Good day, everyone, and welcome to the Q1 2018 Kilroy Realty Corporation Earnings After today's presentation, there will be an opportunity to ask questions. And please note that today's 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, Jeff Hawken, David Simon, Steve Rosetta, Heidi Roth, Tracy Murphy, Rob Barad, Elliot Venture 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 ks with the SEC, and both are also available on our website. John will start the call with a review of the Q1, 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?
Thank you, Tyler. We're off to a great start this year and are particularly encouraged by the strength we continue to see across our West Coast markets. We reported solid first quarter financial results with both FFO per share and same store results exceeding our expectations. Across our stabilized portfolio, we signed new or renewing leases on approximately 300,000 square feet of space that were up 26% on a GAAP basis and 15% on a cash basis. We continue to backfill our 4 material 2018 expirations ahead of schedule.
We re leased approximately 70% of the expiring space in Bellevue and are making excellent progress on the 2 San Diego expirations. And as we reported on our last call, we commenced construction on Phase 1 of the Academy on Vine, our mixed use development project in the Hollywood submarket and acquired 3 lab buildings in South San Francisco's major biotechnology hub of Oyster Point. Now let me provide some more color. Market conditions are showing remarkable strength across the West Coast region. Generally, we're seeing declining vacancy rates, higher leasing volumes, increased rents, limited supply and increased demand across our markets.
The fundamentals are amongst the strongest we've seen in the cycle so far, with big tech and big content creators continuing to grow and the fire category following. Seattle remains one of the best performing markets in the country. Bay Area fundamentals continue to improve both on the office and life science fronts and new supply remains limited. Los Angeles continues to be the recipient of growth from many industries, including entertainment and content creation. And in San Diego, we're seeing the leasing velocity increase over the past 6 months coming from a broad cross section of industries, including defense, technology, life science and the fire category.
The market strength is evident in our leasing success where we continue to make progress on our 2018 expirations as well as future expirations. As a reminder, late last year, we backfilled all of the expiring Delta Dental space at 100 and First Street with Okta. In Seattle, we signed 97,000 square feet of leases so far this year with various tenants at Skyline Tower in Bellevue. The majority of these leases will replace the 111,000 square foot move out we had in February by Valve. Cash rents on the new leases were higher by 59% and GAAP rents were higher by 86% when compared to the prior lease.
In San Diego, we had advanced discussions to backfill more than half of the expiring Bridgepoint space on the I-fifteen corridor. Assuming we are successful in completing these transactions, we will have sufficiently effectively completed the re leasing of the Seattle and San Francisco 28 expirations and be well ahead of schedule on the San Diego expirations. We've also made some tremendous progress on future expirations, including our only 2 2019 expirations that are greater than 100,000 square feet. ISB, an affiliate of Provident Health, a life science tenant 401 Terry in South Lake Union, signed an early renewal for 141,000 square feet, extending its expiration from 2021 to 2,031. In Silicon Valley, we signed renewals totaling 169,000 square feet with 2 life science tenants, both of which were scheduled to expire in 2019.
We received notice that Microsoft will move out of our Westlake Cary building in Southlake Union in 2019, thereby triggering Amazon's must take for all 125,000 square feet that will now expire in 2,030. And at our Stanford Research Park asset in Palo Alto, the existing biotech tenant assigned its 116,000 square foot lease under the same terms to Stanford University, significantly improving the credit profile of that asset. These transactions will generate rent increases of 14% on a cash basis and 33% on a GAAP basis. Moving to development, we remain on track with our current construction projects at 100 Hooper. As previously reported, we executed a 314,000 square foot lease with Adobe last year for the entire office portion of the 400,000 square foot project.
We delivered the core and shell to Adobe earlier in the month and anticipate occupancy in phases late in the year. The remaining 86,000 square feet of project is PDR space, and we just signed 2 PDR leases totaling 33,000 square feet, bringing the overall project to 87% leased on a square footage basis and 93% leased on an economic basis. At the Exchange, we expect to deliver the corn shell to Dropbox in late May. Work also continues at our 3 other construction projects, 333 Dexter in South Lake Union, submarket of Seattle, Phase 1 of the Academy on Vine, and Phase 1 of our One Paseo mixed use project in Delmar, where we've now leased 51% of the retail space and expect to be over 80% committed next quarter. As a matter of interest, the shops at One Paseo was recently voted best new retail in the region, highlighting the much anticipated delivery of our 1 Paseo project.
