Good afternoon, and welcome to the Kilroy Realty Corporation 4th Quarter 2018 Earnings Conference Call. All participants will be in listen only mode. 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 Jeff Hawken as well as other senior members of our management team who are available for Q and 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 8 days both by phone and over the Internet. Our earnings release and supplemental package have been filed on a Form 8 ks with the SEC and both are also available on our website. John will start the call with a review of the Q4 and the year, Jeff will discuss conditions in our key markets, and I'll finish up with financial highlights and a review of our initial 2019 earnings guidance that was published yesterday in our earnings release. Then we'll be happy to take your questions. John?
Thank you, Tyler. Hello, everybody, and thank you for joining us today. I'll begin this morning with a review of 2018 highlights and 4th quarter results and finish with the status of conditions in our markets that are driving our development activities and shaping our 2019 outlook and objectives. First, last year's highlights. 2018 was an excellent year for us across the company.
Our West Coast markets remain healthy and vibrant, and we in turn delivered a record high leasing performance, signing 3,400,000 square feet of leases in our stabilized portfolio and development program. Cash and GAAP rents were up 15% and 36%, respectively, in the stabilized portfolio. We proactively addressed our 2018 2019 expirations. We signed a 12 year lease with Netflix for all of the 355,000 square feet of our office space at the mixed use development project that is under construction in Hollywood. We also signed leases on 91% of
the retail space
and have commitments on roughly 2 thirds of the office space at our One Paseo mixed use project in Del Mar. We commenced revenue recognition on all of the office space at 100 Hooper in San Francisco. We added a key life science development opportunity to our pipeline with the acquisition of Kilroy Oyster Point, a fully entitled approximately 40 acre waterfront site in South San Francisco. We made 2 strategic property acquisitions totaling 257,000,000 1 in South San Francisco and the other in San Francisco's Technology Corridor on Brand Street. Both acquisitions are adjacent to existing KRC assets.
We generated $373,000,000 in our capital recycling program through the disposition of 3 non strategic assets. We increased our dividend by 7.1 percent or 30% over the last 3 years. We strengthened our balance sheet, lowered our overall cost of capital and successfully managed earnings dilution with the issuance of $1,100,000,000 in equity and debt. And we reinforced our commitment to building a sustainable enterprise with a pledge to achieve carbon neutral operations by year end 2020. We also ranked number 1 sustainability across all publicly traded real estate companies in the world by Gres B and received numerous other awards for our leadership positions from the EPA and NAREIT.
Now let's get into the 4th quarter details. We had another outstanding quarter in leasing. In our stabilized portfolio, we signed newer renewing leases on 768,000 square feet of office space. Rents that were up 25% on a cash basis and 51% on a GAAP basis. Included in the 4th quarter was a 5 year renewal with Microsoft for 76,000 Square Feet in Silicon Valley that was to expire this year.
The deal addressed the last of our 5 20 that backfilled our 2019 expiration. We were equally busy closing out our investment activities for the year. We completed the disposition of 3 non strategic assets for $373,000,000 across 3 markets Seattle, the San Francisco Bay Area and the 101 quarter in Los Angeles. The average cap rate on the 3 transaction was in the low 5% range. We also completed in December the $146,000,000 acquisition of 345 Brandon Street in San Francisco.
This building is connected to our 333 Brannen Street project that we developed and delivered in 2015, and both properties are currently occupied by Dropbox. Along with 301 Brannan, these buildings will serve as GM Cruise's new headquarters following Dropbox's move to the Exchange later this year. I'll make a few comments about the market tone across the West Coast. From San Diego to Seattle, every market we compete in is benefiting from broad based economic growth fueled by the growing number of companies and industries competing for space and talent, not only in technology, media and life science, but also a broad cross section of sectors of the economy. This dynamic has resulted in one of the strongest market conditions we have seen with very limited supply and solid demand driving declining vacancy rates and higher rents.
Other indicators we monitor also remain healthy. 2018 BC funding was at a record level in this cycle and our West Coast markets accounted for 60% of the funding. Sublease activity in San Francisco remained disciplined with 1,700,000 square feet or just about 2% of inventory. Job growth in our markets also outperformed the rest of the nation, led by strong growth in San Diego and Seattle. And in terms of the investment market, high quality, well located assets in our markets continue to command strong valuations as we have seen pricing in the $1500 per square foot range in San Francisco, over $1,000 per square foot in Seattle and Los Angeles, and now $700 per square foot for older products in the San Diego submarket of Del Mar.
