Kilroy Realty Corp (KRC) 2006 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second quarter Kilroy Realty Corporation conference call. (Operator Instructions) We will be facilitating the question and answer session toward the end of the conference. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

I would now like to turn our presentation over to our host for today's call, Mr. Richard Moran, Executive Vice President and Chief Financial Officer. Please proceed, sir.

Thank you very much, and good morning everyone. Thanks for joining us. With me today are John Kilroy, our CEO; Jeff Hawken, our COO; Tyler Rose, our Treasurer; and Heidi Roth, our Controller. At the outset, I need to say that some of the information we'll be discussing this morning 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 webcast live on our website, and will be available for replay in the next ten days, both by phone and over the internet. Our press release and supplemental package have been filed on a Form 8-K with the SEC and are both available on our web site.

We released our second quarter financial results yesterday afternoon, FFO was $1.11 a share. That includes $0.29 a share from a lease termination fee we received on an Orange County industrial building. We'll give you more details on that later in the call. John will start with a review of the quarter, followed by a review of our key markets. I'll add the financial highlights and updated earning guidance, and then we'll be ready to take your questions. John?

Thanks, Dick. Hello everyone. Thanks for joining us. Southern California commercial real estate markets have demonstrated continued strength through the first half of 2006, with occupancies and rental rates both trending upward.

More broadly, underlying economic trends in California remain healthy with continued job growth, stable unemployment rates and substantial growth in personal and corporate tax receipts. Los Angeles county now has an unemployment rate of 4.7%, down another point from last year at this time. Orange County's unemployment rate is only 3.7%, and San Diego's is 4.2%. Meanwhile, companies large and small continue to demonstrate strong interest in Southern California, with many now expanding their presence here.

For KRC, it's been a very productive quarter. We signed new and renewing leases on more than 500,000 square feet of space, at average cash rents 5.6% higher than previous rates. We increased occupancy in our stabilized portfolio by more than 2 points, to over 97%. Vacancy in our industrial properties is now essentially nil. And the same is true in our San Diego, West Side, and 101 corridor office portfolios. We continue to actively pursue opportunities to expand our development program, add to our long-term strategic land position, and to capitalize on value-added opportunities in our existing portfolio, and we're making progress.

One value-added opportunity we've made good progress on relates to our recent lease termination with Qwest Communications. Qwest held a long-term lease on an industrial property of ours in Orange County, that it wasn't using. We saw an opportunity to cancel the lease and significantly enhance the value of the property, given Orange County's shrinking industrial supply, coupled with strong demand fundamentals.

We've now complete the first phase of these efforts, with Qwest paying a $9 million lease termination fee, and being required to make some fairly significant capital improvements to the building. The second phase of unlocking value is now under way, as we've entered into escrow to sell the property to an owner/user.

On another property in Orange County, our value-added strategy involves the rezoning of one of our Irvine buildings from industrial to residential. We expect to complete the process later this year, and be in position to sell the building next year. On the development front, we are in advanced negotiations to develop a prelease, 6-story, 150,000 square foot building on our last remaining land site at our Innovation corporate center development in Rancho Bernardo.

Assuming we conclude this transaction, the new building will represent a total investment of approximately $53 million, and come on stream in the third quarter of 2008. The San Diego market's ongoing robust demand for commercial office space has also convinced us to move ahead with a third office building at our Kilroy Sabre Springs campus along interstate 15, at the intersection of route 56. As we recently reported, we've broken ground on 143,000 square foot Class A office building, and expect to complete construction by the end of next year.

Now let's take a closer look at KRC's individual submarkets. San Diego continues to be one of the top commercial real estate markets in the nation, with current active demand for office space in central San Diego of approximately 8.9 million square feet, up from 8.2 million square feet last quarter. This is the the location of all of our current San Diego properties, active development projects, and the bulk of our future development sites. Let's begin in the coastal submarket of Del Mar, where KRC is the dominant office landlord with approximately a 1/3rd market share. Current direct vacancy here is approximately 3.7%, and total vacancy is 10.2%. Our stabilized properties in Del Mar are 100% occupied.

