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Kilroy Realty Corporation (NYSE:KRC)
Q4 2019 Earnings Call
Feb 4, 2020, 1:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day and welcome to the Q4 2019 Kilroy Realty Corporation Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] 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.

Tyler H. 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 market color, our 2019 highlights, a review of the fourth quarter, and our objectives for 2020. I'll provide financial highlights and review our initial 2020 earnings guidance, then we'll be happy to take your questions.

John?

John B. Kilroy -- Chairman, President and Chief Executive Officer

Thanks, Tyler. Hello, everybody. Thank you for joining us today. Conditions in our West Coast markets remain very strong. From San Diego to Seattle, our submarkets have not only developed into central hubs for innovators and technology, media and life science but are also benefiting from broad-based economic growth.

Unemployment rates are at record lows. San Francisco, Seattle and San Diego fourth quarter unemployment rates dropped below 3%, and LA came in at just under 4%. Public market returns for tech, healthcare, and biotech have surpassed other industries by roughly 2 times over the past decade. And just last week, Apple, Amazon and Microsoft, three of our major tenants and three of the four largest companies in the world, have all reported record earnings. These companies all unveiled extraordinary plans to develop or to continue to shape our lifestyle with their products, this growth will drive increased demand for modern work environments at our markets.

Real estate capital markets remain wide open as equity investors continue to search for growth and debt investors continue to search for yield. 2019 VC funding was the second highest year over the -- the highest year over the past decade and our West Coast markets accounted for 55% of that funding.

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 $1,500 per square foot range in San Francisco; $1,100 per square foot in Seattle and Los Angeles; and over $700 per square foot for older product in San Diego. This backdrop has resulted in real estate conditions that are among the strongest we have seen with very limited supply and solid demand driving declining vacancy rates and record high rents. While we don't have a crystal ball, we see this operating environment continuing for some time absent a macro event.

Now let's get into 2019 highlights. 2019 was a terrific year for us across the company. We delivered strong and, in many cases, record results for our shareholders. We signed 3.5 million square feet of leases across our stabilized and development portfolio, a new all-time high for the company. We continue to expand relationships with our key customers. We executed leases in our stabilized portfolio that generated record-high leasing spreads. Rents increased 30% on a cash basis and 52% on a GAAP basis compared to prior leases.

We signed long-term leases with top quality tenants for 90% of the office in life science space and our $2.2 billion under construction development program. This level of development leasing was not only a record for us but was also about 24 months ahead of our stabilized leasing projections on average.

We made three strategic acquisitions totaling $359 million, all of which provide attractive development or redevelopment opportunities. We increased our FFO per share nearly 7% year-over-year. We increased our dividend by 6.6%, a cumulative increase of 29% over the last four years. We generated $886 million in capital from our capital recycling program and new debt and equity issuance maintaining the strength of our balance sheet while addressing future funding needs.

And we continue to build on our leadership in ESG. We were the first North American REIT to make a commitment to be carbon neutral operations by year-end 2020. This timing exceeds both Californian Federal standards by multiple decades. We've been recognized year after year by many industry groups across the world, including GRESB, which is ranked as number one in the Americas across all asset classes for the past six years. We've won the EPA's highest honor of the Energy Star Partner of the Year Sustained Excellence Award for the past four years and NAREIT's Leader in the Light Award for the past six years.

We're included in the Dow Jones Sustainability World Index and recently Bloomberg added us to its 2020 Gender-Equality Index. While we are proud of our accomplishments in these areas we will continue to look for new and better ways to foster a diverse and inclusive work environment, engage our communities and minimize our environmental impacts.

Now let's get into the details on activities since the end of the third quarter. In our stabilized portfolio, we signed new or renewing leases on 400,000 square feet of office space. At rents, they were up 30% on a cash basis and 45% on a GAAP basis. One of the bigger deals included a 10-year lease with Microsoft-owned GitHub for just under 62,000 square feet of office space at our Skyline Project in Bellevue Submarket of Seattle. This new lease fully backfills a January expiration, along with two other leases we signed in January. Our entire Seattle portfolio is now 100% leased. We expect conditions in the Seattle to remain robust, given the record low vacancy and extremely limited supply of large blocks of modern high quality space.

In other construction development program, we signed more than 600,000 square feet of leases during the quarter fully leasing the remaining space at Kilroy Oyster Point Phase 1 to strive for its new headquarters and signing a transaction December for our entire 160,000 square foot Towne Centre Drive project in San Diego to a Fortune 50 technology company.

We commenced construction on both projects in the first quarter of 2019 and both leased up roughly seven months after construction commencement. That's a strong indicator of the strength of our markets and the quality of our development. We also made good progress at our One Paseo mixed-use project in Del March The office space is now 80% leased and commands the highest rental rates in the region. Also, two-thirds of the 237 residential units that were delivered in September are leased. With these fourth quarter in transactions, we have effectively derisked 90% of the office and life science components of the $2.2 billion development projects under construction with strong credit and long leases.

To recap, this program includes One Paseo, a one-of-a-kind mixed-use office, residential and retail development in San Diego's most sought-after coastal community. Netflix on Vine, a mixed-use to office and residential project in the heart of Hollywood. 333 Dexter, a two-tower state-of-the-art office project in Seattle's Tech Centric South Lake Union Neighborhood, Kilroy Oyster Point Phase 1, the first of a multi-phase 11-building office and life science development in the West Coast Leading Life Science Market. 9455 Towne Centre Drive, an office and life science capable project in San Diego's University Town Center area, and finally, our recently commenced 2100 Kettner, an office and retail complex in Little Italy, one of San Diego's most popular downtown neighborhoods.