Now let's move to development. We have 2 projects that are nearing stabilization, 100 Hooper and The Exchange on 16th. Once stabilized in 2020, these two development properties will generate approximately $70,000,000 of cash NOI. Based on current market cap rates, we believe the value creation on these two projects is approximately $850,000,000 doubling the value of our investment. We have 3 projects currently in the construction process, 333 Dexter, 650,000 square foot project in the South Lake Union submarket of Seattle 1 Paseo, a 1,100,000 square foot mixed use office, retail and residential project in Coastal San Diego's Del Mar Community and our Hollywood development, a 570,000 square foot mixed use project.
In Seattle, we continue to make progress on lease negotiations with several tenants at 333 Dexter. The strength of the market in Seattle remains robust and we expect to have a substantial leasing on this project by shell completion that is scheduled for later this year. Also, I would like to bring you up to speed on the new tunnel that connects South Lake Union to the south ends of the city. Just yesterday, SR 99 tunnel opened to traffic after 5.5 years of construction, improving traffic flow and transforming the pedestrian environment around our 333 Dexter project. Travel time from the south end of the city to the north end of the city is now estimated to be less than 3 minutes.
That is a really big deal for our development and for South Lake Union. At our One Paseo project, the retail space is essentially fully leased, marketing is underway for the 608 residential units to be delivered over time beginning midsummer and office pre leasing activity is roughly 67%. The office component is commanding premium rents that are 25% to 30% higher than existing top of class product in the market. With the Netflix lease down in place for all of the office space at our Hollywood development project, we commenced construction on the project's 193 residential units. We expect to deliver the office space to Netflix in mid-twenty 20 and the residential tower later that year.
Taken together, these three projects represent a total estimated investment of over $1,500,000,000 with an average delivery timeframe of early 2020. Upon stabilization, projected cash NOI is close to $100,000,000 with the product components to be 65% office and 35% residential and retail. In terms of our development pipeline, we are making progress on both the Flower Mart and Kilroy Oyster Point. With regards to the Flower Mart, in early December, San Francisco's Board of Supervisors unanimously approved the Central Central SoMa plan, which allows for Prop M allocations to be allocated this spring. As anticipated, there have been a few lawsuits filed that oppose the Central Soma plan and the timing on how those get sorted out is still unclear.
We continue to see significant interest from a variety of large users in what is arguably one of the most sought after commercial submarkets in the country. At Kilroy Oyster Point, we are extremely well positioned with 2,500,000 square feet of entitlements in a supply constrained market that has a vacancy rate of about 2%. We are in numerous discussions with potential tenants in connection with Phase 1, which includes 3 buildings totaling 600,000 square feet. Wrapping up, we will be focused on 3 key objectives in 2019. First, execution in our development pipeline.
We continue to believe that development is the best way to create shareholder value at this point in the cycle, and our focus is to ensure that our current projects deliver on time and on budget and that we make progress on securing entitlements for the Flower Mart. 2nd, maximizing value in our stabilized portfolio. This includes leasing up our vacancies, driving rents where possible and proactively addressing expirations. And 3rd, maintaining a strong and flexible balance sheet. This includes keeping our metrics conservative and having access to multiple forms of capital.
That completes my remarks. Now I'll turn the call over to Jeff for a closer look at our markets. Jeff?
Thanks, John. Hello, everyone. As John stated, conditions in our West Coast real estate markets remain healthy. Let's begin in San Francisco, which remains among the strongest commercial real estate market in the country. 2018 was a spectacular year in leasing large blocks space.
There were 21 transactions greater than 100,000 square feet outpacing 20 seventeen's record of 2018. This drove rent increases across the market and with no new product being delivered until 2023, we expect rents to continue to increase. For the year, San Francisco delivered Class A rent growth of 12% year over year, more than twice the level the brokerage community had initially forecasted. In San Francisco Soma, South Financial and Mission Bay Districts, Class A direct vacancy rates were 1.8%, 4.6% and 6.6%, respectively. In South San Francisco, life science vacancy rate was 2% and in Silicon Valley, Class A direct
A
a as the labor pool for the technology focused workforce continues to migrate to Seattle. With limited supply, Class A rents hit a record high. Class A direct vacancy in South Lake Union is 1.7% and in Bellevue, it is 5.3%. Our Seattle portfolio is currently 97.7 percent leased. Our in place rents are approximately 10% below market.
