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Kilroy Realty Corporation (NYSE:KRC)
Q3 2019 Earnings Call
Oct 24, 2019, 1:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day and welcome to the Third Quarter 2019 Kilroy Realty Corporation Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to Tyler Rose, Chief Financial Officer. Please go ahead.

Tyler Rose -- Executive Vice President and Chief Financial Officer

Good morning everyone. Thank you for joining us. On the call with me today are John Kilroy and several other members of our senior 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 our markets and review of the third quarter. I'll provide the financial highlights and discuss our updated 2019 earnings guidance, then we'll be happy to take your questions. John?

John Kilroy -- Chairman, President and Chief Executive Officer

Thank you, Tyler. Hello everyone. Thank you for joining us today. I'll begin with a quick overview. In summary, our markets remain strong. We've made significant leasing progress in both our stabilized and development portfolios. We were successful in acquiring two strategic value-add properties and we improved our balance sheet.

From San Diego to Seattle, the supply and demand fundamentals of every market we compete in remains sound with low vacancy rates and increasing rents. With these favorable conditions, we signed approximately 1.3 million square feet of leases in our stabilized and development portfolio since the end of last quarter. This includes 421,000 square feet with Stripe, at Kilroy Oyster Point that we announced this morning.

We are on track to have another great year on top of our record leasing last year. Our stabilized portfolio is now 97% leased. We commenced construction on 2,100 Kettner, a $140 million office project in the Little Italy neighborhood of San Diego. We completed two acquisitions totaling $226 million; both provide attractive future redevelopment upside. We maintained a sharp focus on balance sheet, raising $616 million through the pending sale of one building and the issuance of public bonds, and we continue to build a world-class sustainable enterprise. We are ranked number one in sustainability across all publicly traded real estate companies in the Americas by GRESB for the 5th consecutive year. The EPA has awarded us the highest honor of Sustained Excellence for the past six years, and NAREIT has recognized us as a Leader in the Light for five years running. Further, we are on track to be carbon-neutral operations by year-end 2020.

Now, if I can get into the details. First, we signed 550,000 square feet of leases in our stabilized portfolio since the end of last quarter. Cash rents on these leases were up 19%; GAAP rents were up 40%. One set of transaction provides a good example of how we are leveraging our existing assets and development skills in today's strong markets. In Del Mar, we signed two leases with existing tenants that both expanded to take approximately 300,000 square feet in the aggregate, with the change in cash and GAAP rents average 20% and 50% respectively.

These properties are in close proximity to our new One Paseo mixed use development and both have benefited from the amenities, public spaces, and cohesive character that the development of One Paseo has created. Across our development portfolio, we signed 710,000 square feet of leases since the end of the last quarter. This includes a lease for 421,000 square feet that we announced earlier with Stripe for a term of 12 years. With this transaction, our $560 million Phase 1 is now fully leased just 7 months after construction commencement and roughly 24 months earlier than scheduled.

We have exceeded our initial underwriting on this project, both on a cash and a GAAP basis. Our strong leasing performance extends to One Paseo as well. The office component is now 70% -- 76% leased. All the balance of the space is in negotiation and the retail component of One Paseo is 100% leased. We delivered 237 residential units at One Paseo in mid-September; more than a 3rd of the units are already leased. We are also active in negotiations at our 9455 Towne Center Drive development in San Diego. A 160,000 square feet project located in the UTC submarket is being developed to accommodate both life science and life -- excuse me, both life science and non-life science users.

A strong location and highly amenitized state-of-the-art environment is attracting interest from a range of media, tech, and life science companies. We expect this to be well leased before shell completion mid next year. Given our strong leasing success, we commenced construction on 2,100 Kettner which is located in Little Italy neighborhood of San Diego. This is a 1.2 acre full-city block and one of San Diego's most popular neighborhoods for young professionals.

It is 2 blocks from the harbor surrounded by restaurants, retail, and other amenities, and within close proximity to public transportation in the San Diego Airport. We are developing a 200,000 square feet modern office and ground floor retail space in a brick and timber low rise design. Our incremental investment is roughly $100 million with core and shell completion scheduled for the first quarter of 2021. Excluding 2,100 Kettner, where construction just started, the office and life science component of our $2.2 billion development program under construction is now 90% leased.

Upon stabilization over the next three years, the six projects under construction which includes 2,100 Kettner, One Paseo office and residential, Netflix and Living on Vine, 333 Dexter and 9455 Towne Center Drive and Phase 1 of Kilroy Oyster Point, are estimated to generate a total cash NOI of approximately $150 million. Approximately 85% of this NOI will come from office and life science and 15% from the 564 residential units at Phases II and III of One Paseo Living -- at One Paseo rather and Living on Vine.