To summarize, these five projects currently total just over 2,100,000 square feet of office space, 120,000 square feet of retail space and 237 residential units. Together, they represent a total estimated investment of 1,700,000,000 with remaining incremental spending of approximately $700,000,000 More than half of the office space is leased and on schedule to deliver by year end. Overall, we expect to generate over $120,000,000 of NOI from these 5 projects. As we discussed on last quarter's call, in January, we purchased 3 office and lab buildings for $111,000,000 in the Oyster Point submarket of South San Francisco, an acquisition that takes us into one of the most vibrant life science markets in the U. S.
Today. It is approximately 80% occupied and represents a mid 6% yield upon stabilization. As
most of
you know, we are pursuing a development opportunity directly adjacent to our new Oyster Point acquisition. We have a confidentiality agreement that prohibits us from discussing details at this time, but we are very excited about this opportunity given the strength of the life science sector as well as this particular location. We expect to be able to provide details on this land acquisition and our development plans at our June 4 Investor Day in New York City. We're also making progress on our capital recycling goals for 2018. We're in the process of taking to market a combination of non core and core assets and expect to meet our previously stated objective of $250,000,000 to $750,000,000 of dispositions with closings in the second half of this year.
To summarize, 4 months into 2018, we are seeing rising demand, shrinking supply and upward pressure on rental rates for top quality properties across our West Coast markets. We have the youngest and most sustainable portfolio geared toward the modern worker and continue to see opportunities to earn strong returns and create shareholder value, largely in development, and we remain committed to pursuing these opportunities with prudence and financial discipline. That completes my remarks. Now I'm going to turn the call over to Jeff for a closer look at our markets. Jeff?
Thanks, John. Hello, everyone. Let's begin in San Francisco, where the city's high-tech job growth has increased nearly 40% over the past 2 years, where robust demand and shrinking supply continue to characterize one of the strongest real estate markets in the nation. It was evident in the city's Q1 numbers with total leasing activity of more than 2,100,000 square feet and solid net absorption. Supply has meaningfully decreased with the last remaining near term delivery believed to be in discussions with a prospective tenant.
Given these dynamics, brokers expect rents to further increase. Class A direct vacancy rates in San Francisco's SoMa, South Financial and Mission Bay districts were 5.5%, 8% and 2.5%, respectively. Vacancy in South San Francisco was 2%, and in Silicon Valley, Class A Direct vacancy was 7.9%. We are currently 97.9 percent leased in the Bay Area, and our in place rents for the region are approximately 26% below market. It's much the same story in Seattle.
Last fall, PWC and the Urban Land Institute predicted Greater Seattle would be 20 eighteen's top performing real estate market in the nation, and it's proven to be true. With a young educated workforce and twice the U. S. Average for science, tech, engineering and math jobs, Seattle continues to experience rising demand for modern workspace, while new supply is very limited. Similar to the real estate dynamics of San Francisco, Seattle rental rates are poised to grow even further given the lack of available space and growing demand.
Class A direct vacancy in South Lake Union and Bellevue are currently 3.7%. Our Seattle portfolio is currently 94.7% leased, reflecting the Bellevue move out in February. Our in place rents are approximately 8% below market. In San Diego, the market continues to strengthen. Job growth is positive and VC funding set a new record.
Rents were up 4.7% last quarter across all San Diego submarkets, and there's minimal new office supply in the region. In Belmar, which commands the region's highest asking rents, Class A direct vacancy was 12.5%, a majority of which is south of the 56 Freeway and not competitive with our product. Our San Diego portfolio is currently 99.2% leased, and our San Diego in place rents are approximately 7% above market. In Los Angeles, the evolution of traditional entertainment and media focused techtainment firms continues. The region is attracting entrepreneurial talent with Silicon Beach now home to more than 500 tech start up companies in Hollywood and Culver City, now home to the large content creators, including Netflix, Amazon and Apple.