In San Diego, market fundamentals in 2018 outperformed a strong 2017 in terms of vacancy, net absorption and rental rates. This was driven by expansion in the technology, life science and financial services sector. Most notably, Apple leased a 97,000 square foot project in University Town Center, deepening the technology concentration that already exists with major names like Amazon and Walmart Labs. The vacancy for competitive product in Del Mar was approximately 9%. Our San Diego portfolio is currently 90.9% leased.
We reported last quarter that our in place rents were for the first time in 40 quarters at market. Rents have since continued to increase and we are now approximately 4% below market in San Diego. According to Crunchbase, Los Angeles is now ranked as the 3rd largest tech ecosystem for startups in the nation. The region had a 6th consecutive year of positive net absorption, generating all time high rents as major tech media companies such as Netflix, HBO, Amazon, Facebook and Apple continue to expand across the market. Class A direct vacancy in West LA was 6.5% and Hollywood was 7.9%.
Our Los Angeles portfolio is currently 96.% leased. In place rents are approximately 13% below market. On a portfolio wide basis, our estimated average in place rents were approximately 20% below market. That is the greatest differential in company history. We are in excellent shape on our 2019 expirations.
We have leased 929,000 square feet of the 1,400,000 square feet set to expire in 2019, leaving only 4% remaining to be leased for this year. And we are focused on getting ahead of future expirations with only 2 expirations greater than 100,000 square feet in 2020. In 2019, we will see the benefit of some of the big leases we executed last year, including Amazon in Seattle and GM Cruise, DoorDash, Splunk and Nektar in San Francisco. We do expect on average about 3 to 4 months of downtime associated with each of these leases when the prior tenant moves out and we complete tenant improvements for the new tenant. That's a snapshot of our markets.
Now Tyler will cover our financial results in more detail. Tyler?
Thanks, Jeff. FFO was $0.78 per share in the 4th quarter includes 3 one time items that on a net basis lowered FFO by $0.12 per share. On an adjusted basis, FFO would have been $0.90 per share for the quarter. The first one time item is a $0.12 per share charge related to the early redemption of our 2020 senior notes. The second one time item is a $0.12 per share non cash charge related to the potential accrued retirement benefits.
And the 3rd one time item is a positive $0.11 per share gain on the sale of land in connection with the disposition of the Plaza Yarrow Bay asset. For the year, excluding these three one time charges, FFO was $3.60 per share. Same store NOI continued to reflect strong growth in rental rates. GAAP NOI rose 3%. As anticipated, on a cash basis, NOI was down 0.9% due to free rent associated with new leases as well as a one time benefit in the Q4 of last year.
For the year, cash and GAAP NOI both grew 3%. We ended the year with occupancy of 94.4 percent in line with guidance and we were 96.6% leased. Moving to the balance sheet. We completed a number of transactions during the Q4 that have positioned us well for the New Year. In October, we drew down the entire $200,000,000 of 4.35 percent privately placed unsecured notes.
In November December, we raised $400,000,000 of 10 year unsecured senior notes at 4.75 percent and redeemed all $250,000,000 of our 2020 bonds. Meanwhile, our overall financial position is sound substantial additional funding capacity. We have total capacity under our credit facility of just under $1,500,000,000 that includes approximately $735,000,000 of availability under the revolver and $600,000,000 under the accordion feature. We have a large unencumbered portfolio with only 3 mortgages. We have very little floating rate debt and no significant maturities until 2022.
Currently, our debt to market cap is in the mid-20s and our debt to EBITDA is approximately 5.9 times pro form a for the equity forward. Now let's discuss our initial 2019 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 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 initial assumptions for 2019 are as follows. As always, we don't forecast acquisitions. Are targeting dispositions in 2019 of $150,000,000 to $350,000,000 We anticipate 2019 development spending to be between 500,000,000 dollars to $600,000,000 We expect to commence revenue recognition on our Dropbox lease at The Exchange in 3 phases: the first phase in the Q3, 2nd phase at year end and the 3rd phase in 2020. Our forecast for year end office occupancy is between 94% 95%.