In addition, on the eastern edge of the Del Mar market is out Santa Fe Summit campus, where we currently have four buildings totaling 466,000 square feet under construction. This first phase of Santa Fe Summit is 100% preleased to Intuit. To the south of Del Mar lies Sorrento Mesa submarket, where KRC competes in 2 and 3-story office products. Direct vacancy for this product type is currently 7.1% and total vacancy is 9.1%. Our stabilized properties here total approximately 1.5 million square feet and are currently 100% occupied.

Sorrento Mesa is also the location of another of our current development projects. As reported last quarter, KRC signed a lease agreement with Cardinal Health, covering 411,000 square feet of space in two buildings, including an existing 93,000 square foot office building, and a to-be-built, state-of-the-art, 318,000 square foot office and manufacturing facility, which we just broke ground on last week. Occupancy is scheduled for the third quarter of next year. South of Sorrento Mesa is the UTC La Jolla submarket. KRC also competes in the 2-story product type there, which has a current direct vacancy rate of 6.2% and total vacancy of 6.8%. Our UTC properties totaling approximately 430,000 square feet are 97% occupied.

Further east at the intersection of the 56 corridor and interstate 15 is our Kilroy Sabre Springs office campus, that includes two office buildings totaling approximately 282,000 square feet, which are 97% occupied. And as I mentioned a moment ago, KRC recently broke ground here on a new 6-story, 143,000 square foot Class A office building. We expect to complete construction on this third building late next year, for a total investment of approximately $66 million.

The I-15 corridor is the location of approximately 1 million square feet of our stabilized office and industrial space. Currently, the 2-story product type along the I-15 corridor has a direct vacancy rate of 2.1%, and total vacancy of 3.7%. In the Class A product type, direct vacancy is 13.6% and total vacancy is 15.7%. Our stabilized properties in the market are 99% occupied. We have several active and potential projects in this area. Innovation corporate center is located here in the submarket of Rancho Bernardo.

It is a complex of six buildings, the seventh building currently under construction. And one remaining development site, where as I mentioned, we are in advanced negotiations for a new 150,000 square foot building. Rancho Bernardo is also the location of Kilroy Center Rancho Bernardo, a 20-acre development property formerly know as the Unisys site. Unisys' lease expires in September. We are currently evaluating a number of potential development alternatives at this location, given the strong interest we are seeing from those requiring major office campuses ranging from 600,000 square feet to a million square feet.

Finally, in the city of Carlsbad, KRC is on track to close escrow on a title land near the city's airport in the first quarter of 2007. Moving north to Orange County, our 3.9 million square feet of industrial buildings remain virtually fully occupied. Industrial properties here are experiencing phenomenal demand and historically low vacancy rates. We are pursuing opportunities to take advantage of these market conditions by both selling donor users, and by converting existing industrial properties to higher value residential uses.

Continuing north along the 405 freeway is the Long Beach airport market, where demand has remained steady so far in 2006. Class A vacancy is 6.6% and total vacancy is 8.1%. Our seven-building Kilroy Airport Center office campus here is currently 92% occupied. Further north in El Segundo, direct vacancy in a Class A market is now 17.2%, and total vacancy, 20.2%. Leasing efforts at our 999 Sepulveda property have brought that building to 97 - or rather, excuse me, 95% occupied. 909 Sepulveda is now 70% committed, up from 65% at the end of the first quarter.

While we are talking about El Segundo, let me give you an update on Boeing. As you know, Boeing vacated approximately 101,000 square feet at 2240 East Imperial Highway, at the end of April. We are now in the process of renovating this space, with an expected incremental investment of approximately $12.6 million. We expect to complete the renovation by the end of next year. As we've discussed on prior calls, it has been our hope that Boeing would not exercise it's three-year option to renew it's 286,000 square foot lease at 2260 East Imperial Highway, that expires in July '07.