Class A direct vacancy in West LA was 5%, West Hollywood was 6.2% and Hollywood was 8.1%. Our Los Angeles portfolio is currently 95.5 percent leased with in place rents approximately 9% below market. On a portfolio wide basis, our estimated average in place rents are 14% below market. As John discussed, we are making good progress in reducing our exposure to 2018 expirations. Additionally, with further we have further addressed our larger 2019 through 2021 expirations with terrific rent increases on those transactions.
Specifically, in 2019, we now have only 3 expirations greater than 75,000 square feet and none greater than 95,000 square feet. All three are in the San Francisco Bay Area with rents that are approximately 15% below market. That's a snapshot of our markets. Now Tyler will cover our financial results in more detail. Tyler?
Thanks, Jeff. FFO was $0.94 per share in the Q1. We were ahead of our internal expectations, primarily driven by lower bad debt expense, lower operating expenses and $0.02 of timing differences related to expenses and G and A. Same store NOI increased on both a GAAP and cash basis in the quarter, driven largely by higher rental rates. GAAP NOI was up 5.4% cash NOI increased 4.8%.
Occupancy at the end of the Q1 was 94.3%, reflecting the move out in Bellevue that John and Jeff discussed earlier. In January, we used proceeds from our term loan to fund the acquisition of Oyster Point Tech Center. Earlier this month, we launched a $250,000,000 8 year debt private placement that includes 3 6 month delayed draw option. We expect this transaction to close in May and fund in July October. We currently have $625,000,000 available in our credit facility, which is expandable by $600,000,000 under an accordion feature.
Our debt to market cap is approximately 26% and our debt to EBITDA at quarter end was approximately 5.7 times. Before moving to guidance, I'd like to comment on the new lease accounting change will become effective next year. Under the new rules, all internal leasing costs and third party legal fees associated with leases will be required to be expensed. Lessors will only be allowed to capitalize contingent leasing costs such as 3rd party broker commissions. While this is a non economic change, it will both negatively impact future earnings and positively impact our yields.
We are working to quantify the impact on our 2019 projected earnings and we'll have more to color to provide next quarter. Now let's discuss in more detail 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 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 2018 are as follows: the midpoint of our projected dispositions of ventures remains $500,000,000 We anticipate remaining 2018 development spending on our projects under construction to be approximately $350,000,000 to $400,000,000 As we've reported on prior calls, we project no FFO contribution in 2018 from the Dropbox lease and revenue recognition from the Adobe lease at 100 Hooper later in the Q4. Given advanced discussions of the Bridgepoint buildings, we're now assuming that 50% of the square footage will be leased before Bridgepoint's expirations in July October. Under this scenario, we would no longer take the buildings out of service. This new assumption would negatively impact 2018 earnings by about a $0.01 half cash same store results by about 1% and year end occupancy by about 90 basis points.
But the overall economics of the project will be much improved with shorter than projected downtime and significantly lower capital costs. Given the better than expected leasing activity across the portfolio, even with the change on Bridgepoint, we remain comfortable with our year end office occupancy guidance of 94% to 95%. Similarly, we continue to project office same store cash NOI to be between 0% and 1%. While including the Bridgepoint campus in the same store portfolio negatively impacts these results, the better operating performance offsets the negative impact. Last quarter, we provided initial earnings guidance for $2,021.45 to $3.65 per share with a midpoint of $3.55 per share.
Positive changes to that midpoint include the $0.02 positive impact from the Q1 results and $0.035 from better projected operating activity over the rest of the year. Negative changes include the $0.015 from leaving the Bridgepointe buildings in service and $0.025 from the debt private placement. Taking these updated expectations into account, we are increasing our FFO midpoint to $3.57 per share with a range of $3.49 to $3.64 per share. That's the latest news from KRT. I will be happy to take your questions.
Operator?