We project positive GAAP same store NOI growth of 3% to 4%. We expect flat cash same store NOI this year given the downtime associated with TI build out on some of the large move ins Jeff discussed. The downtime will impact our same store numbers in the first half of the year, but should be positive in the second half of the year. G and A is projected to be in the $81,000,000 range. As we previously reported, we expect a drawdown on the equity forward by May.
From a 2019 FFO perspective, our 4Q normalized run rate was $0.90 or $3.60 on an annualized basis. We project the new lease accounting change will reduce FFO by approximately $0.09 per share, which will be partially reflected in G and A and partially in a new line item on our income statement. The dilution from our projected dispositions is estimated to be about $0.08 per share subject to actual timing. The impact from new development NOI including the exchange 1 Paseo retail and residential is estimated to be about $0.18 per share positive. And finally, the impact of GAAP same store financing and other factors is estimated to be about $0.07 per share positive.
Taking all these assumptions into account, our initial earnings guidance for 2019 is $3.58 to $3.78 per share with a midpoint of $3.68 per share. To put that into perspective, without the accounting change, our year over year FFO per share growth would be approximately 5%. That's the latest news from KRC. Now I'll be happy to take your questions. Operator?
We will now begin the question and answer The first question comes from Craig Mailman with KeyBanc Capital Markets. Please go ahead.
Hey, guys. On 333 Dexter, it sounds like you guys are in talks with potential tenants. I guess I thought maybe a deal could have come together a little sooner given the quality of the product and the location. I mean, have people been waiting for the new connection to be completed? Or what do you think has kind of maybe delayed that a little bit relative to maybe Street expectations?
Hi, Craig. This is Rob Peratt. I'll handle that. And thanks for the compliment on the project. It's really looking great now.
The I-ninety nine undergrounding project has been on people's minds and on radar screen for several years. I think the great news is that with very little hiccups and delays, it's opened relatively on time and that's a critical factor in everyone's assessing that project and what it means for 333 Dexter. And to your point, we're pleased with the activity we have. And I think depending on the tenant, it's very company specific and also dependent on size just how long it takes from initial discussions to actually getting a lease executed.
And do you think I mean given kind of the tenants looking at it, how do you kind of envision that breaking out in terms of amount of tenants and kind of where you guys maybe on the demand versus availability?
Yes, I don't want to
comment on the mix and that sort of thing at this point.
Fair. And then just on the Flower Mart, with the challenges from the community, kind of how has that changed maybe internally your view of commencement dates relative and maybe capital needs here? You guys have done a good job raising debt, equity and doing dispositions. But I guess as you guys are looking out at Oyster Point, Flower Mart into beyond 2019, it looks like maybe I would have thought maybe dispositions would have ramped a little bit as you guys were able to pull it back in 2018. Is that kind of is there some fluidity there in terms of disposition volumes just given some of the timing?
Well, yes, we try to this is John. We try to kind of do just in time when we can. In terms of the Flower Mart, almost every project of substance in California gets a sequel lawsuit. It's just the way the homeowners and the various property owners deal with projects. It costs you, I think, something like $30 to file a lawsuit in California.
I have my own thoughts about how this is going to play out. I don't really want to air them publicly because it is fluid. We're working with the city as are the other major developers that own properties in Soma to try to get things resolved. I think they'll clearly get resolved. It's just a question of how long.
In terms of the timing, even if we expect to get our development agreement signed late in the sometime in Q4 that would permit us to start development. I don't think we'd want to start development with the lawsuits against Central Soam. It's not against our project, it's against some other projects and some other issues related to other projects in the area. I don't think we'd want to start without those lawsuits being resolved or at least sufficient clarity. Having said that, we never anticipated starting construction until we move the Flower Mart.
And the Flower Mart, we won't move until we get the development agreement signed. We'll continue with that. So will this delay our start from what we had projected, which was I believe 'nineteen, early or mid 'twenty. I don't know. With regard to Oyster Point, that's all entitled and there's no issues there at all with regard to entitlements.
And so we'll go through that phase by phase. In terms of how that relates to dispositions and so forth, like I said, we'll look at dispositions or ventures with regard to our needs and Tyler does a pretty good job figuring that out. So I think we're in really good shape across the board. Anybody else?
All right. That's helpful. Then I guess just a tag on to that last one. You're kind of getting back the stock to where you guys did the forward deal And just thoughts on cost of equity here relative to the yields versus dispose and the kind of the attractiveness of each of those capital sources?
Tyler, you want to take that one?