All these six projects -- excuse me, as these six projects are completed and stabilized, over the next couple of years, we estimate they will generate total cash NOI of approximately $150 million, roughly 85% from office and life science, and 15% from residential. Further at today's cap rates, this translates into value creation of approximately $1.7 billion.

Now let's turn to recent updates on our future development pipeline. First, in January, San Francisco's Board of Supervisors unanimously approved our Flower Mart project and we now have a fully executed development agreement that protects our entitlements into perpetuity. We also acquired a land site that will become the Flower Mart vendors' new permanent location. With these pieces in place, we anticipate late 2021 start date on the first phase of the project.

Second, we acquired a site in the heart of Seattle's Central Business District, commonly referred to as the Vance site. The site encompasses five parcels situated on 1.37 acres and includes the 47,000-square foot historic Lloyd Building; a second 31,000-square foot office building and several parking lots. The location is main and main of downtown Seattle and one of the reasons we are so excited about this project. It is immediately adjacent to Seattle's most-used light rail station and offers multiple transportation options, including the South Lake Union Trolley, the bus and convenient freeway access. It just blocks from the Amazon's headquarters, Seattle's iconic Pike Place Market, the city's newly renovated retail core; and finally, lies at the center of a triangle connecting Seattle's core downtown amenities with two of its most important innovation clusters, Denny Triangle and South Lake Union.

These neighborhoods support tenant names like Facebook, HBO, Zillow, Google, among others. We paid $133 million to that site and plan to seek entitlements for an urban mixed-use development anchored by a fully restored Lloyd Building. The project will include two office buildings totaling approximately 900,000 square feet, 25,000 square feet of Street level retail, and a residential development currently zoned for 575,000 square feet, which equates to somewhere between 400 and 500 units. This is the third acquisition with excellent development potential that we've completed in the past six months. It follows the purchase, purchases of our two-block East Village site in downtown San Diego and the Blackwelder creative campus in Culver City.

With these three development opportunities, we have backfilled our pipeline with tremendous infill opportunities in some of the West Coast's most vibrant submarkets. These projects lay the groundwork for continued growth in both earnings and NAV. In our capital recycling program, we completed the disposition of 2211 Michelson Drive, our last operating property in Orange County. The proceeds of approximately $116 million puts our total 2019 dispositions at just under $134 million. For 2020, we are evaluating a handful of assets for potential disposition ranging between $150 million and $300 million of proceeds.

Wrapping up, we'll be focused on five key objectives in 2020: first, delivering our $2.2 billion of under construction projects; second, maximizing value in our stabilized portfolio. This includes leasing up our vacancies, driving rents, and proactively addressing expirations; third, driving earnings and dividend growth; fourth, maintaining balance sheet strength and flexibility; and fifth, continuing to advance our strong relationships with some of the world's best and fastest growing companies.

That completes my remarks. Now, I'll turn the call over to Tyler.

Operator

Thanks, John. FFO was $1 per share in the fourth quarter and $3.91 for the year. Fourth quarter FFO largely benefited from additional occupancy and rents commitment at the Exchange and included $0.015 of one-time items.

Turning to same-store results, cash NOI grew 4.5% and GAAP NOI was up 4.8% in the fourth quarter. Same-store cash NOI growth was driven by higher rental rates and cash commencement of several large leases. For the year, cash NOI came in at negative 0.6%, largely due to first half expirations. On a GAAP basis, full-year NOI grew 5.3%, rising in step with strong rent increases. We entered 2020 with about 700,000 square feet of lease expirations, approximately 5.5% of the portfolio. The embedded rents in our 2020 expirations are roughly 20% below market. Across our portfolio, we estimate that weighted average in-place rents are 21% below market. By region, we believe in-place rents are approximately 30% below market in San Francisco, 13% below market in Los Angeles, 13% below market in Seattle, and 9% below market in San Diego. At year-end 2019, our stabilized portfolio was 94.6% occupied, in line with guidance, and 97% leased.

Moving to the balance sheet, we completed several transactions since the end of the third quarter. First, as John noted, we closed on the previously announced sale of 2211 Michelson for proceeds of approximately $116 million. Second, we sold $160 million of shares of equity under our ATM issued on a forward basis, increasing our total undrawn forward equity sales to approximately $250 million. Third, we drew down approximately $350 million on our bank line to fund our recent acquisitions.

Our overall financial position remains sound. In addition to the $1 billion of unused debt capacity under our credit facility, we have a large unencumbered portfolio with only two mortgages. We have very little floating rate debt and no significant maturities until 2023. Our current debt to market cap is in the mid-20s. Our fourth quarter annualized net debt to EBITDA is approximately 6.5 times pro forma for the undrawn equity forward position, and we expect our debt-to-EBITDA ratio to decline further as our lease development projects come on stream.

Before moving to guidance, I'd like to provide some color on Prop 13. As you know, the split rolls on the ballot for this coming November, our advisors are telling us that while it looks like a closed rate, given the negative impact it will have on the state, the polling indicates that it's likely to lose. However, should it pass, attempting to quantify our potential impact for this time is nearly impossible. There are too many variables and unknowns, including how assessors will derive market value, the status of our portfolio at the time, including a component of triple net leases, base year resets and what we own.

Now let's discuss our initial 2020 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 reflect 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 2020 are as follows. As always, we don't forecast acquisitions. We are targeting dispositions of $150 million to $300 million of proceeds. We anticipate development spending to be between $500 million to $600 million. We expect to commence revenue recognition for the following projects within the following timeframe. At The Exchange on 16th, the remaining 130,000 square feet in the third quarter of 2020, and Netflix on Vine at the end of the year, at 333 Dexter the initial phase totaling 330,000 square feet in the fourth quarter, and at One Paseo office we expect revenue commencement in phases starting in the third quarter.