Now for a few comments about our development pipeline; at Kilroy Oyster Point, we recently submitted the precise plan to the City of South San Francisco for the second, third and fourth phases of the project totaling approximately 2 million square feet. This process takes about a year and we currently estimate we could start any one of these phases in 12 months to 15 months subject to the right market conditions. And at the Flower Mart, we're happy to report that the four CEQA lawsuits affecting the entire Central SOMA area are now resolved. We are close to executing the development agreement, which will position us to commence construction as early as 2021.

And looking to the future, we've added two redevelopment projects to our future pipeline that will provide significant earnings and value growth over time. The first is the fully leased Blackwelder Creative Office project in Culver City submarket of Los Angeles. We paid $186 million for 158,000 square feet of fully leased office buildings situated on a 6.9 acre land site. The campus currently consists of 19, 1 and 2 story, buildings leased to creative tenants with average in-place lease term of 39 months. In-place rents are approximately 35% below market.

We have the optionality to significantly increase the project square footage through redevelopment over time. The project has terrific locational advantages versus transit. Blackwelder offers multiple transportation options. The Metro Expo line is about a five minute walk from Blackwelder and provides a 20-minute ride to Santa Monica and 25-minute ride to Downtown Los Angeles. Freeway and airport access is also excellent. Second, Blackwelder is in close proximity to the Hayden Track and downtown Culver City, which offers an abundant range of new commercial, retail, and residential amenities. And immediately adjacent to Blackwelder is the Cumulus project, which is under construction and is scheduled to deliver in 2021. The Cumulus encompasses 1200 residential units including a 30-story residential tower, 100,000 square feet of retail space, which is 40% leased to Whole Foods and a one acre public park. We're very excited about our entrance into Culver City, much like Hollywood, and it's become a magnet for LA’s young creative professionals and the companies for whom they work.

Major media content producers in the area now include Amazon, Apple, HBO, and Sony Pictures. Amazon and Apple alone are expected to occupy a footprint of approximately 1.5 million square feet in Culver City in the near future. Creative Class A office space vacancy in the market is 2%. All-new development projects in the area roughly 1.6 million square feet of office have been substantially leased prior to construction completion.

The second future redevelopment project that we acquired is located in the East Village submarket of downtown San Diego. East Village has become one of the most vibrant and sought-after neighborhoods in coastal San Diego that is increasingly attractive to the city's large and growing millennial population. We paid $40 million for 2.3 acre fully entitled mixed use site. The prior owner will be leasing back three existing buildings through mid-2021. During this time, we will be evaluating the appropriate mix of uses for this site. We envision a project reflective of the neighborhoods urban mixed use character, including rooftop decks and balconies, street level retail, and ground level open space.

One of the things that attracted us to the East Village is the availability of housing. Over the past five years, 4,500 new residential units have been delivered to this area with another 3,000 under construction and another 2,500 units in planning review. Retail and cultural institutions including Petco Park, home to the Padres baseball team; the new San Diego Central Library; University of California San Diego's new extension campus, have quickly followed. Employers attracted by the young well-educated workforce are boosting demand for modern office space in this market.

The East Village reminds us of what SOMA looked like 10 years ago. There is a similar vibe in character. A big difference is that the East Village has significantly greater availability of residential and it’s far more affordable. Let me close with some summary thoughts. Market conditions remain strong and highlight the value of our stabilized portfolio, which is monetizing market strength in the form of significantly higher rents. Development continues to be a major value creator for KRC. We believe that our patient, disciplined, and creative approach to new development adds a meaningful premium in the returns we can achieve on projects as varied as One Paseo, 333 Dexter, Kilroy Oyster Point, and the Flower Mart, to mentioned just a few.

Not only are we achieving greater returns, but we are creating the most advanced work environments in the country. And with all this activity, we're doing in such a way that continues to place balance sheet strength and financial flexibility at the core of our business strategy.

That completes my remarks. I'll turn it over to you, Tyler.

Tyler Rose -- Executive Vice President and Chief Financial Officer

Thanks, John. FFO was $1.01 per share in the third quarter, driven by strong core results, $0.03 of one-time items and the impact from our disposition and recent bond offering. Same-store cash NOI was 0.6% [Phonetic] and GAAP NOI increased 8.3% cash. Same-store NOI growth was primarily driven by the burn off of free rent at a few San Francisco and Seattle properties. The increase in GAAP same-store NOI was driven by commencement of new leases, also largely in San Francisco and Seattle.

At the end of the third quarter, our stabilized portfolio was 92.1% occupied and 97.3% leased. With our strong leasing activity through the first 10 months of the year, we've effectively addressed all 2019 lease expirations with just 64,000 square feet remaining, and have a manageable 2020 expiration profile of 774,000 square feet or just 6.4% of the portfolio. We only have one expiration greater than 100,000 square feet in 2020.