Yes. I mean, right now, we don't have the need for capital, so we don't have to make that decision. But we you're right, we have to balance the cost of equity versus the cost of debt versus the cost of joint ventures and the cap rates on dispositions, which still remains strong. So, we don't need to make that decision today, but we'll be following that as we go forward.
Great. Thank
you. The next question comes from Manny Korchman with Citi. Please go ahead.
Hey, guys. Maybe for Jeff or Tyler, when you think about the remaining expirations in 2019, got about 500,000 left. How should we think about sort of retention on those? And I think in the last call, you mentioned 100 75,000 square per tenant as sort of the largest potential exploration. Is that still the case?
And where does that fit?
Yes. So this is Jeff. On the 2019, so again, we've got about 460,000 square feet of remaining expirations. None of them are larger than 50,000 square feet. And so we're in negotiations with a lot of the remaining tenants.
There's 2% or 3%, about 25% of the remaining, we know they'll vacate. But again, they're all fairly small and spread across the portfolio.
Thanks. And Tyler, on the 2019 disposition guidance, a few questions. One, how much of that is going to be JV versus outright sale? And then just help us figure out sort of where timing and yields will be on those planned dispositions?
Yes. I mean, right now, we're not anticipating those would be ventures. So it would just be straight sales, but obviously that could change. Timing would be sort of 3rd quarter mid year to 3rd quarter. And cap rates, we always are fairly conservative in our cap rates.
We're probably in the low 6s to pick a number.
Thanks, guys.
The next question comes from Jamie Feldman with Bank of America. Please go ahead.
Thank you. I guess just sticking with the guidance first. Tyler, can you give us some thoughts on what AFFO in your dividend coverage looks like based on your outlook?
Yes. So, our payout ratio based on our CapEx modeling at this point is sort of the mid-80s.
On AFFO?
Well, we think of it as FAD, but yes, AFFO, FAD.
Okay. And then can you help us think through just the pay or kind of quarterly what same store looks like and what earnings looks like? Just how do we whether on a GAAP and cash basis, just what the as we go throughout the year, what the changes will be? I
mean, yes, as I said earlier, the it will be negative in the 1st couple of quarters and positive in the second. I mean, on a cash basis, it's roughly in the negative 5% range for the 1st two quarters and then positive 3% 6% in the last two quarters. Those are the current estimates. But as you know, it's very hard to model same store, so those numbers will move around.
Okay. What about in terms of FFO?
FFO, quarterly guidance, we don't provide quarterly guidance.
By quarters, okay. And then John, just thinking about the reserve for the retirement reserve, two questions. One is, can you just help us think through or give us your thoughts on that payment? And then secondly, when you sit back and think about the next 10 years of this company, given you are thinking about retirement, how should we think about what Tilray looks like over that period?
I'll let Tyler answer the first part and I'll answer the second part. Tyler?
Yes. So on the retirement accrual, basically under John's new employment contract, he would receive a cash payment if and when he retires. So it's a potential payment. It's a non cash charge at the moment. Under the accounting rules, potential payments upon retirement are accounted differently than normal severance payments.
And so the bulk of the retirement payment is required to be expensed in the period the agreement is executed. So that's why it was expensed in the Q4 when the agreement was executed.
In terms of the second part of your question, Jamie, we've been we've had a very robust succession planning going on for the last several years. We have a committee that's a board committee that's on top of that. And we deal with that at each board meeting. That relates to emergency situations, whether it's me or anybody else, as well as long term, we don't disclose who might be candidates for any particular position in regards to succession. In regards to me, I just turned 70.
I'm feeling pretty good. I think most people who know me know I'm I think I'm on top of my game. And yet this is a 5 year extension. I had to make a decision on what I wanted to do. The company obviously wanted me to stay.
We've got a lot of big projects and things going on. And my hope is that we will, over the next few years, be able to determine who the next CEO will be. Will I move to Chairman and we have a new CEO in 5 years? I can't tell you specifically how it's going to go. But I think to be very prudent for our shareholders and for all the stakeholders that we do business with and all the employees at Kilroy, it's important to have a plan.
So that's where we're at and we have a lot of good candidates. I think the ideal person is probably a lot younger than me and a lot smarter than me, and we'll find out who that is.
Okay, that's helpful. All right. And then I guess just final question, what are you assuming for leasing spreads in 'nineteen in the guidance?