With respect to delivery dates for the residential projects, One Paseo residential Phases II and III consisting of 371 units are projected to be delivered by mid-year. And Living on Vine, 193,000 units scheduled for delivery by the end of the year.

We are projecting total NOI contribution of approximately $20 million to $25 million this year from those 2020 development deliveries. Our forecast for year-end office occupancy is between 93% and 94%. We project GAAP same-store NOI growth of 1.5% to 2.5% and cash same-store NOI growth of 6.5% to 7.5%. We expect to draw down approximately $90 million of equity forward sales in the first quarter and the remaining $160 million in the fourth quarter.

From a 2020 FFO perspective, our fourth quarter FFO per share run rate was $0.985 adjusted for the one-time items or $3.94 on an annualized basis. The dilution from our projected disposition is estimated to be about $0.08 per share, subject to actual timing. The impact from new development NOI, including the exchange on Vine, 333 Dexter, One Paseo office and residential is estimated to be about $0.23 per share positive.

And finally, the impact from all other items, including same-store NOI and financings is estimated to be about $0.02 per share positive. Taking all those assumptions into account, our earnings -- our initial earnings guidance for 2020 is $4.01 to $4.21 per share with a midpoint of $4.11 per share.

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

Questions and Answers:

Operator

We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Nick Yulico of Scotiabank. Please go ahead.

Nick Yulico -- Scotiabank -- Analyst

Thanks. Just in terms of the guidance, Tyler, I was hoping you can just expand on some of the assumptions driving the cash same-store NOI growth this year picking up to about 7% of the midpoint versus last year?

Tyler H. Rose -- Executive Vice President and Chief Financial Officer

Yeah. A lot of it is a free rent burn off that we had in the numbers in the free rent in 2019, so you can see the difference between cash same-store and GAAP same-store is mainly the free rent burn off.

Nick Yulico -- Scotiabank -- Analyst

Okay. And then, in terms of, I guess San Francisco leasing market, any latest thoughts you can share on demand in the market from bigger users as we're thinking about Flower Mart eventually starting and can you just remind us there, I mean is that still an earliest start possible there is 2021?

Tyler H. Rose -- Executive Vice President and Chief Financial Officer

Late 2021.

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

Good morning, Nick. This is Rob Paratte. I'll address the San Francisco market in terms of your question. The market is still extremely dynamic and vibrant. I mean, we're tracking over 9 million square feet of demand right now in San Francisco, and that's ranging in a lot of size ranges. But there is a healthy appetite in the, I'd say, 300,000 to greater market right now. There are some large transactions that are close to being announced that have not yet been announced, and we think we're poised really well. There's really no new product to compete with Flower Mart. And the floor plates the design, etc, are going to be very attractive.

And the last thing I'd say as we've said on multiple calls being on Brannan Street, particularly with the new central subway system there is really going to be an important factor in the whole development of the south of market and specifically Central SOMA area. So, we're really pleased given everything that's going on this year with elections and that kind of thing, demand has remained strong and continues to be pretty much unabated.

Nick Yulico -- Scotiabank -- Analyst

Okay. That's helpful. Just one last question is, there was some news that came out about the GM Cruise space you have at Brannan where I know when they signed that deal, it's a great deal you guys got higher rents. I think the highest rents in the market when it was signed and I guess now there is a news that they're subleasing a portion of that space to Nortel. Can you just tell us what's going on there? What drove that decision?

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

Yeah. I won't go into specific transactions and that sort of thing. But it's one -- they basically, I guess, I would say, somewhat overshot the estimate for need for space. It's a very small component of the total 375,000 square feet that they've leased and they have a lot of activity on it. So without getting into specific comments on it, that's what's going on. But it's very active in terms of demand for the space.

Nick Yulico -- Scotiabank -- Analyst

And just in terms of what type of rent you think they may get on the sublease versus where the GM Cruise deal was done?

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

I can't predict that. I think if you look at sub landlords throughout the city right now, I think they're trying to figure out where the market is for sublease space and what kind of rents they can achieve, and they're trying to maximize and do what we've done actually on a direct basis, which sometimes is hard to do.

Nick Yulico -- Scotiabank -- Analyst

Okay. Appreciate it. Thank you.

Operator

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

Elvis Rodriguez -- Bank of America Merrill Lynch -- Analyst

Hi. Good morning. This is Elvis Rodriguez for Jamie. Can you talk a little bit about the Prop B risks and the potential there for future phases at the Flower Mart?

John B. Kilroy -- Chairman, President and Chief Executive Officer

Yeah, hang on. Tyler, if you got that -- we're in two different locations and I don't have my notes on that. If you got that, Rob?

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

Sure. This is Rob Paratte again. So, the way we look at Prop B, I won't comment on good or bad policy just in terms of government. But the way we look at Prop B is that it does accelerate development in the Central SOMA area. It long-term may have an impact on the ability of landlords to build new space in the city and get to the size that we're talking about at Flower Mart for existing property owners and development sites that have their Prop M allocation, it's going to bode well for rental rates and asking rates because it's just going to make San Francisco tougher to develop in.

Elvis Rodriguez -- Bank of America Merrill Lynch -- Analyst

Okay. Thank you. And with your portfolio -- your development portfolio currently 89% pre-leased, how do you feel going spec on that project at the end of 2021? Or do you still expect to not start with...

John B. Kilroy -- Chairman, President and Chief Executive Officer

If we could start right today, we consider starting it. But I've always said, I think we're going to do some substantial pre-leasing before we start it. It's two years off before we can -- in essence before we can start, a lot's going to happen between now and then. We'll be taking a look obviously at the macro environment all the local demand supply situations and so forth. So we don't need to make a decision right now, but the market is very strong right now for big modern space. The -- you're going to see some deals that are going to be done in this city at near $100 triple-net.