Thank you. And we will now begin the question and answer session. And our first questioner today will be Craig Mailman with KeyBanc Capital Markets. Please go ahead.
Hi, everyone. This is Laura Dixon here with Craig. Congratulations on the quarter. Quick question on the timing differences that you mentioned for other expenses and G and A. How much can you quantify that and how much is going to and when those will occur instead?
Yes, it's roughly $0.02 and it's related to professional service fees primarily and we can expect to see that in the 3rd Q4.
Okay. And then just curious about the PDR space at 100 Hooper. Can you elaborate on what that is and the tenants and how do the rents there compare to traditional office space?
Sure. This is Rob Peratt, Laura. So PDR stands for production, distribution, repair and it's San Francisco's attempt to keep makers and workers in the city and Kilroy is a big supporter of that. We're going to have some at the Flower Mart. We have it at Hooper.
And the 2 leases that we've signed, 1 is a publicly traded reprographics and printing company, and it's a relocation and expansion. And the other tenant is actually a really great amenity for the project. Adobe is going to be excited about it. And it's a boutique distillery food purveyor. So without getting into more detail, but it's going to add life and amenity, which we said we would do at the project, but it will also be additive to the neighborhood.
So we're excited about both those. And then with the space we have remaining, we're seeing activity from smaller technology companies that manufacture and create things. So, we're really pleased with what we've accomplished so far. On the
rent side, this is John speaking. On the rent side, they're not it's not as high as office space, it's not as highly improved. So it can range depending upon the type of PDR, anywhere from the low 20s to multiples of that on a per square foot per annum basis. Ours is higher quality stuff, so we think we're going to do pretty well on it. I made it in my comment that we're with less than with approximately 55% of the PDR to be leased.
We're already at 93% of our pro form a income for the property. That's because the office space does rent at a higher space. But as part of that deal, we actually made possible a 50,000 square foot facility that's not in our 400,000 square foot calculation that we were required to do as part of the entitlement that we helped develop and sold or at cost to a NGO that provides space at a subsidized basis to craftspeople. So everything that's in the Central SoMa area that has that displaces any kind of PDR space will have to reproduce it on site as part of their development. That's now official policy and rules of the city.
And our next questioner today will be Blaine Heck with Wells Fargo. Please go ahead.
Thanks. Good morning out there. So great job taking care of some of these move outs. Now that you guys have backfilled the Delta Dental space and it sounds like a good part of the valve space. Can you give us any sense of when we should expect those leases to commence?
And is there any contribution in 2018?
This is Tyler. I can take a first crack at that. For the Delta Dental space, Okta is moving in later in the year. So it would be very little contribution in 2018, probably a December timeframe. And Rob, maybe you can comment on the valve space.
Sure. The valve space should be in large
part, so
we have the we just signed 55,000 feet between 2 tenants, which will be late in the quarter, Q4 in terms of their commencement. And then the remaining space we have about 34,000 feet, I expect we should have those signed probably by June, July, something like that. We've got a lot of activity. Bellevue is seeing a real uptick in activity over the last 6 weeks or so.
Okay, great. And then just continuing on that vein, can you give any more color on the leasing progress at the Fish and Richardson space in Del Mar? And I think that was a long term lease that's expiring. So is there any work that needs to be done at that space?
Yes. On the one building deal that we're working on, that is a long term lease. You're correct, Blaine. And there is work that's being done. You'll recall also we're doing a little bit of a refresh on the project regardless of that in terms of the lobbies and landscaping and that sort of thing.
But for the tenant itself, there will be some rework, but they're putting money into the space also. And so that's about 144,000 feet. We have That's you're talking about the single building.
Yes, what you're talking yes, about Fisher and Richardson. I'm sorry, I'm sorry.
I was talking about yes, I'm sorry. And then switching to Fisher and Richardson, we have about 50 4,000 feet of leases that are being negotiated right now. So, expect those to be signed fairly shortly.
Okay, got it. And then John or David, if he's on, we've seen a couple of big deals trade hands in LA recently and there's I think more on the market. Can you just talk about your interest in those deals and expanding in that market in general outside of obviously the development you're doing at the academy?