Well, I think Jeff went through the where we are by market. I mean, we're 24% under market for our 2019 expirations.
Okay. All right. Thank you.
The next question comes from Nick Yulico with Scotiabank. Please go ahead.
Well, thanks. I guess first just a question on Oyster Point. John, trends in that market are very strong as you talked about. It felt like this quarter you'd announced a construction start there, yet you haven't. So I guess I'm just wondering what's holding you back at this point from starting the first phase there?
Well, nothing's holding us back. We've been under construction with the site work and all the roads and all the rest. Originally, when we structured the purchase and sale agreement, The previous owner was going to do that work. We took that work over for them, got an appropriate credit for the cost of that and for the timing and so forth. But we're well underway with all that and we don't need to start yet.
We have to make that decision fairly soon. And Tracy is here with me, the delivery date, assuming things just go seamlessly from the current site work and pre development work to construction to completion, the completion date for Shell is scheduled would be scheduled for when? Roughly Q2 of 2021. Yes. So stay tuned.
Okay. And in terms of M and D, do you feel like you need to get leasing done at Dexter before you start Oyster Point?
No, I don't think the 2 are connected at all. Both are very strong markets, different kind of clientele. This we're right in the catbird seat with regard to South San Francisco Life Science. I think we've got the best material site down there. Of course, Biomed, Blackstone has been very successful.
They started their building just next door to us and leased it and they have another phase. So between them and we, we think we sort of control that market.
Okay. That's helpful. Just one other question, Tyler, on the same store NOI guidance, trying to square that up with the occupancy guidance. I mean, I get it that there's move ins, move outs that are affecting the year and the cadence of the year. But the occupancy guidance looks like it's showing an increase in occupancy by the end of the year and struggling to see how that happens with a flat cash same store NOI growth guidance?
Thanks.
Yes. Well, as I mentioned, the flat is being driven by the first half of the year and we're it turns positive in the second half. So I think the projections assume that the occupancy improves in the 3rd Q4.
Thank you.
The next question comes from John Guinee with Stifel. Please go ahead.
Great. Nice job, guys. Hey, Tyler, about 8 months ago at the June NAREIT, you gave a pro form a FFO of $4.46 assuming all the development hit, which is about $1.10 a quarter by year end 2020, is that still attainable?
Well, remember that was all things being equal with the lease accounting change and other things, you have to adjust for that. But I think we still anticipate that same general growth of NOI on an annualized basis by the end of 2020, assuming that we've completed the development as we laid out and it's leased, Dexter's leased and so forth. So, and again, this came up on last call, but we have certain disposition and estimates in our numbers. And to the extent we decide to sell more than our current plan or sell less, that could either increase or decrease the number. And it's assuming leverage is consistent and so forth.
So I think we still anticipate strong pickup in NOI by that point, but it does move around and the lease accounting change will impact
that. And then, John, I think you'd mentioned that, you think that you're going to get about $70,000,000 of stabilized cash NOI for Dropbox plus Adobe at Hooper. Looks to us like that's about an 8 plus yield on cost on a cash basis. Is that an accurate way to look at it?
Yes.
Okay. And then the last question is DIRECTV, how many years do you have left on that lease? And is that something that's pretty soon becomes decreases in value rapidly in the private market?
No, I think the opposite. Tyler or Jeff, you remember better than I how many years are left on that lease. What's the number? Yes, September of 'twenty seven. Okay.
So there's roughly 8 years left. Is that right? So 8.5 years. In terms of the rent, it's way below market and El Segundo has been a hotspot recently with the lack of available space on the Westside and with the traffic patterns continuing to deteriorate, the South Bay isn't the greatest market when you get down south of El Segundo to the Harbor Freeway. That area that we've never liked, but El Segundo has become very strong, both with regard to people trying to acquire product in the area as well as tenant demand, including a number of media tenants and so forth.
So I think our mark to market on that asset is I'm looking at Steve across from me. I don't know if you know it or Jeff, but it's the Brent is really low there. The market El Segundo Rent is very low in our project in El Segundo.
Okay. Can you repeat that El Segundo is a hotspot?
Well, relatively speaking, okay, John, I mean, there's tall people in different cultures that aren't as tall as some other people in other cultures. So it's all relative, but El Segundo has now become a much stronger market than we have seen over the last 10 or 15 years. So, and I think that just I think so we are kind of debating We always take a look at all of our assets annually, try to assess the markets where they're going. And I've been pretty pleased with the data on El Segundo in terms of where rents have gone and where demand has gone. Rob, I know the rents now in that market are getting to what in El Segundo or Jeff?