However, in April, Boeing notified us that it was interested in renewing, and under the terms of the lease, initiated the process by which a rental is to be determined for the extension period. By the end of this month, Boeing has the following options: it can accept our rent number, and we would have a new lease through July 2010; or it can decide to extend the lease but not agree with our rent number. In this case, we would go to an arbitration process, as set out in the lease, to determine the rent for the extension period. Or it can decide not to extend the lease, and the current lease would expire in July of next year. So, there is more to come on this transaction.

Now let's move on to west Los Angeles. The office market is pretty much recaptured its historic strength, with direct vacancy now at 7.2% and total vacancy at 8.1%. Our properties in the market totaling 677,000 square feet are 99.6% occupied. Our last market in the Los Angeles area is along the 101 corridor in northern Los Angeles and Ventura counties, where the overall market has a direct vacancy of 5.5% and total vacancy of 5.9%. Our properties here are 99% occupied.

Lastly, I'd like to summarize our current development activities. We have eight building totaling 1.1 million square feet of new development and redevelopment under way. This includes: 466,000 square feet along the 56 corridor, 100% preleased to Intuit; 77,000 square feet in Rancho Bernardo, 100% preleased to accredited home lenders; 318,000 square feet in Sorrento Mesa, 100% preleased to Cardinal Health; 143,000 square feet along the I-15 corridor that we just started; and 100,000 square feet of redevelopment in El Segundo. Combined, these properties are 78% preleased and have a total estimated investment of approximately $324 million.

In summary, as we have said in previous conference calls, we are excited about the opportunities that we have as a Company. Our stabilized properties are performing well. We are harvesting value-added opportunities within our portfolio. Our committed development program has increased substantially, and we continue to have serious conversations with potential tenants regarding sizeable new developments on our future pipeline. That's an update on our activities. Now Dick will cover the financial results; Dick?

Thanks, John. FFO in the second quarter was $1.11a share, compared with $0.45 in the second quarter of 2005. As I mentioned at the beginning of the call, the $1.11 we reported includes $0.29 from a lease termination fee we received during the second quarter from Qwest Communications. Excluding the termination fee, FFO would have been $0.82 a share.

Details on the Qwest transaction are as follows: we recorded $9 million cash lease termination fee, as well as $2.3 million of noncash income for the roof that Qwest replaced as part of the original lease and termination agreement. Those amounts were partially offset by the write off of Qwest's straight line rent receivable of $1.5 million. So, the total GAAP lease termination fee was $9.8 million, or $0.29 a share. On a cash basis, the termination fee was $9 million or $0.27 a share.

Occupancy in our stabilized portfolio at the end of the second quarter increased to 97.4%, up from 95% at the end of the first quarter and year-end 2005. Same store NOI improved during the quarter, both on a GAAP and cash basis. Excluding the impact of the Qwest lease termination fee, the GAAP NOI was up 4.3% and cash NOI increased 5.7%. Those numbers reflect improvement in both occupancy and rental rates. GAAP rents in the second quarter were up 17.9%. Cash rents were up 5.6%. Based on our evaluation of prevailing market rates, we believe that our overall portfolio rent levels are approximately 5.4% or so under current market rates.

Capital expenditures in the second quarter were $4.9 million, up from $2.7 million in the first quarter. Our FAD payout ratio was 62%. Excluding the impact of the Qwest lease termination fee, the FAD payout ratio would have been 89%. We didn't have any acquisitions or dispositions during the quarter.

Looking forward, we have approximately 711,000 square feet of leases expiring through the remainder of 2006. That includes the 303,000 square foot Unisys lease on the property we will redevelop in Rancho Bernardo that expires in September. It also includes the 157,000 square foot industrial lease on the Orange County property we are rezoning to residential and to sell. The current lease with Delphi, which was originally scheduled in December, terminated this month after Delphi declared bankruptcy and rejected the lease. That will have a negative FFO impact of $0.03 a share over the balance of the year.

