pressed to be under construction in 15 months, assuming we wanted to start construction. I don't think we could start probably for another 15 months, plus or minus there, for the next phase. With regard to the Flower Mart, obviously, we've got to see the city solve the lawsuits. Hopefully, that happens over the course of the next 6-12 months. We've got to move the Flower Mart off, and then we start construction. Those are downstream. We have 2100 Kettner down in San Diego, which Michelle, forgive me, everybody, but I just can't remember the numbers on every single project. That's an incremental spend of how much, Michelle? About $100 million. $100 million? About $100 million.
Yes. Yeah. Okay. Yeah. We'll probably start that sometime in the next six months based upon what we're seeing for tenant demand. Then buying additional sites, we're always looking. We'll report on that when we think we're serious about something or we have something to announce.
All right. That's really helpful. It looks like CapEx per square foot and concessions in general were a little higher this quarter. Can you just talk about whether that was a mix issue? I guess, maybe for Rob, more generally, what are you seeing with respect to TIs and free rent in your markets?
Sure. I'll handle the last part of your question first, Blaine. What's happening with the TI market is basically cost-driven, meaning that the costs are higher just because labor, et cetera, materials, that kind of thing, just given the economy that we have. That said, with our new development particularly, the TI tends to be a little bit higher, but we're also getting higher rents for that. TIs are also driven largely by a function of how long the lease terms are that you sign. In past markets and that sort of thing, TI becomes sort of a concession that gets increased, but that's not the case now. They're all in different sub-markets falling within a certain range, depending on whether it's new construction or existing lease term, and then the type of rent you're getting.
All right. That's helpful. Thanks.
The next question will come from Michael Carroll of RBC Capital Markets. Please go ahead. Mr. Carroll, your line is open. It may be muted on your end.
Operator, let's move on.
The next question will come from Manny Korchman of Citi. Please go ahead.
Hey, guys. John, you talked about sort of an overlap between tech and life science tenants. Can you talk about your leasing approach to those two different constituencies and how you either make sure or don't make sure for them to overlap?
I'm sorry, Manny, the last part. What was the last part of your question? It cut out.
How you manage the leasing process between those two somewhat different constituencies within the same assets.
Well, remember that sometimes they're in the same asset, sometimes it's a multi-building thing. All of the stuff, whether it was The Exchange or whether it's KOP or whether it's 9455, they're all designed structurally, mechanically, et cetera, floor loading, ceiling height, et cetera, for life science, because they do have specific things that are important to them. What we're seeing with the major tech companies is they also need more mechanical, more ceiling height, it tends to fit pretty consistently between the two uses. In terms of mixing them in a building, as you know, there's various lab issues and so forth on lower floors versus higher floors and so forth. We're very conscious of making sure that the different types of uses we might put into a project are compatible and not incompatible. We've not had any resistance.
As I mentioned in my comments, all the space that we have underway for life science, we are in negotiations with life science companies and in many cases with tech companies for the same space. I like that because the tech companies push life science companies on rent.
Thanks for that. Can you just give us updated thoughts on your search for JV partners, either for existing assets or some of these large-scale developments?
Well, there's a lot of people out there that want to do ventures on existing product, on life science product, on the Flower Mart, on other projects that we're doing. If we want to do that, unless there's some big change in the marketplace in a macro context, I think we have multiple candidates from which to choose with very favorable pricing. More to come.
Thanks, John.
You're welcome.
Our next question will come from Dave Rodgers of Baird. Please go ahead.
Hey, John. Maybe this dovetails a little bit with Manny's last question, with regard to kind of pushing asset sales into next year and bringing the bond offering forward, what was the main driver in kind of pushing the asset sales back and just kind of given the demand you're seeing for assets, would you want to get that done sooner rather than later? Were there any triggers kind of in the first half of the year that led you to kind of push that back a little bit?
Well, as I've tried to explain at previous conference calls, the mark to market, Dave, on these assets is far greater than what we thought it was, and we think we can significantly increase the value of them through repositioning and then to dispose of the assets that we had sort of earmarked, we think it'll translate to a much higher sale price. It's as simple as that.
Same assets, just maybe investing some more capital, or is it more leasing when you talk about repositioning?
It's investing some capital, which will, we think, achieve significantly higher rents on the expirations that we see over the next year or so.
In capital?
Pardon me?
Sorry, go ahead.
Yeah. I think it translates to a lower cap rate because it puts the assets in a much better light.
Fair enough. Is that a meaningful number in terms of the CapEx going into those for sale or potentially for JV assets?
Put it this way, the value creation versus the added increment of investment is an enormous positive return.
Okay. Thank you.
You're welcome.
Ladies and gentlemen, this will conclude our question and answer session. At this time, I'd like to turn the conference back over to Tyler Rose, Executive Vice President and Chief Financial Officer, for any closing remarks.
Thank you for joining us today. We appreciate your interest in KRC. Goodbye.
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect your lines.