We estimate that our portfolio-wide weighted average in-place rents remain above 21% below market. By region, in-place rents for San Francisco are approximately 33% below market; Los Angeles and Seattle's are 10% below market, and San Diego's are about 9% below market. Our 2020 lease expirations are estimated to be 17% below market.

Now let's move to the balance sheet. In July, we drew down all the proceeds from the sale of 5 million shares of equity we issued in 2018, on a forward basis. A roughly $90 million of forward equity issued in the first quarter under the ATM, remains undrawn at this time. We intend to draw this down in the first quarter of 2020. We raised $500 million of 10-year bonds at 3.05% in September.

We are in escrow to sell our only Orange County building for proceeds of $116 million. And with these transactions, we have substantial debt capacity and flexibility. Prior to drawing the ATM, we will have approximately $150 million of cash and $750 million of capacity under our bank line and an incremental $600 million under the accordion future. 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 28% and our debt-to-EBITDA was approximately 6.6 times, adjusted for the remaining equity forward transactions. We expect our debt-to-EBITDA to come down as our leased development projects come on stream.

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. We forecast remaining 2019 development spending of $125 million to $150 million. Our forecast for year-end office occupancy remains at 94% to 95%. Given the recent commencement on some of our leases in San Francisco and Seattle, we are increasing our projected 2019 GAAP same-store NOI by 50 basis points to 3.5% to 4.5%. And our forecast for cash same-store NOI remained flat for the year.

Last quarter, we provide updated earnings guidance for 2019 of $3.67 to $3.78 per share with a midpoint of $3.73 per share. Heading into the fourth quarter, there are many moving parts. Given the strong results in the third quarter, the two recent acquisitions, the timing of our disposition, the benefit of our recent bond offering, we are increasing and narrowing our range to $3.82 to $3.88 and increasing the midpoint by $0.12 to $3.85 per share.

This midpoint would imply a fourth quarter FFO per share of $0.94, which is $0.07 lower than our third quarter results, primarily driven by the downtime associated with Dropbox expanding into the Exchange and moving out of 333 and 345 Brannan; a full quarter of interest expense from the new bonds and the disposition.

As a reminder, we are projecting revenue recognition at 333 and 345 Brannan by the end of the year. That's the latest news from KRC. Now, we'll be happy to take your questions. Operator?

Questions and Answers:

Operator

[Operator Instructions] The first question comes from Nick Yulico of Scotiabank. Please go ahead.

Nicholas Yulico -- Scotiabank Global Banking -- Analyst

Thanks. First off, on Oyster Point, congrats on getting that lease done with Stripe. Can you give us a feel for the rents on that deal? I know you talked about the overall first phase project is now exceeded underwriting, so imagine you're getting higher rents for the office than for the lab there?

John Kilroy -- Chairman, President and Chief Executive Officer

Yeah. I don't want to give you specific rents on specific deals, Nick. Let's just say that of our office at life science across the board that I mentioned in our earlier remarks, we are continuing to be in the very high 7% or better ROCs. Most of these leases are 10 to 15 years throughout the -- ones we've mentioned. And they typically have 3%, 3.5%, 4% annual bumps. That’s about as good as I can give to you.

Nicholas Yulico -- Scotiabank Global Banking -- Analyst

And as we're thinking about though future phases of Oyster Point, your desire to do office versus lab there, I mean, does this mean that the overall yield on this whole project could be higher for the future phases if you were to do more office or you're looking to do more office there?

John Kilroy -- Chairman, President and Chief Executive Officer

I don't want to get into predicting what the yields in the future are going to be. I mentioned when we underwrote this thing we were looking in the early to mid 6s. We've done quite a bit better than that. I think we'll do better in the other phases, obviously subject to market conditions. As it relates to tech versus life science, I'm sort of agnostic. We do what we think is in the best interests of our shareholders and we have the unique situation with the product and the environment that we've created at Kilroy Oyster Point. Remember, we have 40 acres plus a 10-acre Marina. So we have something that nobody else has. We have extraordinary views; the ferry service, etc. I think this is going to be a blockbuster project.

I think it's going to appeal increasingly to tech as well as the life science and we're working with many people in both camps.

Nicholas Yulico -- Scotiabank Global Banking -- Analyst

Okay, thank you. And just last question on Culver City, the acquisition you did there. Our understanding is that there are a lot of people looking at that project. You ended up getting it. There is this densification potential there, which is attractive. Can you talk a little bit more about how much square footage you could ultimately build there and how we should think about when this could become a -- is this a new development, is it a redevelopment of existing space and you have to wait the full 39 months on the lease term to get the project started or would you think about being able to get tenants out earlier?