As John mentioned earlier, with our committed development pipeline in San Diego preleased, we decided to start construction on a new building in our Sabre Springs office campus. We are also moving ahead with the redevelopment of the office space at 2240 East Imperial Highway in El Segundo. These additions expanded our committed development and redevelopment to eight buildings totaling just over 1.1 million rentable square feet. We expect to spend about $324 million on the eight buildings, with about $112 million spent to date.

In the second quarter, we also completed two strategic balance sheet transactions to ensure that we have the funding capacity to build out our entire development pipeline, and capitalize on opportunities beyond that. First, in April we increased our unsecured revolving credit facility from $425 million to $550 million, and extended its term to April 2010, with an option to extend the maturity an additional year beyond that. Pricing varies from (inaudible) 85 to 135 basis points, depending on our leverage ratio.

And second, in May we sold 2 million shares of KRC common stock, which was our first equity offering since 1998. The total proceeds of $137 million were applied to the balance of our credit facility. Taken together, those actions provide us with the capacity to finance our development plans for the foreseeable future, while maintaining conservative debt levels, financial flexibility and a strong balance sheet.

Now, let me finish with our 2006 earnings guidance. First, I should mention again, as I did last quarter, that our 2006 long-term executive compensation plan hasn't been determined yet. Depending on the amounts and how it's structured, there could be an effect on our future earnings guidance and reported results.

Also, please note that our first half results don't include any costs for new 2006 equity related executive compensation, since that plan or plans haven't been adopted yet. If new 2006 executive equity related plans are approved, then those costs will begin on the date that the new plan or plans are approved. Last quarter, we provided 2006 FFO guidance of $3.07 to $3.33 a share. Since then, our core operating performance has continued to improve, with both rents and occupancies up.

Beyond that, a couple of transactions we've mentioned will affect our 2006 financial results. The actual Qwest lease termination fee was $0.29 a share, compared with the $0.10 or more a share when included in the upper end of our guidance last quarter. And partially offsetting that, our rental income on the two industrial buildings that we're positioning for sale will be lower in the second half of the year. The Qwest lease termination fee will cut rental income by $0.04 a share over the balance of the year.

And, as I mentioned earlier, the lost Delphi rent on the building we're planning to convert to residential zoning, will reduce second half FFO by another $0.03 a share. So, after tightening the range a bit, we're now providing increased 2006 FFO guidance of $3.35 to $3.50 a share. That's the latest news from here, and we'll happy to take your questions. Operator?

(Operator Instructions) Your first question comes from the line of Ross Nussbaum with Banc of America Securities.

Thank you. It's John Kim with Ross. John, you continue to be very bullish on the prospects of San Diego. Obviously, you've seen some pricing power recently. But the market reports from the brokers are saying that there's been negative net absorption during the second quarter. Are you concerned at all about this demand relative to all the new supplies coming into the market, and your ability to push rents?

Well, you know, we keep a look at these things very, very closely. There's really not that much supply. As I've gone through in prior quarters, broken down building through building, we don't see a supply problem in San Diego at all, an over supply problem. A fair amount, or the bulk of what's been our construction has been for owner/users like Biosite and Gen-Probe and Qualcomm and so forth, all of which are owned and to be occupied and now nearing completion.

There are a couple buildings that are under construction in San Diego. Downtown, of course, we don't worry about that. That's performing well, in my view. There's a little building that's -- a couple buildings are going to be under construction with a local developer down there in Prudential, and Torrey Hills, which is just south of Del Mar proper. It's an okay site. It's certainly not Class A location Del Mar, but I think they'll do just fine. And Del Mar, the most current building that's been complete is 240,000 square feet. Nearing completion, it's already 75 or 80% leased at very good rates. So, I don't see anything happening in that market.

