Kilroy Realty Corp (KRC) 2006 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third quarter 2006 Kilroy Realty earnings conference call. My name is Minotia and I will be your coordinator for today. [OPERATOR INSTRUCTIONS] I would now like to turn the presentation over to your host for today's call, Mr. Richard Moran, Chief Financial Officer. Please go ahead, sir.

Thank you very much, and good morning, everyone. Thank you for joining us today. 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 will 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 web cast live on our website and will be available for replay for the next 10 days both by phone and over the Internet. Our press release and supplemental package have been filed on a Form 8K with the SEC and are also both available on our website. We released our third quarter financial results yesterday evening. FFO was $0.76 a share.

John will start with an overview of the market followed by a review of our - a review of the quarter followed a review of our key markets. I'll add financial highlights and updated earnings guidance, and we'll be happy to take your questions. John?

Thanks, Dick. Hello everyone. Thanks for joining us. The market environment for commercial real estate in Southern California continues to be strong. Occupancies in nearly all of our major office and industrial submarkets are on the rise. Rental rates are increasing, valuations remain strong, and demand from tenants is solid.

Driving this growth is a diversified economy that is maintaining solid momentum for both new age industries and old standards. This year, for example, Southern California is expected to post new record highs in international trade and tourism. Our five-county region gained nearly 100,000 net new jobs in the 12 months through September, and unemployment rates remained at historically low levels. In L.A. the rate is 4.8%, Orange County, 3.4%, in San Diego, 3.9%.

At KRC we entered the third quarter with most of our stabilized portfolio performing at near peak capacity, and a strong expanding development program underway. Since our last call, we have signed new and renewing leases on more than 850,000 square feet of space, and maintain occupancy in our stabilized portfolio above 96%. And we continue to execute our business plan to expand our development program, add to our long term strategic land position, and to capitalize on value-added opportunities in our existing portfolio. We have made progress since our last call in all of these areas.

On the development front, we have expanded our construction in progress with the execution of an 18.5 year lease with Scripps Health for a new 6-story, 146,000 square foot office building in the Rancho Bernardo submarket of San Diego. This $52 million project is scheduled for completion in the third quarter of 2008. We have also entered into an 82,000 square foot lease with DIRECTV at our redevelopment project in El Segundo, which is under construction and scheduled for completion in the second quarter of next year.

In addition, we continue to be successful in expanding our future development pipeline in the key coastal submarkets. Our focus remains on acquiring the very best high identity sites with in-place entitlements and predictable development costs.

We are scheduled to close on a 24 acre parcel in Carlsbad this coming January. And at our Santa Fe Summit project on the 56 corridor just east of Del Mar, where we are under construction with our first phase totaling 466,000 square feet for Intuit, we have just reached agreement to acquire an additional 11 acres. This follows our earlier acquisition in mid-2005 of the 11 acre phase two land parcel, so our Santa Fe Summit project, phase one through three, will total over 1 million square feet upon buildout.

Upon our acquisition of the phase three land, KRC will effectively control all of the office development entitlements along the 56 corridor. As to new development starts, we are working on several transactions that could lead us to begin construction in 2007. And while we are still in the planning process, our preliminary projection is that new construction starts in 2007 are likely to range between $150 million to $300 million, depending on significant preleasing.

At this point, I'd like to provide a summary of our construction in progress, which currently consists of 9 buildings totaling 1.3 million square feet at a projected cost of $377 million. 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; 146,000 square feet in Rancho Bernardo, 100% preleased to Scripps; 143,000 square feet along the I-15 corridor we just started; and 107,000 square feet of redevelopment in El Segundo, 77 preleased to DIRECTV. Combined, these properties are 87% preleased and are in the target yield ranges of 9 to 10%.

Turning to our value-added activities in Orange County, our efforts to unlock value in our industrial assets are also paying off as we mentioned on our last call. We executed a lease termination agreement with Qwest for about 9 million on our Toledo Way industrial property. We said at the time that we would reposition the asset either for lease or sale.

In fact, we completed in mid-September the sale of the entire property for a price of $45 million. Price reflects Orange County's shrinking supply of industrial real estate and the strong current demand for this type of property. In addition, our efforts to rezone the land underneath a 157,000 square foot Irvine industrial property to residential, continues to progress. We expect to complete the process in mid-2007.

Before I provide our customary review of our submarkets, I'd like to mention the progress we are making in El Segundo, our most challenging submarket in recent years. Since the second quarter, we have been successful in executing a series of transactions that totalled more than 750,000 square feet.