Well, yes, we have a number of things we're looking at. We'd like to expand. We think the pricing and the quality issues on some of the deals that have recently traded us, we weren't interested. We know those assets intimately well. They just we didn't we've looked at the numbers.
We understand the numbers, we understand what's going on, we understand things and others saw things in there that we didn't. So we didn't have any interest, 0.
Okay. That's fair. Last one for me, John, on the Flower Mart. First of all, what's the latest on entitlement there? And then can you give any update on the interest or activity you're seeing around that project?
Yes. Well, let's start with the schedule. So the Central SoMa approval status or timeline is and all that has to be done through the Board of Supervisors here. It's before the Planning Commission. They're scheduled to vote on the Central SoMa plan for adoption on Fiveten of this year, May 10.
And the Board of Supervisors are currently scheduled to then vote for hopefully for approval in mid July. Assuming that happens, we are expecting entitlements late this year, early next year. And in terms of the Central Subway, which is part of that whole thing, as you know, it's been under construction. It was originally scheduled for the official date is completion late 2019, well before we'd have the Farm Art complete. I think realistically, it's probably mid to late 2020, but that's not official.
In terms of interest, I'm not going to get into specific companies and all that, of course, but we have a lot of interest from the investment community, from the investors in real estate that want to co invest with us. We evaluate everything. And with regard to tenants, I can tell you that I think we're teed up beautifully for some major tenants. And as I've said for the last couple of years, I think it will be a handful of tenants or maybe 1. And obviously, we're going to do some pretty serious pre leasing before starting.
The phasing of that project, we think is the first phase will be roughly 1,700,000 square feet of office. The 125,000 square feet of Flower Mart and roughly 100,000 square feet of market hall, retail, restaurants, etcetera. And then the second phase will come later, which is about 300,000 square feet of office.
Got it. Thanks for the color.
You're welcome.
And our next questioner today will be Manny Korchman with Citi. Please go ahead.
Hey, everyone. John, maybe sticking to the transaction environment, there's been some press reports of you looking to expand San Francisco as well, specifically at 345 Brandon as well as the Ferry Building. Maybe you could share your thoughts on both of those assets?
Ferry Building is a great building, love to own it. We are not proposing on it. That's a misread. And in terms of whoever published it, I don't know if it's a broker or whatever, we've evaluated in detail. We just don't think there is a money making proposition there for us.
With regard to the other building you mentioned, I'm not going to comment on prospective deals that might be in play or not until they're done.
Okay. And Tyler, one for you. Let's say you go down the path on the building that John just mentioned or didn't mention. You've got Oyster Point, which is a big project, you've got the Flower Mart, which is a big project. Understanding that you have some dispositions teed up, how do you think about funding over the next couple of years as a few of those big projects start to come to fruition?
Yes. Well, one of the reasons we did the private placement a little ahead of schedule is we wanted to lock in some funding for some of these future opportunities. So, I think we've talked about our disposition strategy of $500,000,000 We did the $250,000,000 private placement of debt. And we'll continue that same strategy going forward. Some of the projects you talked about in that list won't need money for several years.
But we're going to continue the same strategy and ventures are an option as well as additional debt. And then we've raised equity when it made sense and we'll do that. We'll obviously evaluate that if that comes up as well.
Great. Thanks, guys.
And the next questioner today will be Jamie Feldman with Bank of America Merrill Lynch. Please go ahead. Jamie Feldman, your line is open for questions.
Sorry about that. So you guys sound very positive on market conditions and leasing demand from tenants, I assume especially for new assets. Is there a chance we could see you do one off developments that aren't right now on the future development pipeline? I mean is there other conversations going on for tenants that just need now and want to get started and don't want to wait?
Well, San Francisco is pretty tough because it's an entitlement game, right? And with Prop M, it's just the only thing that you can develop. There's a couple of projects that have Prop M that have not started that we've looked at, but we're not players elsewhere. We have a lot of discussions markets and so forth and nothing is signaled there. So, we have a lot of discussions, Jamie, nothing is imminent.