In Sorrento Mesa, there's nothing that's coming onstream that is competitive. I know Mcguire's talked about a, I think it's a 10 or 12-story, 300,000 square foot building. We're not going to build that kind of building in Del Mar -- rather in Sorrento Mesa. The two-story product type is what we find really works well. And we control most of the -- I think, all the remaining sites there. On the 56 corridor, we're in negotiation beyond in the Intuit site with a number of different folks for the property we have there. In I-15 area, we have a site, the Kilroy Center Rancho Bernardo site, where we're dealing with a couple of tenants. One is a million square feet. We're really on of the few, if only places - I think the only place where you can get that kind of square footage in coastal San Diego.

Now, up in Carlsbad, we've talked about this before, you have a lot that's going to be developed, and it's mostly 5 to 20,000 square foot product for sale. We're buying -- and most bought their land in the 25, 26, $27 land value, land per square foot value. We're buying our property there at $15 a land foot, and we're going to doing build-to-suit. So, I feel very comfortable with our position in San Diego. I can't imagine having a better position in any market, at least here in California. And I feel very well positioned with the amount of negotiations we have under way, John.

Okay. Conversely then, in the past you've not been very bullish on the prospects of downtown L.A. But given the tightening in west L.A. and some of the other submarkets there, have your thoughts changed at all recently? And if not, where do you see any growth potential in L.A.?

Well, I'm not going to camp on downtown L.A. I hope it does well for everybody that's down there. But if you take a look at the rents they're getting, the rents are pretty anemic. You're not going to see Kilroy down -- we have no plans to be in downtown L.A. at present or for the foreseeable future, which is, I'm 57, so I don't plan to be there for a heck of a long time, if at all. It certainly -- people may go there. It's cost efficient.

We saw when the west side filled up before at high rates, some people migrated that way. I'm not an expert on downtown. I don't -- I care for it culturally, I don't care for it as an office market.

But going forward within L.A., are you going to be going through development and redevelopment projects, is that a fair --

We have in Long Beach, which is very well positioned between Orange County and L.A. county, the ability to add an additional 600,000 square feet, at our project there. There's about 500,000 square feet in the market -- shopping for a home in that market, as we speak. We have been working with the city on what will probably be the next phase there, which would be somewhere in the neighborhood of 200,000 square feet. We fortunately are very well positioned in that property because we already paid for the infrastructure, the traffic offsites, the mitigation fees and so forth, better than ten years ago.

So, our ability to deliver product at that market is probably in the neighborhood of $100 a square foot of buildable area under what it would cost if we weren't in such an ideal position. I think we'll -- we haven't decided to pull the trigger there yet, but we're getting ready to be in a position to do that, because that market is looking very good. In terms of the 101 corridor, we have some things that we're looking at. In west L.A., right now, we take a look at everything, but it's very difficult to deliver product in this market. Of course, there's El Segundo, which is still a laggard. The rents at this point, John, don't make sense in L.A. to build new product.

Okay,. Then a final question on the long-term incentive plan. As Dick mentioned, we're halfway through 2006, or actually more than halfway through, and you still haven't disclosed or decided what the terms of the LTIP are going to be. At this point, are you going to be retroactively setting the benchmarks to achieve the LTIP from the beginning of '06, or is it going to be going forward when you establish it?

It will be a go-forward plan. Just to challenge your words a little bit, if we had the plan where we could disclose it, we would. We don't. Unfortunately, since NAREIT, where quite a few people have asked us about this, there's been a series of vacations by people, the consultants, the comp committee members and so forth.

I personally am disappointed that it's not in place, but it is what it is, and we're working as best we can. It's not under the control of management.

Okay, so then the LTIP is going to be from the beginning of '07 or from whenever you - ?

No. Any go-forward plan that has not been put in place, if it's any stock-based plan has to be based on the date of grant, it's a go forward from the date of grant, that's just a --

Okay, but as far as the benchmarks, then, it would be including the performance that you've had in '06?