First, as we previously reported, we renewed Boeing's 286,000 square foot lease at 2260 East Imperial Highway for an additional 3 years to July 2010. GAAP rent is down about 20%. However, we will incur less than $1 per square foot in capital improvements and we provided no further options to Boeing. Second, we extended the lease for Mattel's 192,000 square foot design center in El Segundo to 2016 at a GAAP rent 16% higher than the previous rate. We have no tenant improvement costs on that extension.

Third, renovations are well underway at our 107,000 square foot redevelopment project at 2240 East Imperial Highway, and tenant interest is very strong. In fact, as I mentioned a few moments ago, we just signed a new 7-year lease with DIRECTV for 82,000 square feet. This is part of the space, by the way, that Boeing vacated this past April. The new lease with DIRECTV is expected to commence in June, 2007. Fourth, DIRECTV is also extending its existing 207,000 square foot lease at 2250 East Imperial Highway for an additional 2.5 years to 2014.

Finally, we have completed a number of smaller transactions at our 909 and 999 Sepulveda buildings, to bring our committed percentages to 70% and 96%, respectively. I should note that El Segundo was recently named the most business friendly city in Los Angeles County by the L.A. Economic Development Corporation. Our expectation is that El Segundo market will continue to improve, and sometime over the next several quarters we should expect to see significant rental momentum.

Now, let's take a closer look at our individual submarkets, starting in San Diego where KRC continues to lead the market. Commercial real estate fundamentals remain strong. Simple, San Diego, the location of all of our San Diego properties and asset development projects is currently registering active demand for office space of approximately 8 million square feet.

In Del Mar, which we view as the best office market in Southern California, KRC is in the dominant landlord position with approximately a 1/3 market share, and a 2/3 market share of top tier, class A product. Current direct vacancy here is approximately 4.6%, and total vacancy is 11.5%. Our stabilized properties in Del Mar are 100% occupied. South of Del Mar in the submarket of Sorrento Mesa, KRC competes in 2- and 3-story office products. Direct vacancy for this product type is currently 5.6%, in total vacancy, 8%.

Our stabilized properties here total approximately 1.5 million square feet and are currently 100% occupied. Just south of Sorrento Mesa in the UTC/La Jolla submarket, current direct vacancy in the 2-story product type in which we compete is about 3.1%, and total vacancy about 6.2%. Our UTC properties total approximately 430,000 square feet and are 99% occupied.

Now, let's move to the I-15 corridor where KRC owns approximately 670,000 square feet of stabilized office space. The 2-story product type here has a current direct vacancy rate of 1.9%, and total vacancy of 2.9%. In the class A product type, direct vacancy is 11.4%, and total vacancy is 14.5%. Our stabilized properties here are 99.5% occupied.

Further north in Orange County, KRC's 3.7 million square feet of industrial properties are 96% occupied, including the vacancy of the 150,000 square foot project we are rezoning to residential. Continuing north to Kilroy Airport Center Long Beach, our 7 building office campus immediately adjacent to Long Beach Airport, is currently 90% occupied and 94% committed. Demand in this market remains steady with class A direct vacancy at 5.8%, and total vacancy of 7%.

I discussed earlier our significant progress in El Segundo where our stabilized properties are now 92% occupied. Direct vacancy in the class A market here is 17.9%, and total vacancy, 18.4%. A significant portion of tenant growth in this market is coming from the advertising, entertainment, and video gaming industries. We expect this market to improve as the surrounding submarkets continue to tighten.

Moving north from El Segundo, the West L.A. submarket has clearly recaptured its historic strength. Direct vacancy here is now at 6.5%, and total vacancy at 7.5%. Our properties in the market totaling 680,000 square feet are 98% occupied. Our last Los Angeles submarket is the 101corridor which runs through northern Los Angeles and southern Ventura counties. This market remains strong as demonstrated by a direct vacancy rate of 5.3% and total vacancy of 6%. Our properties here are 99% occupied.

Before I wrap up, let me make a comment about acquisitions. While pricing for acquisition remains extremely competitive, we are pursuing some favorable value-added acquisition opportunities, primarily in San Diego. We expect to have more to report on those efforts next quarter.

In summary, our markets are improving with lower vacancies and increasing rental rates, our stabilized portfolio is performing well, and we are unlocking value in selected industrial assets. Our committed development program is 87% preleased at attractive yields, and we continue to have numerous discussions with prospective tenants to take advantage of our fully zoned and entitled future development pipeline.