Elvis Rodriguez -- Bank of America Merrill Lynch -- Analyst

Great. Just one more for me. You made some comments on split roll, has that changed any conversations with tenants on leasing and any new leases going forward?

John B. Kilroy -- Chairman, President and Chief Executive Officer

Hasn't come up at all.

Elvis Rodriguez -- Bank of America Merrill Lynch -- Analyst

Okay. Thank you very much.

Operator

Our next question comes from Craig Mailman with KeyBanc Capital Markets. Please go ahead.

Craig Mailman -- KeyBanc Capital Markets -- Analyst

Thanks. Tyler, could you just talk a little bit about what's going into the occupancy decline assumption? I think last call you guys said you have one expiration over 100,000 square feet in 2020. Just give a little bit of color on what you guys are assuming or if it's a known move out or just kind of lower retention expectation?

Tyler H. Rose -- Executive Vice President and Chief Financial Officer

Yeah. N,o it's what we had mentioned last time, which is we have a lease in Long Beach that rolls in the fourth quarter. So, we're assuming at this point that it won't be released and so occupancy dips in the fourth quarter. It will also by the way dip a little bit in the first quarter because we have a move out in Seattle, which has already been leased. So, it will -- the occupancy will come back up, I think, in the second quarter. So it will be a little bumpy but the reason that our guidance is down a point is from that lease in Long Beach.

Craig Mailman -- KeyBanc Capital Markets -- Analyst

That's helpful. And then, John, your commentary it sounds like the Flower Mart is definitely moving to a new site. I know it's not a near-term start here, but can you just talk about kind of where your yield expectation is going on that project now that rents moving to $100 a square foot...

John B. Kilroy -- Chairman, President and Chief Executive Officer

Well, we're not -- Craig, we're not performing $100 a square foot. So, I want to make that clear. But on the other hand, I wouldn't mind getting that. In terms of yields, if you think about it, we've had to buy another site. We're improving that. We always had to move the Flower Mart to a temporary location and bring them back. So, the net cost is an increase. On the other hand, at the Flower Mart, the development project between fifth and sixth on Brannan, we now have square footage that would have been the return of the Flower Mart that's now office and lease at a yield that is probably 15, 20 times higher than what we would have gotten. We have a significant reduction in cost because we now don't have all the 300 or 400 parking places for the -- which would have been required for the Flower Mart that are subterranean and all the truck access ramps and so forth that had to go down below.

So when you look at everything in terms of where our pro forma is, I think it's going to be right there where you've seen everything else that's come on stream over this cycle and that we have under way right now sort of that high seven, low eight initial ROC unlevered and pretty strong GAAP rents.

Craig Mailman -- KeyBanc Capital Markets -- Analyst

That's helpful. And then, just -- I apologize if I missed it. Did you give any expected timing on the start in Seattle in the new mixed-use site?

John B. Kilroy -- Chairman, President and Chief Executive Officer

No. Well, I think what I said is, it's going to be two years, we have to go through. Seattle is a much simpler place than San Francisco. You know what you could build but you still go through a process that takes a little over a year, but you have a predictable outcome. We're working with the city to address how these sites that are all next door to one another will look and what the street feel will be and I think it's going to be pretty exciting. So I'm anticipating that we could be under way in a couple of years. And when we think about that, site putting aside the little historic building, which is kind of a neat little building, we have -- I love this project. It has two office buildings that total about 900,000 square feet that can be phased. And it has a residential site that I don't think we will develop -- I think we'll probably -- we might venture it or we might sell it, we'll see. But we want to plan it and make sure it's planned sensibly with regards to the adjacent properties that we own. So it's just a fantastic site. We're really excited that this is one that I think between the Flower Mart and Vance property, we probably have the two best development sites on the West Coast if not the country.

Craig Mailman -- KeyBanc Capital Markets -- Analyst

That's helpful. And then just one more quick one for Tyler. Just you guys have been pretty successful at doing forward on the ATM. But given kind of the upward momentum in the stock price, what's the appetite to kind of try to do just spot ATM issuance versus continuing to do forwards?

Tyler H. Rose -- Executive Vice President and Chief Financial Officer

Well, when we do our ATMS, we look at it what the cash needs are at the time. So, the forwards are slightly more expensive than just doing a regular way ATM. So, it's really a decision at the time -- every time we do a transaction for the cash needs. As I mentioned, we'll be drawing down $90 million in the first quarter and the remaining $160 million in the fourth quarter of the existing ATM. But we haven't decided to do any more ATM at this point anyway. So, that's a decision for the future.

Craig Mailman -- KeyBanc Capital Markets -- Analyst

Great. Thank you.

Operator

Our next question comes from Manny Korchman with Citi. Please go ahead.

Manny Korchman -- Citigroup -- Analyst

Hey. Thanks. John, just if we think about Seattle and the demand there for both your new development and some others. Can you just talk about what the demand pipeline looks like from tenants in Seattle?

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

Yeah. Hi, Manny. This is Rob Paratte again. Seattle has a very similar I guess story to San Francisco. And in fact some ways I think almost better, because it's got more room to go. Clearly big tech has found Seattle and is expanding there in specific markets, those being South Lake Union and Bellevue and parts of downtown. And I'd say parts of downtown because you can subdivide downtown into what used to be traditional financial district and then more creative office space.

And so with -- as John was talking about the Vance project, it is a really exciting project that will be a modern office next-generation building, which currently does not exist downtown. There are a lot of high rises, but this will be much more in line with what you've seen Kilroy do here in San Francisco and elsewhere.