If the benchmark is set off of a share price and it's appreciation in the share price, then it has to be, by definition, it's go forward. It's not retro.

John this is Dick speaking. If -- we submitted, at the beginning of the year, our business plan to the consultants and the comp committee with our internal objectives. So they've had that and have been incorporating that in their assumptions. How exactly they structure the plan has yet to be determined. We don't know yet.

But we -- the objectives, we did our business plan the same way we've always done it and submitted it as we've always done it at the end of last year, beginning of this year. So, we simply aren't able to say, precisely, how it will be structured. If your question is getting at the issue of are we going to be halfway through the year and figure out what our objectives are, the answer is no.

Okay, thank you.

Your next question comes from the line of [Sri Nagarajan], with RBC Capital Markets. Please proceed.

Thanks. I had a quick question on the Qwest space disposition. What would be the timing of that?

Well, currently the timing is -- excuse me, the timing, Jeff, is what, September now?

Yes.

We've entered into escrow. They've gone hard with $1 million. The escrow is supposed to close in September, and the purchase price net to Kilroy, is something we'll disclose later.

Okay. And secondly, in terms of the Delphi space, I think you talked about land sale, possibly, there. I was wondering about the -- specifically, if could you give us some color on the timing of both the Delphi space, as well as the Irvine space itself. I heard you're converting it to residential lot sales.

Well, that building -- Sri, this is Dick speaking. The Delphi, as it happens, was the occupant of the building that we have been talking about for the last year or so, that we're in the process of processing and attempting to convert to residential zoning. As it happens, that lease expired at the end of the year and they just went bankrupt before the end of the year.

Okay, great. In looking at your lease expirations for the rest of '06 and '07, it seems that there are possibly more industrial expirations that are kind of divided between San Diego and Orange County. I know that John had talked about the market conditions being extremely favorable with respect to industrial. But on an '07 basis, are you still comfortable with where the market is in terms of industrial; or looking forward, are you anticipating more residential land sales in the land that you own in the counties there?

We evaluate each property that we own to determine whether, in our leasing, to determine whether it's best to lease it, whether we want to provide options, whether it's better to do a shorter lease because we think its value will be higher two or three years out. You can't always be perfect in that kind of analysis. But we -- we will continue to -- if you take a look at expirations, Jeff, next year, is there anything that -- any of those particular buildings - I know, maybe you can't answer this question right now, that we've earmarked for not renewing beyond what we talked about here?

Yeah. In our 2007 expirations, looking at the industrials, there's at least a couple that we're aware of that probably will not be renewing. We're in negotiations right now to release those spaces. We have not identified additional redevelopment sales at this point. But, more to come on that.

Excellent. Thank you.

A couple -- I just might take the opportunity right here, a couple people have asked over various calls in the past, what is all this industrial translate to in the way of acreage in Orange County? And it translates into about 223 acres that we have. That's what that 3.9 million plus square feet sits upon. Some of that will be industrial for a long time. Some of it will, like these buildings we've identified, will ultimately convert to a higher and better use. What percentage, can't tell you.

That's very useful. Thanks.

You're welcome.

Your next question comes from the line of Lou Taylor with Deutsche Bank. Please proceed.

Thanks. In terms of the Boeing space, is it really going from lab to office or is it just a -- is that the right description?

You're talking about the 100,000 feet that have already expired?

Yes.

We're pursuing a number of different opportunities there, Lou. It's high-base space, so it can be office, it can be lab, it can be entertainment. It can be a variety of different things. And we have a plan. You know, that space, they've been in that for 25 years. So it really needed to be upgraded with regard to rest rooms, lobbies, the whole shebang. We're going through, removing the ceilings and all that sort of stuff, and taking it to a position where we really can display it to the variety of users that are out there.

Okay. And Dick or Tyler, from an accounting perspective, is the building going to be out of service?