John Kilroy -- Chairman, President and Chief Executive Officer

I don't want to talk about that. I think talking about strategy with tenants and with competitors is bad to do on a telephone call. We do have a -- we're looking at early stages of looking at what we might be able to redevelop the project to over time. It would be many, many times the square footage that's there now. In the meantime, Tyler, do you want to talk about the yields on that project?

Tyler Rose -- Executive Vice President and Chief Financial Officer

I think over the next -- excuse me, I'll do it. Over the next three or so years, we think we get to a north, maybe a high 6. We're going in right now in the mid-threes on a ROC basis. That's not allocating any value to the future development.

Nicholas Yulico -- Scotiabank Global Banking -- Analyst

Okay, thanks. And then just one last question on the one-time items this quarter. I think, Tyler, you said it was $0.03. Is that all in NOI, as we're thinking about just a clean run rate on NOI going forward? Is the $0.03 all should be stripped out of NOI this quarter?

Tyler Rose -- Executive Vice President and Chief Financial Officer

Yeah. It's related to parking and some common area maintenance true-ups, but yeah it is in the NOI.

Nicholas Yulico -- Scotiabank Global Banking -- Analyst

All right. Thanks everyone.

Operator

The next question comes from Craig Mailman of KeyBanc Capital Markets. Please go ahead.

Craig Mailman -- KeyBanc Capital Markets -- Analyst

Hey, guys. Maybe Tyler just sticking on guidance. So if we think there's a lot of moving parts, you guys are up $0.12 over the last quarter, kind of stripping out that $0.03, you’re at $0.09, how much of that was just the recurring kind of upside from 3Q versus some of these other moving parts on acquisitions and commencements and other things?

Tyler Rose -- Executive Vice President and Chief Financial Officer

Yeah, I mean if you break down the $0.12, roughly $0.07 of that is core. And the non-core I just went through. So the core is about $0.035 and then the acquisition is accretive initially and the bond transaction is later and lower in rate than we had anticipated. So that's the other difference.

Craig Mailman -- KeyBanc Capital Markets -- Analyst

Okay, that's helpful. And I know John, you said, kind of $0.035 going in on Blackwelder. What's that when you assume kind of the FAS 141 impact for the below market leases, so on a GAAP basis?

John Kilroy -- Chairman, President and Chief Executive Officer

Tyler, do you want to take that?

Tyler Rose -- Executive Vice President and Chief Financial Officer

Yeah, it's about mid 5%.

Craig Mailman -- KeyBanc Capital Markets -- Analyst

And then, John, you had mentioned the sequel lawsuits are kind of done for the Flower Mart. In the past you've kind of said you want to hold off on leasing there till the lawsuits are done. Could you give an update on prospects there, maybe potential timing on a pre-lease before you go forward?

John Kilroy -- Chairman, President and Chief Executive Officer

No. I won't for competitive reasons.

Craig Mailman -- KeyBanc Capital Markets -- Analyst

Okay, that’s fair. That's all for you guys. Thanks.

Operator

The next question comes from Jason Green of Evercore. Please go ahead.

Jason Green -- Evercore -- Analyst

Good afternoon. How should we think about the remaining Dropbox space at the exchange coming on? You're at 52% now. How much does Phase II in Q1 of '20 and Phase III in 3Q of '20 add to that 52%?

Michelle Ngo -- Senior Vice President and Treasurer

Hi, Jason. It's Michelle. Dropbox at the exchange is scheduled to come online. The rest of it towards the end of the year and by December.

Jason Green -- Evercore -- Analyst

Okay. And just to be clear on the disposition side, $150 million that -- the $150 million that's not in guidance right now, is that expected in fiscal year '19 or is that a fiscal year '20 event?

John Kilroy -- Chairman, President and Chief Executive Officer

The disposition -- we are in escrow to sell off project for $116 million that should be closing any day. We sold a property earlier this year for roughly $20 million, so that's roughly $135 million. That's the dispositions that we will complete in 2019. We haven't given 2020 guidance yet on disposition.

Jason Green -- Evercore -- Analyst

Okay, thank you.

John Kilroy -- Chairman, President and Chief Executive Officer

Yeah. And Jason, just to clarify in terms of the Dropbox at the exchange, there'll be on Phase II roughly 50,000 square feet coming online by the end of the year and then the remaining phase will be coming online towards the middle of the year, next year.

Jason Green -- Evercore -- Analyst

Okay. Thank you.

John Kilroy -- Chairman, President and Chief Executive Officer

Sure.

Operator

Then the next question comes from Manny Korchman of Citi. Please go ahead.

Manny Korchman -- Citi -- Analyst

Hi, everyone. You guys have had a busy acquisition market or been busy. What does the acquisition pipeline look like right now going forward, if you can?