So demand is very strong. It's 7.2 million feet in Seattle right now. There are a lot of tenants probably more than I've seen over 100,000 feet in search of space right now. So, we're very excited about it, and really can't wait to get our design base so we can start really getting out into the market.

Manny Korchman -- Citigroup -- Analyst

Thanks, Rob. And Tyler, if we just think about your fourth quarter results. I think you said there was $0.015 of one-time items in there. What else drove the beat to sort of your previous guidance?

Tyler H. Rose -- Executive Vice President and Chief Financial Officer

It's mainly the Exchange came online earlier than anticipated from a GAAP perspective about $0.03 of that.

Manny Korchman -- Citigroup -- Analyst

Okay. And then, Tyler to you again, on Prop 13, I think previously you had given a range of $0.02 to $0.04. What's changed that you're less comfortable or uncomfortable with giving a range today?

Tyler H. Rose -- Executive Vice President and Chief Financial Officer

Yeah. I mean, it's still in that same general ballpark, but there just seems more and more uncertainty. There's drafting issues in the current proposal that are uncertain about how small businesses are dealt with. There's uncertainties about how the assessors are going to value the properties and when they're going to value the properties. So, it just seems more and more uncertain almost every day. So it's harder for us to value.

Manny Korchman -- Citigroup -- Analyst

Thanks, everyone.

Operator

Our next question comes from Blaine Heck with Wells Fargo. Please go ahead.

Blaine Heck -- Wells Fargo Securities -- Analyst

Hey, thanks. Can you just talk about the dispositions you guys are targeting for this year? Are there any specific properties you can talk about that are up for disposition? And I guess, how should we think about timing and pricing on those sales?

John B. Kilroy -- Chairman, President and Chief Executive Officer

Well, in terms of -- I'll answer the first part. This is John. We always have a handful of projects that we look at. We evaluate everything. We have not yet made a decision on what would constitute all $300 million if we go that high. We have a number of projects that we have identified, but we don't like to get identified internally. But for a lot of reasons, we don't like to get too specific until we have something that's transacted. It can impact people here at Kilroy, it can impact tenants, it can impact other things going on with cities. So, I'm not going to get specific.

In terms of the timing Tyler, you want to address that?

Tyler H. Rose -- Executive Vice President and Chief Financial Officer

Yeah. We've modeled effectively mid-year for the proceeds from the dispositions.

Blaine Heck -- Wells Fargo Securities -- Analyst

All right. That's helpful. And maybe if I can ask just a little bit differently. Would you characterize the sales as more non-core or maybe more harvesting value in properties that might be kind of stabilized at a high level of NOI or a pretty even mix?

John B. Kilroy -- Chairman, President and Chief Executive Officer

Yeah. We look at both, and there might be some of both. One of the dilemmas right now is with the cost of land and with the cost of replacing assets. Unless something is in a market that you really don't care to be in any longer or a building that perhaps isn't going to see continuously better days, it's really hard to pull a trigger because rents have gone up so much and you want to harvest that.

And if you have a new building, for an example, some of the buildings we've recently completed in the cycle, while you can sell them and make a profit the trouble is you can't replace some of these things. So, it gets harder to find which ones to identify which buildings you want to sell. But we go through a rigorous process and we're going through that right now. More to come.

Blaine Heck -- Wells Fargo Securities -- Analyst

All right. That's very helpful. And maybe, for John or Rob. You guys have clearly done a great job of backfilling some move outs you've had in the last couple of years and I know it's a small part of the portfolio but it seems as though there's still some vacancy in the I-15 Corridor. Have you guys seen any of the incremental demand in the San Diego market filter out to that submarket or is it kind of still focused more in Del Mar, UTC and Downtown at this point?

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

No, Blaine it definitely has -- this is Rob. It has filtered into the I-15 Corridor, and we have some activity that I can't get specific on but stay tuned with what's going on. And with the renovations we've done and that sort of thing it's become a very attractive submarket. And I guess the other thing I'd say is that so much tech has started to come into San Diego. Big Tech is going into San Diego and scale and they are looking at various opportunities in different parts of the county. So, we see demand as being very strong and getting stronger.

John B. Kilroy -- Chairman, President and Chief Executive Officer

Wait till next quarter.

Blaine Heck -- Wells Fargo Securities -- Analyst

Okay. Good to hear. Thanks.

Operator

Our next question comes from John Guinee with Stifel. Please go ahead.

John Guinee -- Stifel -- Analyst

Great. Thank you. Just more of a curiosity question. In Seattle with the 900,000 square foot office building, 600,000 square feet of multifamily, looks like about a 25 FAR project and you're clearly not building low-rise there. What's going to be -- what's the cost all in per unit? And what's the cost all in per square foot when you start out with that sort of land basis?

Tyler H. Rose -- Executive Vice President and Chief Financial Officer

John, I don't have those numbers. We went through our whole DSP, which is our process to approve a project and so forth. I just don't have those numbers on my head. I can get back to you with them. But do you have those, Michelle?

Michelle Ngo -- Senior Vice President, Capital Markets, Treasurer and Investor Relations

Yes. John, I think on a full project on the office basis, we're modeling roughly $700 to $800 per square foot in terms of total estimated investment.

John Guinee -- Stifel -- Analyst

Great. And where do you get to sort of uncomfortable on a per square foot when you're building in these markets? Have you gotten close or do you think that the rents are so strong and the tenants or so price insensitive that they'll just pay up for quality product?