Yes.

John, can you please talk a little bit about development yields? What's your expectation for the current pipeline of projects that's under construction?

We're finding that we're keeping our yields basically in line where they have been over the last couple of years, where we're looking at sort of, mid -- as a minimum, mid eights or in generally, higher than that, initial ROCs unleveraged, and straight lines in the double digits.

Okay. All right, then second, or next question with regards to lease roles. I guess when you take out the Delphi space, the Unisys and the Boeing space, possibly, for next year, and you look at the remaining leases that expire between now and the end of '07, how would you describe their -- the current in place rents, vis-a-vis market? Still in line with the portfolio of 5%, or a little higher or lower than that?

Lou, this is Dick speaking. We think overall we're 5% or maybe even more under market today on the overall portfolio. And we think that applies as well to our '07 expirations.

Great, thank you.

Your next question comes from the line of Jim Sullivan with Green Street Advisors. Please proceed.

Hey guys, it's Michael Knott sitting in for Jim. I'm just curious if you can just chat about your thoughts on the potential impact that the housing slowdown in San Diego could ultimately have on office demand down there?

This is John. It remains to be seen. We have a -- we renewed last year, I think it was, KB Homes on, what is it, Jeff? How many square feet? KB Homes -- no, down in San Diego? The 25, 30,000 square feet. And they're at under market rent. But they've got a strong operation. And of course we have creditor home lenders on the lending side that we've talked about before, out on I-15, where rents from moved up since we leased that space to them.

We're not anticipating, at this point, any substantial downturn in the demand for office space. Because if you look at where it's coming from, it's very broad-based. In terms of if they were to -- if the home builders were to vacate space, would that throw sublease space on? Yeah. It's far less, as Dick has talked about before, susceptible in San Diego county, as contrasted with, for an example, Orange County, where you have massive amounts of space owned -- or occupied by both the home builders and the mortgage companies.

I'm sorry, could you just reiterate what it was you said, that the total housing exposure in your San Diego markets might be, as a percent of total stock?

You mean our total home building or exposure as percentage of our San Diego portfolio?

Yeah. Not necessarily your portfolio specifically, but just the market in general.

It's tiny.

It's fairly small because you don't have many mortgage companies headquartered down there. You do have the regional offices, but you don't have any headquarters facilities beyond one or two, and then the home building. Obviously, home builders are not big tenants themselves. So, the exposure is, from an office perspective, is much more the people intensive than just a mortgage business in San Diego. In north San Diego county you principally have the branch production offices, with a couple of moderate-size headquarters facilities thrown in. It's obviously very different than Orange County.

Right. Okay, thanks. Also, could you just repeat what you expect the incremental yield on redevelopment El Segundo to be?

We can't repeat it because we haven't talked about that. More to come. We're still evaluating the precise nature of the tenant we might entertain. As John said, we're still in the process of clearing out the building. So, more to come on that.

Okay. And then at what point does Boeing have to notify you about its intentions with respect to the lease that expires at the end of next year in Seattle?

The end of this year, December 31st.

What's sort of the long-term strategy for owning that asset, given that it's the only one up there in your portfolio?

We're constantly evaluating each and every asset in the portfolio, whether it's time to sell it or not, and what the alternative use for proceeds would be. And that is something that we'd look at there, as well as everybody else. We've not announced anything on that yet.

Okay. And then just lastly, just curious how confident you are that you'll be able to sell that Orange County industrial facility in Irvine to a potential condo developer, say, six, eight, nine months from now?

Well, it always remains to be seen. There's certainly been a softening in the high rise condo folks, as we understand -- you know, the towers, with respect to the construction costs and so forth, that have been had. This particular site that we have on Von Karman is being surrounded by retail and by some other elements, and because it's 4-story, we think that, from everything the brokers tell us, we're very well positioned.