Yes, they're $3.50 full service gross per month. So they're definitely been increasing significantly. And that's about $0.70 or so, $0.60 more than what we've got with DIRECTV, I think.
Great. Thank you.
Yes.
The next question comes from John Kim with BMO Capital Markets. Please go ahead.
I may be mistaken, but I think I'm pretty soft from my culture. You had a busy leasing quarter.
Yes.
And I realize that, but when the equity markets were in turmoil back in December, did you see any pullback in decision making among any of your tech tenants that may have spilled over to this year?
No. To the contrary, we do, as I've mentioned many times before and Rob and others have mentioned, we have NDAs with quite a few people. And when I say quite a few, I'm talking about dozens. And we share what we're doing, they share what they're doing and so forth. We've not seen any slowdown in people's rate of growth or their plans for growth.
We've seen people have a shift deciding that they want to grow in a market versus another market because of labor, but we haven't really seen any decline. And just from a trend standpoint, I think we're pretty well set up. If you look at the vacancy rates in most of our markets, they're really frictional. They're anywhere from 1% to 3% or 4%. The one difference is our Del Mar market in San Diego, where the vacancy rate is higher.
But if you break it down to the quality stuff, it's pretty low. And we're seeing good demand up and down. I keep waiting for it to slow down, and we just haven't seen it.
Okay. And on 100 Hooper and the exchange, on the $70,000,000 of stabilized NOI that you expect to get next year, can you just update us on what you expect will be contributed this year by quarter?
Yes. We didn't provide details by quarter. But as we said, our new development for 2019 will be generating $0.18 of effective FFO to the bottom line or I should say NOI.
For 2019?
Yes.
Okay. And then Tyler, on the Ford Equity deal, is there any cost associated with waiting as far as when you execute the sale? In other words, are the proceeds dividend adjusted?
Well, if we were to raise our dividend, it would impact it. But if we don't change our dividend, then no, it has no cost.
So logically, would you just execute 12 months after you announced the transaction?
Yes. I mean it depends on the need for proceeds. If something came up earlier, we could draw down or we could draw down in pieces as well. So it's sort of like an ATM, but at the moment, we're planning to draw it entirely in May.
Okay. Thank you.
The next question comes from Daniel Ismail with Green Street Advisors. Please go
ahead. Hey, guys. Good morning. Can you provide an update on yield expectations for the academy resi and office component at One Paseo?
Academy resi and which? The office components in 1 Paseo. Yes, I don't want to get in really to office yields while we're leasing. It's not a very good thing from a competitive standpoint. So forgive me for not answering that one.
On the resi, Tyler, where are we at? We're on Academy, we're sort of in the 6% each range. Is that right?
Yes, 5% to 6% range.
Okay. And maybe on Columbia Square Resi, the drop in occupancy quarter over quarter, can you give us an update on your plans for that asset?
Plans as in what?
Just on explaining why the drop in occupancy quarter over quarter?
Sorry, I thought you Columbia Square. Oh, Columbia Square, Steve. I beg your pardon. I thought you were saying One Paseo and I didn't get the connection. But Steve, you want to talk about One Paseo Resi?
Hi, Daniel. So we went through a management change in the Q4 at that asset, and we have also been decreasing our short term stays in that asset and going to a more of a traditional apartment rental market for longer term occupancy. So we had a near term dip, but we anticipate that by year end or Q3 of this year, we'll be back around 95%.
Okay. That's helpful. Thanks. And maybe just last one. I know we're only about a month into 2019, but any commentary from tenants on Proposition C in San Francisco?
What's funny is that some of our biggest tenants have been really big supporters of that And I'm not hearing anything from anybody. And we talk to them all the time. Rob, you want to add to that? Yes. No, I think the reality, Daniel, is that tenants that need
to be in San Francisco factor in the cost of occupancy and cities like San Francisco, New York, etcetera, are going to have those sorts of levies. So I mean, we monitor it, obviously, but we're not hearing any pushback or seeing any.
Okay, great. Thanks guys.
This concludes our question and answer session. I would like to turn the conference back over to Tyler Rose for any closing remarks.
Thank you for joining us today. We appreciate your interest in KRC. So long.