John B. Kilroy -- Chairman, President and Chief Executive Officer

Yeah. I kind of -- I'm one of those believers that you want to get a good strong yield upfront and you want to have a valuation when you capitalize that people that can be supported. There have been some things that have traded that we've looked at and just said you got to have too many things go right to get to a place where the cost is a little high, the yields are a little thin and why do that? I guess, what I'm trying to say is, John, we're not at that point in any of the projects that we have on the books. We're at a point where I think our delivery cost is less -- well less than what things you're trading for and our yields are projected to be pretty strong like the ones I've historically discussed.

So, all I can talk about is what we have, and I feel very comfortable about our underwriting and what our delivery prices are in all of our markets. You're seeing Seattle now, trade, buildings in the $1,100 range for quality projects and we took a look at all of those. Some we didn't like for various reasons. And as Michelle said, we've got one of the best sites in town with two buildings that total 900,000 square feet, two different office buildings, not one 900,000.

And as she pointed out with our land costs, with highest quality Kilroy type standards, the best in sustainability, all the great stuff that we do in our buildings and a big amount of projected increase in construction costs and being in a $700 or $800, I mean that's pretty spectacular.

John Guinee -- Stifel -- Analyst

And then, second question along the same lines. Culver City, you're paid $1,200 a foot for a bunch of 8,000 square foot buildings, that's clearly not the end game. It's just a covered land play. Are you at liberty to talk about what the ultimate entitlement you expect in Culver City?

John B. Kilroy -- Chairman, President and Chief Executive Officer

Not in a political year, but you can imagine it can accommodate. We have -- what do we have there seven, eight acres?

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

Yeah.

John B. Kilroy -- Chairman, President and Chief Executive Officer

And if you think about the Flower Mart, we have seven acres, OK? And I'm not saying it's going to be exactly the same size of the Flower Mart but it's going to be a lot more than what's there, but I just don't want to become a lightning rod for any political agendas.

John Guinee -- Stifel -- Analyst

Thank you. Have a good day.

John B. Kilroy -- Chairman, President and Chief Executive Officer

Thank you.

Operator

Our next question comes from John Kim with BMO Capital Markets. Please go ahead.

John Kim -- BMO Capital Markets -- Analyst

Thank you. With GM Cruise, your second largest tenant now, can you remind us if this lease is now fully contributing to FFO and cash same-store this year?

John B. Kilroy -- Chairman, President and Chief Executive Officer

GM Cruise isn't our second largest tenant. Where are they Michelle or Tyler? They're way down the line.

Tyler H. Rose -- Executive Vice President and Chief Financial Officer

Fully contributing as of the fourth quarter -- last fourth quarter.

John Kim -- BMO Capital Markets -- Analyst

Okay. So the Nortel sublease does not impact that at all?

Tyler H. Rose -- Executive Vice President and Chief Financial Officer

That's right.

John Kim -- BMO Capital Markets -- Analyst

On split roll, I realize it's hard to assess the earnings impact, given the moving pieces. But can you provide an estimate as to how much of the exiting $7 million to $8 million in real estate taxes you get reimbursed today from tenant?

Tyler H. Rose -- Executive Vice President and Chief Financial Officer

Well, one way to answer to that is about 50% of our leases are triple net, but that's not an exact number. I don't have any further details on that question.

John Kim -- BMO Capital Markets -- Analyst

Okay. And any thoughts on Prop 10? I realize that multifamily has not been a big part of your portfolio, but any views on the likelihood of this passing? And how this would impact your mixed-use developments going forward?

John B. Kilroy -- Chairman, President and Chief Executive Officer

Prop, what?

John Kim -- BMO Capital Markets -- Analyst

Prop 10.

Eliott Trencher -- Senior Vice President, Corporate Strategy

This is Eliott Trencher. While we're not going to comment on whether it passes or not given the age of our product which is pretty new, we don't think it will have a material impact on us.

Operator

Our next question comes from Steve Sakwa with Evercore ISI. Please go ahead.

Steve Sakwa -- Evercore ISI -- Analyst

Thanks. Just in terms of sublet in general, are there any other properties currently in the portfolio where you're maybe seeing sublet activity? Or just what a sublet activity in your markets look like and maybe within your portfolio specifically?

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

Sure. Steve, this is Rob. How are you doing? In our portfolio, we've already talked about the Cruise potential sublease. Dropbox has some space on the market at The Exchange. Its short-term space, and I understand they've got activity on that. If I can just take a step back on sublease space in general in San Francisco, there are three things that I'm looking at the numbers ticked up. But really you've got three factors that affect how quickly that will be absorbed. One is the rate expectations of the sub landlords. Secondly, seven out of the 12 sublease spaces in San Francisco right now have a term of less than 24 months.

And then, thirdly, given the demand of over nine million square feet sublease space as we've said on multiple calls that is built in what I would call next-generation or tech-friendly sort of configuration, the sublease space is manageable given all the demand we've got. So, we have -- now and then there are conversations where there are small pockets, but nothing meaningful in the portfolio in San Francisco. And I would say in general on the West Coast, we haven't seen a lot of subleasing.

Steve Sakwa -- Evercore ISI -- Analyst

Okay. And then secondly, just up in Seattle, I know the big focus has generally been more in South Lake Union, but you do own two buildings in Bellevue and there seems to be some shift of Amazon's activity over to the east side. Just curious John or anybody else, how you're sort of looking at Bellevue and potential land opportunities in that market?

John B. Kilroy -- Chairman, President and Chief Executive Officer

Yes. We've looked at all of them. And there are obviously quite a few people playing in Bellevue. We think it's a great market. We're hitting all-time high rental rates there now with our recent leasing. One thing about Bellevue is you can build a lot of space there. And you're going to see a lot of space built and most of it is spoken for, but some of it is not. And you're going to see some projects come on stream that I think are at inferior locations. And I think they'll be pushing hard to get tenants. And I just think the dynamics for us we're much more compelling as an example advance.