Now, could it be that we don't end up with the upper end of what might have been the pricing on the property 6 or 12 months ago? That could be. But we think we're well positioned to ring the bell there.

Thank you.

You're welcome.

(Operator Instructions) Your next question comes from the line of [John Potesek], with [O'Reese].

Hey John. I know how much you guys miss El Segundo and officing there. What's the rent spread between Westside Media Center and El Segundo, and how much square footage does Kilroy have in the Westside Media Center?

We don't have any -- what do you mean? In terms of what we occupy?

Yeah, what you occupy.

We occupy, what, maybe 33,000 feet -- 32,000 feet, something like that, here on one floor.

Would it be economic to move or not?

No.

Okay. In addition, the guidance, if you just an analyzed the $0.82, and add the lease term, you get to a 357 number, Dick. The average occupancy during the quarter was 95.90, ending occupancy, 97.4. I know you're taking $0.04 off for Qwest, but it sounds like that building might close, and therefore you'd paid on the line. Is there other things you're expecting in the back half of this year?

There's the $0.03 also from the Delphi rent loss. And we haven't factored in potential earnings on the building sales proceeds, because we're still sorting through the tax strategy, as to how to manage that carefully. So it's possible we might temporarily have the money tied up without earnings for a short period of time. We're still thinking that through.

And then, beyond that, we're anticipating and we've made some allowance in our guidance for the fact that the second half of the year will have incremental G&A costs for the equity-related executive incentive plan -- long-term incentive plans, that we did not have in the first half of the year at all. Obviously, as we we're talking about earlier, the costs, anything that's equity related, has to be costed out from the date of authorization or grant. That hasn't occurred yet. We'll begin costing that out if and when the committee approves such a plan or plans.

Have you contemplated that expense in so far as getting to a number in the guidance, or is it just a --?

It's one reason that our range is higher than we might ordinarily carry at this point in the year. We, frankly, don't have any particular bottoms up insight on what the structure of the plan will be. So, we've basically taken a fairly broad range. And it's much of the reason, as I say, that our guidance is wider than we might expect. And we've just guessed, made a, frankly, a guesstimate as to what might or might not be included. But we don't have any specific numbers that we can share because we simply don't have those numbers yet.

I'd add to that, John. It's not only the construct of the plan, but it's the number of participants of the plan that can influence those numbers.

Okay, thanks, guys.

Your next question comes from the line of David Loeb, with Baird. Please proceed.

Just a quick follow-up on Boeing and El Segundo. When is it that this whole process is resolved? When do they have to tell you -- I guess you said they have to tell you pretty shortly whether they accept, extend, or don't extend?

That's correct. This is Jeff. They have to tell us by July 31st what their intentions are.

And if it does go into arbitration, how long would that take?

It's not absolutely clear. There's a certain period of time in which you pick arbitrators, and they pick a third, and so the process could take some time, depending on when those things are actually selected.

But If it goes to arbitration, then it's fait acompli, they're renewing, and you're arguing about rent, right?

That's correct.

So, how does the arbitration work? I guess the first question is, how do you determine what you ask them on the renewal? I'm assuming that's market, or something based on market.

Yeah. Basically, what happens -- again, by the end of the month, July 31st, if they exercise, and they don't agree with our number, we have a period of time upon which we have to mutually exchange rent numbers, and then, basically, we'd pick arbitrators, the two arbitrators pick a third, and then ultimately to the arbitration process. It's either the landlord's number is picked, or the tenant's number is picked, and that sets the rent.

David, this is Dick speaking. If you're familiar with the way the baseball salary arbitration process works, I believe this is a close analogue to that.

Great. Hope you get a baseball size of a number. Thank you.

Thank you.

Ladies and gentlemen, we're showing no more questions at this time. I'd like to turn the call over to Mr. Richard Moran.

Thank you all very much for joining us on a busy day. We appreciate your interest in KRC, as always. Thanks.

Thank you for participation in today's conference. This concludes our presentation.