John Kilroy -- Chairman, President and Chief Executive Officer

Yeah, we don't have anything with regard to existing buildings per se that we're -- we evaluated everything. We're not in negotiations on any existing buildings. We're looking always if we're missing something. As I've said in prior calls, I don't see us buying a lot of existing buildings. The exception would be something like a Blackwelder where it's an okay going in return, but it has significant redevelopment potential for the future. I like that. Just buying core, not interested.

Manny Korchman -- Citi -- Analyst

And then you talked about the 2020 lease rollovers for the large space, the one over 100,000 square feet. What are the prospects look like there or the prospect of retention of that tenant?

Robert Paratte -- Executive Vice President, Leasing and Business Development

Hey Manny, it's Rob Paratte. So we have a little bit over a year left before that vacancy occurs and we're already in discussions with people on it. We've had some good leasing activity on current vacancy we have at the project. And then lastly, I would say, we're undertaking a mild refresh of the project itself; lobbies, landscaping that sort of thing, same thing that we did at Sabre Springs and Del Mar Corporate Center, which we think will help us push rents and fill the space.

Manny Korchman -- Citi -- Analyst

Where is that one Rob?

Robert Paratte -- Executive Vice President, Leasing and Business Development

Long Beach.

Operator

Was there a follow-up, Mr. Korchman?

Manny Korchman -- Citi -- Analyst

No. Thank you.

Operator

Thank you. The next question comes from John Guinee of Stifel. Please go ahead.

John Guinee -- Stifel -- Analyst

Great, thank you. Nice job, guys. Hey, Tyler, about a year-and-a-half ago in New York City in June, I think at NAREIT, you had an Investor Day and you just gave kind of a soft guidance of late 2020 FFO at about maybe $4.50 a share. How do you feel about that?

Tyler Rose -- Executive Vice President and Chief Financial Officer

You ask me that every quarter. It's getting to be a tradition I think, but -- yeah and I think the answer is that if you were to go back in time and everything had played out the way we had thought it might, at that point we'd be very close to that number. Obviously with less dispositions and more acquisitions and bond deals at different timing and larger size, that number would change. But I think to answer your question is yes, we would still be on track if everything else stayed the same.

John Guinee -- Stifel -- Analyst

Did everything stay the same and are you still on track?

Tyler Rose -- Executive Vice President and Chief Financial Officer

No, nothing stayed the same.

John Guinee -- Stifel -- Analyst

So higher or lower?

Tyler Rose -- Executive Vice President and Chief Financial Officer

We're not going to comment on that. We will provide guidance on our 2020 numbers next call.

John Guinee -- Stifel -- Analyst

Great, thank you.

Operator

The next question comes from Derek Johnston of Deutsche Bank. Please go ahead.

Derek Johnston -- Deutsche Bank -- Analyst

Hi, everyone. How are you doing? What are your thoughts on how antitrust and potential regulatory actions on FANG companies could impact their demand for office space?

Robert Paratte -- Executive Vice President, Leasing and Business Development

Hi, Derek, it's Rob Paratte, again. You know that we can't predict what the outcome of these various actions that are in the news are going to have on these companies, but given the day to day conversations we have with all of them, there is no cessation in their demand for space, particularly on the West Coast. But you're seeing their demand also in New York and other areas like Austin. So thus far and will it affect one company, more than another; hard to predict and what the ultimate outcome will be hard to predict. But we're seeing a lot of demand and continued growth in all of our markets.

Derek Johnston -- Deutsche Bank -- Analyst

Okay, great. And no, there has been a fair. It's interesting you say that amount of debate about accelerating leasing demand in New York City from the tech or the expanding FANG companies. Does this concern you guys at all and would you ever consider maybe a build-to-suit project in Manhattan or even other markets with your partners?

Robert Paratte -- Executive Vice President, Leasing and Business Development

We've been asked, but we haven't done it and I don't think that New York City really needs Kilroy. The second part of your question, does it concern us? Not at all because they're growing as much as they're growing in New York, they're growing in Seattle, they're growing in San Francisco Bay area. They're coming to San Diego. It's unique time right now.

John Kilroy -- Chairman, President and Chief Executive Officer

The other side of that is everybody likes to focus on the FANGs because they’ve sort of been in the press lately. But the number -- what was the number, 149 or something unicorns in the Bay Area with -- I don't, don't hold me these numbers because I'm just trying to remember what the article was. But it's the number of new companies that are growing sort of exponentially in the Bay Area is something I've never seen before. And it's because these folks are all coming here because of the ecosystem. And any time you pick up a newspaper, there is always another one. So, there's a lot of folks out there demanding space way beyond FANGs.