So, I'm not in any way shape or form suggesting that we've lost enthusiasm for Bellevue. It kind of goes back to John, I think it was John Guinee's question at what point do you get uncomfortable? I look at what can be delivered. What's starting spec? What costs are you going to have for a completed project? What rental rates do you have to get? And I'm not as enthused currently about Bellevue spec development as I am about Seattle.

Steve Sakwa -- Evercore ISI -- Analyst

Got it. Thanks.

Operator

The next question will come from Dave Rodgers with Baird. Please go ahead.

Dave Rodgers -- Robert W. Baird -- Analyst

Yes. Tyler, maybe a question for you with some help from John, but as you look at 2019, I think you guys came in relatively low on the dispositions relative to guidance and acquisitions kind of came in above, you have issued some on the forward ATM and thanks for the details on the quarters. But I guess, I'm wondering between the two years '19 and '20, it seems like you probably have issued or monetized fewer assets than maybe you thought a year ago. So, one without putting words in your mouth, is that kind of true? And then two, are you seeing it longer to put money to work in the development pipeline? Are there acquisitions that just haven't come to fruition that maybe make up that difference in your thinking?

Tyler H. Rose -- Executive Vice President and Chief Financial Officer

Well, let me first start with your comment on regarding acquisitions came in above we don't give guidance on acquisitions because it's totally unpredictable. On dispositions, we did give guidance between $150 million and $300 million. We came in a little bit on the shy on the lower side. I've made comments throughout the year, throughout 2019 that a couple of projects we looked at as candidates for sale, which would have pushed us to -- if we done both, it would have pushed us well above the $300 million. We decided that there was some real opportunity to gain value and appreciable value by repositioning those assets and leasing them up at much higher rates. So that's the course we took, and we're going to be flexible like that Dave. It's -- we do not operate by, we got to allocate so much capital to this or that in a year or that we have to go buy this or that or sell this or that. It really is far more of a -- I think a much more thoughtful process than that.

In terms of 2020, we gave the guidance of $150 million to $300 million that seems like a reasonable range. On dispose, I made the comment that we haven't -- we're not going to identify for all of you until they close, which ones those are. Acquisitions, we're not really -- we look at everything. The three that we did this year were very compelling for the reasons I mentioned, and I think they set the company up in development projects and got one with a covered land play, where we're going to have a terrific cost per square foot comparatively, and great locations where there is just tremendous demand. So I think it really positions us well.

And we don't -- we're not looking at acquiring existing core type assets and what not. It's not the right place for us to put our money unless their leases are being sold based upon a very low in-place rent, but then it's going to be so competitive. I doubt we'd be successful. So I hope that helps but it's -- each year is different. You've seen us years where we didn't acquire anything years when we acquired something in this case with the success of our development program, we felt comfortable reupping, refilling the pipeline in these very strong markets where we have a really good business, good platform.

Dave Rodgers -- Robert W. Baird -- Analyst

Any change in your thinking on timing for KOP Phase II through IV or any of the additional pipeline assets you already addressed Flower Mart in Seattle so?

John B. Kilroy -- Chairman, President and Chief Executive Officer

Yeah, that's a good question. On Oyster Point the timing for Phase II, III, IV we actually have a fifth phase that we'll talk about it in the future. The -- we submitted the precise plan for Phases II through IV earlier this -- or rather this last year. We anticipate approval very soon. And design work is under way for Phase II. The earliest potential start would be the end of this year.

Phase II consists of approximately 900,000 square feet, but it can be phased within the phase. So we haven't determined just what we're going to pull the trigger on. And obviously, we'll make that assessment as to timing in square footage when we get further into the year based upon what we're seeing in the market. The demand there is very strong. And if I had it up today, I think it would be leased very quickly, and I think we've got just the greatest position in that market of anybody and we're really excited. So, more to come.

Dave Rodgers -- Robert W. Baird -- Analyst

Thanks, John.

Operator

Our next question comes from Daniel Ismail with Green Street Advisors. Please go ahead.

Daniel Ismail -- Green Street Advisors -- Analyst

Great. Thank you. Just a few quick ones for me. It looks like construction costs fell slightly quarter-over-quarter for a few projects. Can you describe what was the cause of the decline? And was this mostly a result of going from life science to traditional office tenants?

John B. Kilroy -- Chairman, President and Chief Executive Officer

Yeah. That's the both 9455 and Dexter the cost -- overall construction cost coming in lower and KOP as well coming in lower because it was indexed with KOP that came in lower because of non-life science. Well, it also came in lower because a lot less carry because we lease them up so quickly so...

Daniel Ismail -- Green Street Advisors -- Analyst

Okay. And it looks like retention rates were a bit lower than historical average in 2019. Was this more of a function of the leases that rolled in 2019 or anything really notable in that figure?

John B. Kilroy -- Chairman, President and Chief Executive Officer

No. I think it -- we don't have much the lease, but there's nothing specific that went on in 2019 that's any different than any other year.

Daniel Ismail -- Green Street Advisors -- Analyst

Okay. And just in terms of construction costs it seems like the last few years have seen mid single-digit type increases in construction -- overall construction costs. Can you maybe share your thoughts on what you guys are projecting going forward for total development cost increases?

John B. Kilroy -- Chairman, President and Chief Executive Officer

Michelle, you want to handle that?

Michelle Ngo -- Senior Vice President, Capital Markets, Treasurer and Investor Relations

Yeah, I think it's going to be within the same range. We said it's been that 5% to 7% over the past few years and I think we expect that the same going forward.