Okay. And then can you talk about just generally the like rent growth in the markets? I mean, what do you think we could see this year across the major markets?
Hey, Jamie, it's Rob. Again, just given the strength of the markets, and this is kind of up and down the West Coast, Clearly, the West Coast is a technology gateway now and more and more tech is moving here. It's the world renowned leader in tech and attracting that kind of talent. So with the limited space availability from Seattle down to San Diego generally, we think there's opportunity for significant rent growth, particularly San Francisco. So San Francisco, even brokers now are saying upwards of 8%.
Seattle, I think, would be in the same ballpark in terms of percentage increase in rents. Los Angeles, a little bit more moderate, but I think it depends on the submarket you're in, whether it's Santa Monica in the Westside where conditions are very tight, Hollywood is also poised for, I think, improved rent growth, probably in the 5% range and San Diego, probably in the 4% to 5% range. Again, very dependent on the submarket you're talking about. Yes. Jamie, one other this
is John again. One thing I'd say is that, Rob's talking about sort of the market, the general likelihood of rent increases sort of on the average product. And obviously, the modern user is very discerning of the type of product they want and they're going to pay a lot more for state of the art stuff than they are for generic office space. So that could be many multiples of those rental increases. So we've always been conservative with regard to projections and we always like to be surprised by higher rental increases that happen, a lot to be seen.
I think it's teed up when you it's classic Economics 101, right? A lot of demand, very little supply, tends to be a pretty good time to be a landlord.
Okay. And then finally, just more color on leasing at 333 Dexter and the Academy?
Sure. I'll start with Dexter up at South Lake Union. Again, Seattle has a lot of the same market dynamics that the Bay Area has that John and Jeff mentioned in their commentary. We have a significant group of tenants that were prospects that we're talking to, all of which are over 100,000 feet. And in fact, we're able to sort of selectively prioritize those that we're really focusing on and others that are sort of we'll continue to talk to.
But there are some just based on the type of tenant, type of business that we're moving forward on. The project itself is now just getting above grade. So it's going to start coming up on the skyline here over the summer, and we're really pleased with that activity. On Academy, I'd say, in a similar vein, we have 4 to 5 different prospects. Some could take the entire project, some could take components of it.
And it's just it's situated in a perfect location in that Hollywood submarket adjacent to Columbia Square. So a lot of good interest considering we just started in January.
Okay. I mean, are these markets where you just you tend not to see the pre leasing until the building is almost done?
Yes. They've always pre leasing in a lot of markets is a tough sell, but in these markets and I don't want to predict when we're going to be announcing things, but the activity that we have on both these developments is strong as I've seen it.
Yes, Jamie, let me put in context the completion of the shell and core at 333. Dexter is scheduled for the end of Q3 of next year. And revenue recognition we forecasted is the Q4 of 'twenty. The Academy shell and core completion is scheduled for sometime in the Q1 of 2020 with revenue recognition in late 'twenty one. So what I like is that we're building great product in markets with very little demand, with very little new supply, with big creditworthy tenants out needing space and rising rentals.
It's a and we've got quite a bit of time. So we're going to try to be thoughtful with regard to how we fill these particular buildings.
Okay. All right. Thank you.
And our next questioner today will be John Kim with BMO Capital Markets. Please go ahead.
Just sticking with Dexter, given the strength and upward pressure on rents in Seattle, can you just comment on where rents and yields are versus your original underwriting for that asset?
On rents, rents had historically not been they've been sort of in the low to mid $30 triple net plus parking. And rents now have jumped the $40 per square foot per annum plus parking. I personally think if you look at San Francisco, where rents today on a triple net basis are for a similar product are sort of in the mid $60 a square foot plus parking. I think Seattle rent growth is poised to grow pretty tremendously over time. With regard to underwriting, obviously, we've said that we expect to be in the high 7s, low 8s, sort of that area, and I think we'll achieve that.
Okay. And then just given your maintaining of your same store NOI guidance, I realize there's a lot of moving parts that you may have. But just given your current occupancy levels and what you achieved in the Q1, what are the components that would cause same store NOI to decline and be negative for the remainder of the year?