Derek Johnston -- Deutsche Bank -- Analyst

That's good color. And then just lastly for me, I think there has been some pretty well documented chatter about Prop 13 making its way to the ballot again next year. You guys have a fairly young or new portfolio. How do you view that? I mean, seriously you're closer to it on the ground. What do you think about that?

Robert Paratte -- Executive Vice President, Leasing and Business Development

You want to cover that John or Tyler?

John Kilroy -- Chairman, President and Chief Executive Officer

Obviously, we're watching that, watching the polls and how that might play out. The vote is next November. If it passes, which is not necessarily going to pass, but if it passes it will take several years to sort of get implemented. What we've said previously is initially anyway for us, it's a $0.02 to $0.04 hit as you point out. We have a fairly young new portfolio. So it doesn't impact us initially as much over time.

Derek Johnston -- Deutsche Bank -- Analyst

Thank you, guys.

Operator

The next question comes from Jamie Feldman of Bank of America Merrill Lynch. Please go ahead.

Jamie Feldman -- Bank of America Merrill Lynch. -- Analyst

Thanks. I guess, John kind of sticking with your comments on the San Francisco unicorns and growing companies there. I mean, we've seen a little bit of a hiccup here in the tech IPO market or the IPO market in general. Have you seen any change in mood or sentiment or cash or investment flows in your West Coast markets?

Robert Paratte -- Executive Vice President, Leasing and Business Development

Hey, Jamie, it's Rob Paratte again. We're not seeing any change. In fact Q3, there was $26 billion of VC funding nationally; 60% of that came to the West Coast and 20% of that came to life science. So we see a very -- and that's on par with very close to Q2 of 2019. So we're not seeing any let up in that and as John said earlier, the amount of young growing companies in the Bay Area and elsewhere, frankly, is truly astounding right now.

Jamie Feldman -- Bank of America Merrill Lynch. -- Analyst

Okay, that's helpful. And then, have you seen any change in either the tenant demand or different co-working operators looking for space since WeWork pulled its IPO?

Robert Paratte -- Executive Vice President, Leasing and Business Development

Well, there's always been -- there is Knotel group. There are a number of other competitors that we work that are always looking for space and so forth. I want to make it clear to everybody on the call that Kilroy has, I think, it's something -- Michelle, correct me if I'm wrong, but it's well under 1%. I think it's under 0.5% exposure to co-working. We've not been a big fan of having that kind of tenant in our buildings in scale.

But just to comment about WeWork, there has been a lot of speculation in the press and whatnot, what does this mean. Now it's going to mean different things in different cities, I want to guess. But if they give any of that space back, their space is terrific space. It's total plug-and-play for most of the tech companies. So we'll see what happens with those guys.

Jamie Feldman -- Bank of America Merrill Lynch. -- Analyst

Okay and Tyler, I know you ran quickly through some of the financials here. But I guess, as we just kind of think through the next year or so, can you just walk through kind of sources and uses of funding?

Tyler Rose -- Executive Vice President and Chief Financial Officer

Yeah, so in terms of spending, as I said about $125 million remaining this year and roughly $500 million or so next year, assuming nothing else happens. And in terms of funding that, as I said, we'll have $150 million of cash, we have the $90 million of ATM and we're looking obviously at doing dispositions next year. And we have debt capacity and other capacity to do ventures equity, we leave all the doors open and we'll evaluate it. But more than half of it is funded today and will -- as we always do, we'll be selling properties and doing other funding next year.

Jamie Feldman -- Bank of America Merrill Lynch. -- Analyst

Okay. Right, thank you.

Operator

The next question comes from Blaine Heck of Wells Fargo. Please go ahead.

Blaine Heck -- Wells Fargo -- Analyst

Thanks. Can you guys talk about the type of tenant you guys are targeting at 2,100 Kettner? Any early indications of interest you guys are seeing there? And just in general, what factors made you comfortable going ahead with spec development in that market?

John Kilroy -- Chairman, President and Chief Executive Officer

Well, the markets -- it's just an incredible market. It is very supply constrained. It's where a lot of the housing is, it’s where the Millennials want to be and the tech companies and so forth to support that. I don't think you could find a better location other than maybe One Paseo office now because of the One Paseo retail and residential. So you just couldn't ask for better site and better market conditions than what we have there.

Also, the product that we're developing it’s lower rise, what is it Rob? 5 stories, roughly 200,000 feet with ground floor retail brick and timber, high ceiling heights, lots of deck. I mean, it's the, it's the bee’s knees, if I can use that expression in an office space. In terms of the user crowd, we have all kinds of people that are interested in the building or portions of the building. We won't quote a rent at this point. Rents are going up. One Paseo rents have set new highs. We have some other things going on.