Tyler H. Rose -- Executive Vice President and Chief Financial Officer

Actually talking with Justin who is our Executive Vice President of Development runs all our development and construction activities, he's mentioning that we're actually doing -- he thinks we're going to do better than that now. There's been some changes. And notwithstanding all the construction that's going on in our markets, there's been some positive changes in some of the areas. And by the way that 5% to 7%, doesn't mean the project is 5% to 7% higher.

It means that, various -- it's a way of kind of all flows through, when you look at burden, and you look at a design, and you look at construction materials, the ones that are going up, going down. And labor that's going up or whatever it is, it's been translating into about 3% -- 3.5% increase in the cost of the delivered project. We talk in terms of these 5% to 7% and whatnot, in terms of labor and materials. But it's not uniform. It's -- that's not 5% to 7% on the total project cost.

Daniel Ismail -- Green Street Advisors -- Analyst

Great, thanks John.

Operator

Our next question comes from Tony Paolone with JPMorgan. Please go ahead.

Anthony Paolone -- JPMorgan -- Analyst

Thanks. On Culver City, is there any sort of time line we should think about before we start to see some change in the state of play there?

John B. Kilroy -- Chairman, President and Chief Executive Officer

You mean in terms of redeveloping it?

Anthony Paolone -- JPMorgan -- Analyst

Yeah. Just even coming up with a little more specificity on the plan? And what you think you could do there?

John B. Kilroy -- Chairman, President and Chief Executive Officer

Yeah. I'm going to wait for a non-political year. And we have tenants -- remind me Eliott the tenants, don't roll out there, until 2024, is that right?

Eliott Trencher -- Senior Vice President, Corporate Strategy

Yeah. Over the next 36 months or so.

John B. Kilroy -- Chairman, President and Chief Executive Officer

Yeah. So we have a strategy on how -- rents by the way, when we bought it, we're something like 35%, 40% below market in the buildings or -- it's kind of a cool little place if you haven't seen it go look at it. It's really a neat environment. So, we have a strategy to put ourselves in a position to win those tenants get when they roll out, that we are capable of proceeding with an enhanced development.

And that means that we'll be submitting our plans and what not to the city in due course, so that we can be ready to go, by that 2024 period. So working backwards you'll probably see something in 2021 or 2022. We might have some things earlier than that to show. But we're pretty good at getting through all the stuff, even though it may look like it takes an awful longtime and it does and its frustrating and so forth. It's just an unfortunate process that we have to go through here in this environment. I would imagine, New York is probably similar.

Anthony Paolone -- JPMorgan -- Analyst

Okay. And then just a few numbers items hopefully quickly, I may have missed this. Did you give G&A guidance for 2020?

Tyler H. Rose -- Executive Vice President and Chief Financial Officer

Yeah. It's roughly $85 million.

Anthony Paolone -- JPMorgan -- Analyst

Okay. And that's excluding leasing costs, just pure G&A?

Tyler H. Rose -- Executive Vice President and Chief Financial Officer

No, including leasing cost.

Anthony Paolone -- JPMorgan -- Analyst

$85 million?

Tyler H. Rose -- Executive Vice President and Chief Financial Officer

Yeah.

Anthony Paolone -- JPMorgan -- Analyst

Okay.

Tyler H. Rose -- Executive Vice President and Chief Financial Officer

It's a portion -- the leasing cost gets split between, stabilize and development.

Anthony Paolone -- JPMorgan -- Analyst

Okay. But if I look at the income statements, it's like closer to $96 million combined in 2019. So that goes down a decent amount?

Tyler H. Rose -- Executive Vice President and Chief Financial Officer

Yeah, that's about right.

Anthony Paolone -- JPMorgan -- Analyst

Okay. And then capitalized interest, any number for that?

Tyler H. Rose -- Executive Vice President and Chief Financial Officer

Around $80 million.

Anthony Paolone -- JPMorgan -- Analyst

Okay. And then last question, can you give us a sense as to what residential NOI was in 4Q? And then, what that might look like when all the projects under way stabilize?

Tyler H. Rose -- Executive Vice President and Chief Financial Officer

Yeah. I mean we don't really comment on specific projects. I mean, we only have one project. So, we don't comment on the NOI, of a specific asset. So, when we have all three up and running we'll probably be breaking that out.

Anthony Paolone -- JPMorgan -- Analyst

Okay. So there's no contribution from the second project in the fourth quarter then?

Tyler H. Rose -- Executive Vice President and Chief Financial Officer

No. Okay. That's it. Thanks.

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 H. Rose -- Executive Vice President and Chief Financial Officer

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

Operator

[Operator Closing Remarks]

Duration: 59 minutes

Call participants:

Tyler H. Rose -- Executive Vice President and Chief Financial Officer

John B. Kilroy -- Chairman, President and Chief Executive Officer

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

Michelle Ngo -- Senior Vice President, Capital Markets, Treasurer and Investor Relations

Eliott Trencher -- Senior Vice President, Corporate Strategy

Nick Yulico -- Scotiabank -- Analyst

Elvis Rodriguez -- Bank of America Merrill Lynch -- Analyst

Craig Mailman -- KeyBanc Capital Markets -- Analyst

Manny Korchman -- Citigroup -- Analyst

Blaine Heck -- Wells Fargo Securities -- Analyst

John Guinee -- Stifel -- Analyst

John Kim -- BMO Capital Markets -- Analyst

Steve Sakwa -- Evercore ISI -- Analyst

Dave Rodgers -- Robert W. Baird -- Analyst

Daniel Ismail -- Green Street Advisors -- Analyst

Anthony Paolone -- JPMorgan -- Analyst

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