Yes, it's really the expirations, the move outs that were related to the expirations in our portfolio. So, we have valve moved out in the Q1. We've got Fish and Richardson and Bridgeport moving out in the summer and the fall. And as someone else noted, Delta Dental moving out and or is moved out and we're not going to backfill that until the very end of the year with Okta. So it's really that profile of expirations.
Which total roughly 725,000 feet.
And what would be your guidance range if the Bridgepoint asset was taken offline?
So it was about a point higher. So if we hadn't decided to make this change on Bridgepoint, assuming we do this deal, we would have raised our number by about a point.
Got it. Okay. Thank you.
Our next questioner today will be Dave Rodgers with Baird. Please go ahead.
On the lab acquisition that you did in the Q1, going in yield and stabilized yield on something like that. And is that really just kind of a lease up stabilized asset or is that part of the bigger plan with what you've got adjacent to that?
Hey, David, it's Tracy Murphy. Yes, our going in was just over a 3. We've got 20,000 sorry, 20% vacancy at the project, 30,000 feet in shell condition, which we've got really healthy activity on. So I think our year 2 stabilized rate is 6.3% or 6.4%, something like that. And Tyler can correct me if I'm wrong, but yes, your observation is correct.
Yes, the bigger play is that it's next door to the property that we're call it have an option on. And ultimately, we have a plan that those two assets working together will be very synergistic and more to come, come to our Investor Day, learn all about it.
And I realize you have the confidentiality on it, so I
don't know if you
can answer this. Is that confidentiality with the developer or landowner or is that an actual potential tenant?
Yes, I'm not going to comment. We just can't talk about it.
Yes, no worries. And then lastly, just down to San Diego on, I think, Bridgepoint and Fish and Richardson, you said 25 percent potential roll down in rent. The speed at which you re leased it and not kind of not going through redevelopment, how does that change that math?
The math is on the rents is roughly what we had projected. So the rents really haven't moved much. We are having lower on the as I mentioned on the Bridgepoint tenant that if we complete that deal, we'll have much lower CapEx, lower TIs and then move in a lot earlier than we have projected. But the rent levels are roughly the same as we had
originally talked
about. Okay. Thank you. Okay. And the next
questioner today will be Jed Ragan with Green Street Advisors. Please go ahead.
Hey, good morning guys. Just back on the Flower Mart, it sounds like you've got close to 2,000,000 square feet planned for Phase 1. Do you have contingency phasing plans for that project where in a scenario where entitlements are maybe spread more broadly and you get say half that amount or less that you could kind of accommodate that?
Jed, I'm not trying to be coy. I just don't want to go down that road.
Okay, fair enough. There's been a push recently to put a repeal of Prop 13 for commercial properties on the ballot in California. Just curious to get your thoughts on how do you think that might play out? And can you frame up how a repeal could impact your financials over time potentially?
Yes, let me deal with the first part and Tyler can deal with the financial impact. The last 4 or 5 attempts at this all ended in failure with them pulling the people that were proponents of repealing POP 13, pulling it off, never getting on a ballot. That's what happened this time. Does it come back in 2020? I'm sure 2020 or 2022, somebody will bring it back.
The politics is kind of a blood sport out here. As you know, you live in California. You got the idiots run the whole place, both sides of the fence, sort of the microcosm of the bigger picture. And so we're going to continue to see stuff like this and we all got to work to defeat it and we and successfully we've been successful in that as an industry time and time again. But the crazies are running the joint.
Yes,
on the financial side, it is a difficult calculation because if it's 2020 or 2022, then it depends what you own at the time, what are the age of those properties, what have we sold between now and then, how you value that. We have a lot of new product that doesn't have a reassessment. So a lot more to come on how that number will shake out down the road. If we were to have it today, a reassessment right now, it's roughly $0.03 or $0.04 a share. That number would grow over time as leases roll.
Obviously, it's just the triple net leases and nothing in the State of Washington. So it's a complicated calculation, but it's so hard to predict what it could be out in 2021, 2022 given that our portfolio may be different.