We think we're going to set new highs. And we just started construction. That thing delivers, what, the end of next year, Rob, or maybe stabilizes 2021, is that right Eliott?

Eliott Trencher -- Senior Vice President, Corporate Strategy

Yeah 2021.

John Kilroy -- Chairman, President and Chief Executive Officer

So I don't want to quote a rent at this point, but I think it will be a record breaker.

Blaine Heck -- Wells Fargo -- Analyst

More to follow up on that and not to get into specific rents, but maybe for, Rob, I guess where do you think market rent growth could shake out in San Diego? And I guess more importantly in the submarket that you guys operate in over the next 12 months? I mean are you seeing growth there that's getting closer to your other major markets at this point?

Robert Paratte -- Executive Vice President, Leasing and Business Development

Yeah, we are. I mean, San Diego rent growth is 9.2%. I mean I've undershot my rent growth projections in the last few quarters. So I think particularly with -- folding in what John said about the unique character of 2100 Kettner rent growth above 10%, it's not going to surprise me. Again really, it's one thing to be in the markets where the tenants want to be, but it's also building this type of product and collaborating with the tenant/clients that we deal with. And to answer your other question, there is a lot of interest from different categories of tenants, whether it'd be tech or some professional service firms, that sort of thing.

Blaine Heck -- Wells Fargo -- Analyst

Very helpful. Thanks guys.

Operator

The next question comes from Dave Rodgers of Baird. Please go ahead.

Dave Rodgers -- Baird -- Analyst

Yeah. Tyler, maybe start on the accounting side with you, if I could, quickly on the exchange. Can you talk about the capitalization of interest there and kind of how you see that burning off through the final phases of occupancy?

Tyler Rose -- Executive Vice President and Chief Financial Officer

In terms of the actual numbers. I don't have the numbers, but I mean as Michelle said, we will be fully completing capitalization by mid next year when Phase III comes online and we will be reducing cap interest at the end of this year when Phase II comes online.

Michelle Ngo -- Senior Vice President and Treasurer

And we expect cap interest for the year to be in that roughly $80 million. So it's in the similar run rate to second quarter and third quarter.

Dave Rodgers -- Baird -- Analyst

And is that just lower capitalization from exchange offset by the added development projects?

Michelle Ngo -- Senior Vice President and Treasurer

Correct.

Dave Rodgers -- Baird -- Analyst

Okay. The fees in the quarter, I think you had mentioned some time ago some restoration fees from Dropbox. Have you recorded all those or will you get those later? Would those bleed into ‘20?

Tyler Rose -- Executive Vice President and Chief Financial Officer

Yes, those are all have been amortized into our numbers.

Dave Rodgers -- Baird -- Analyst

Okay. So still collecting them on a GAAP basis. And then the --.

Tyler Rose -- Executive Vice President and Chief Financial Officer

Just to be clear, they've been amortized. So we've collected all those and done, they're all done. Yeah.

Dave Rodgers -- Baird -- Analyst

Thank you for that. You mentioned the downtime, I think at the Brannan Street assets, Tyler, with the move-ins and move-outs. But it sounds like that downtime is literally limited just to the fourth quarter this year.

Tyler Rose -- Executive Vice President and Chief Financial Officer

That's correct. We expect Cruise to move in, in December, so there's effectively two months of downtime.

Dave Rodgers -- Baird -- Analyst

Two months, okay, thanks. Maybe last just to John and just follow up on Tyler's comments earlier about funding. You had talked for a number of quarters about larger joint venture sales. It doesn't sound like that's off the table, but you just kind of didn't mention it overtly today. Can I just ask about kind of any progress that you might be making there and if that's still kind of a main avenue for you in the future?

John Kilroy -- Chairman, President and Chief Executive Officer

It's certainly an avenue and it's certainly something that we keep abreast of in talk with folks all the time in specifics. But right now, we don't have anything that we are negotiating in detail. And with the leasing, we're doing and so forth, I kind of feel that if we're going to do a venture on a development project, it's probably a lot better to do it when you have a lease in hand rather than when it's spec because the differential in thresholds for IRR and so forth are a little bit different, but it's certainly a source that we look to for the future.

Dave Rodgers -- Baird -- Analyst

All right, thank you.

Operator

And we have a follow-up from Manny Korchman of Citi. Please go ahead.

Michael Bilerman -- Citi -- Analyst

Hey, it's Michael Bilerman here with Manny. John, congratulations on the Oyster Point Stripe deal. I know they still have like [Indecipherable]. Are you involved at all on their potential sublease of that space or providing them any compensation for lease termination payment or is it solely they're going to deal with that and they'll move in, in 2022 to your space?

John Kilroy -- Chairman, President and Chief Executive Officer

It's the latter. We have no exposure.

Michael Bilerman -- Citi -- Analyst

And then are you going to help them at all on sublease or you're – that’s not even like a service that you'll provide for them?

John Kilroy -- Chairman, President and Chief Executive Officer

[Indecipherable] and it's not generally what we do. So, I don't know -- I have no, I don't contemplate us being involved in that at all Michael.

Michael Bilerman -- Citi -- Analyst

Okay and then just stepping back from it. Clearly, at least from what they're trying to put out there into the press is, one of the big desires for them to move down to South San Francisco is just the need for space and the ability to grow, which is quite limited right now in San Francisco, which is great from a rent perspective for you and great for you to lease up your developments in San Francisco proper. But does it concern you at all if tenants feel that they can expand in the city and/or have to pay exorbitant rent to get space? Is this a trend potentially that others may go down and seek alternatives to the San Francisco market?

John Kilroy -- Chairman, President and Chief Executive Officer

Well, Michael, it's a big question and certainly I don't see it as a trend. There are companies that move out all the time, but there is many more companies that move in. I don't like the idea. I'm not going to agree with you that they're exorbitant rents. If you look at what these types of companies pay and other markets around the world, San Francisco is in the upper quarter from a percentile standpoint, but it's certainly not anywhere near the highest.

So I think there is room to go on rent. As to the availability, now with the CEQA lawsuit solved, we're going to see projects come on stream. I mean we have the Flower Mart, of course and Tishman Speyer has their 800,000 feet or 900,000 feet, 700,000 feet whatever it is and so forth. So the problem is, this has just come about the CEQA resolution. And people move for various reasons; I'm not going to get into any comments with regard to the recent announcement on our Oyster Point tenant. That is better addressed by them.

Michael Bilerman -- Citi -- Analyst

Yeah, no. And that's, and I wouldn't expect you to comment on that. That was more so thinking about that situation and some reasons that they've put out there in the press as to their move and whether as you think about what's happening in the city, whether that could portend to others. But I appreciate your color that you've provided.

John Kilroy -- Chairman, President and Chief Executive Officer

Yeah, one of the things we're excited about with the Flower Mart with the scale of that, remember, that's the first phase is pretty good sized and then there's a second phase that we have the ability to accommodate a large user or a number of large users with the ability to scale up. And frankly, we are seeing that more and more frequently with -- particularly with the faster growing companies. If you think about the Chelsea area there in New York, you saw a big user come in and take some space and take some more space and take more space to take more space and more space. Well, these folks are growing and when they put their foot down at a place, generally they put a second foot down and then pretty soon you have a lot more to follow. What we have in and what we offer is scale in South San Francisco is almost unprecedented.

We have in Phase II, III and IV, roughly 2 million square feet we can deliver and I think 8 or 9 building 7 or 8 buildings. So you could think of those as all being a phase under themselves. And then we have the Oyster Point Tech Center, I think we call it right next door, which is literally a budding Phase II of Oyster Point where we only have 145,000 square feet and we think we can get it entitled for another 0.5 million plus square feet as well.

So people like -- these companies like to know they can grow. And if you think about that was very, a very big point with our relationship in expanding Dropbox into their new headquarters, we did their first headquarters. And what was it 3, 4, 5 years later, we did a bigger headquarters and we didn't have to go to a lender or a partner and get permission and so forth. So we think we have a pretty good program to deal with, frankly, the best working environments and buildings, you can develop in areas with great amenities and transportation. You add to that scalability, you end up with something that's extremely unique.

Michael Bilerman -- Citi -- Analyst

All right, great. Will see you in few weeks.

John Kilroy -- Chairman, President and Chief Executive Officer

Okay, great. Thank you.

Operator

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

Tyler Rose -- Executive Vice President and Chief Financial Officer

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

Operator

[Operator Closing Remarks]

Duration: 48 minutes

Call participants:

Tyler Rose -- Executive Vice President and Chief Financial Officer

John Kilroy -- Chairman, President and Chief Executive Officer

Robert Paratte -- Executive Vice President, Leasing and Business Development

Michelle Ngo -- Senior Vice President and Treasurer

Eliott Trencher -- Senior Vice President, Corporate Strategy

Nicholas Yulico -- Scotiabank Global Banking -- Analyst

Craig Mailman -- KeyBanc Capital Markets -- Analyst

Jason Green -- Evercore -- Analyst

Manny Korchman -- Citi -- Analyst

John Guinee -- Stifel -- Analyst

Derek Johnston -- Deutsche Bank -- Analyst

Jamie Feldman -- Bank of America Merrill Lynch. -- Analyst

Blaine Heck -- Wells Fargo -- Analyst

Dave Rodgers -- Baird -- Analyst

Michael Bilerman -- Citi -- Analyst

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