Okay. Appreciate that. Maybe just one other one for me. So about 60% of your office NOI is now in the Bay Area and Seattle. I guess looking 5 years down the road, do you feel like that proportion stays roughly steady or is there a top down strategy to shift that mix over time?
I've always said that I remember when we were all in Southern California, when everything was in Southern California, you just get asked that question as we started growing Northern California and Seattle, what do you expect the mix to be? And I said, well, I don't know that I can say precisely because development dispositions, acquisitions, all the rest affect everything. I used to say sort of 50% Southern California, 50% Northern in Seattle. Obviously, it's grown in Seattle and San Francisco. They're the 2 best markets in the country.
And we sold off a lot down in San Diego and we'll be selling off some stuff that will mostly be Southern California based, right, Steve? Right. And so that will change the numbers a little bit. And then of course, as we develop or venture,
the number is going to bang around.
I don't know that there is
an ideal number, but we do look at it and we will continue to look at it and make sure that we're feeling comfortable about it.
Great. Appreciate that. Thanks, guys.
And the next questioner today will be John Guinee with Stifel. Please go ahead.
Great. Hey, David Simon, the other David Simon. Academy and Vine looks like it's coming in at close to $800 a foot to build. That seems to be a lot higher than my recollection of a couple of years ago or Columbia Square. Is that correct?
And what's happened to hard costs and land costs in the last few years in your backyard there?
Before you answer that, the one thing to consider here is that the first phase includes all the parking for both phases. Oh! And that's all subterranean parking at about $50,000 of space.
Got you. That will make the difference. Okay. And then 333 Dexter still coming in at under $600 a foot. Any do you get that at a low land basis or is that that land at market to come in at $600 a foot?
We bought the land at a pretty favorable basis compared to where things have gone today, plus we've seen construction costs escalate and whatnot. And I think you're going to see I used to say you're going to see values go over $1,000 a square foot in San Francisco and that happened faster than I thought. And I think you're now going to see them, I don't think it'll be terribly long before you see them at $1500 or $1600 a foot in San Francisco. And I think you're going to you're seeing trades in Seattle now at mid to upwards of mid $800 a foot. And all that stuff is going to be reflected as you have construction costs increase and diminishing supply of land and as cities invariably impose more exactions on properties and develop, but you're going to see costs continue to go up.
So we got a very favorable cost structure there. They're very efficient buildings and that's all subterranean parking as well. So that's what's going on.
All right.
Thank you.
And our next questioner today will be Rob Simone with Evercore ISI. Please go ahead. Hey guys, thanks for taking the question.
John, just a quick follow-up on your
Michelle, help me out. I don't know whether I think I said late 2021 for revenue recognition on That was Academy, I believe. And Q4 2020 for 333.
Got it. Okay. So on my question then on 333 Dexter, are you guys, because it's a spec project, kind of budgeting a longer build out period at this point? Because if you're delivering it in the Q3 of 2018, it feels like 6 to 9 months to build out and maybe like 12 months free. You should be looking at booking revenue maybe like the 1st or Q2 of 2020.
Am I thinking about that the wrong way or is it just kind of confusing?
No, no. When we underwrite spec stuff, we assume that it's going to take a lot longer to lease up than if we do a pre lease or a significant lease during construction. We just underwrite it more conservatively, which I think is
a prudent thing to do.
Got it. Okay. Makes sense. And then Tyler, just a quick follow-up on the Bridgepoint impact. Just want to understand why if you're releasing 50% up to 50% of that space versus taking it fully out of service, there would be a $0.01 drag on FFO?
Well, because there's 2 buildings there. So we would be getting the rent from the building that would be leased, but the other building, which we had originally we're taking out of service that we'd be capitalizing interest on, now would be staying in service empty until we lease that. So it's that other building that would be the drag.
Got it. Okay. Thanks a lot. Appreciate it.
And this will conclude 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 hope you can join us for our Investor Day on June 4 in New York City. Goodbye.
And the conference has now concluded.