In all, we think we are extremely well positioned going into the next year. That's an update on our activities. Now Dick will cover the financial results. Dick?

Thanks, John. FFO in the third quarter was $0.76 a share, compared with $0.43 in the third quarter of 2005. Occupancy in our stabilized portfolio at the end of the third quarter was 96.2%, up from 95% at year end and down from 97.4% last quarter.

As John mentioned earlier, the third quarter decline in occupancy is largely due to the vacancy of the Orange County industrial project that we're in the process of rezoning for residential use. Same store NOI increased during the third quarter both on a GAAP and a cash basis. GAAP NOI increased 1.2% and cash NOI was up 4.5%. Those numbers reflect both slightly higher average office occupancy and higher rental rates.

Our operating performance during this quarter was about $0.02 lower than our forecast, as a result of higher of operating expenses, primarily higher electricity costs. This primarily impacts our L.A. and Orange County office properties that have full service gross leases. Most of the expense increase was due to unusually warm weather and a seasonal nature of electricity costs.

The common area cost reimbursements that we collect lag behind expense increases, so we don't get reimbursed for the increased expenses on a one-per-one basis during a period of cost inflation. We do expect electricity costs to moderate again in the 4th quarter. GAAP rents increased 12.3% and cash rents were up 5.5% in the third quarter. Our latest estimate is that our current mark to market is about 5 to 10% below market, which is up about 5 points from last quarter.

Capital expenditures in the third quarter were $4.2 million, down from $4.9 million for the second quarter. Our FAD payout ratio was 88%. As John mentioned, last month we completed the sale of the Orange County industrial project that Qwest Communications had vacated earlier this year, along with a $9 million lease termination fee. The $45 million sales price resulted in a book gain of $25.6 million. Economically this deal was -- this was a terrific deal for the Company.

If you add the $9 million termination fee that we received, to the $45 million sales price, we received about $54 million in total proceeds. Current annual NOI on the project was about $2 million. So the cap rate on the sale was in the mid 4s, and the effective return on the total proceeds we received was 3.7%. Looking ahead to next year, we have approximately 1.4 million square feet of expiring leases, which breaks down to about 60/40 office and industrial on a square footage basis, and 80/20 on a weighted average rental income basis. Overall, we estimate that our 2007 expirations are currently 10 to 15% under market.

Turning to development, we now have $377 million in development and redevelopment underway. Over the past year or so, we've been expecting that we would begin to see some yield compression, reflecting higher construction and development costs. So far, at least, our returns are remaining strong, even if -- as cap rates have declined.

Year to date in 2006, we started $286 million in new development and redevelopment, totaling approximately 945,000 square feet. These projects are 82% preleased. In terms of deliveries, $21 million will be completed late this year. $225 million will be delivered at the end of next year, and $131 million will be delivered in mid to late 2008. And obviously, we'll begin to see meaningful development related earnings [appreciate] in 2008.

Just as important is the value we're creating for development. The 6 projects we have under construction have a total estimated investment, as I mentioned, of $377 million, are 87% preleased, and have estimated stabilized cash and GAAP returns of 9% and 10%, respectively. These will be brand new, state-of-the-art, class A office buildings in one of the best markets in the country.

So, at any current market cap rate, the value creation is very, very large. And as John mentioned, while it's early yet, our preliminary projection is that our 2007 development starts will range from $150 million to $300 million, depending of course, on leasing and market conditions.

Before I wrap up with guidance, let me touch on our recently announced compensation program. As we understand it, under FAS 123R, this type of program is now accounted for on an accelerated attribution method, and not on a straight line basis. The new program had a $0.01 impact in the third quarter, and our preliminary estimate is that the amortization cost of the program going forward will be $0.06 a share in fourth quarter, and roughly 20 to $0.25 a share in 2007, 9 to $0.12 a share in 2008, and 3 to $0.04 a share in 2009.

In terms of 2006 FFO guidance, last quarter we provided a range of $3.35 to $3.50 a share for the year. We can now tighten that range to $3.43 to $3.48 a share. That's the latest news from here, and now we'll take your questions. Operator?

Thank you, sir. [OPERATOR INSTRUCTIONS] Your first question will come from the line of Lou Taylor of Deutsche Bank.

Thanks. Good morning, guys. Dick, just a quick question on the comp plan. This plan is really just the '06 plan. So if there's an '07 plan, the figures could be added to this, is that correct?

Yes.

Okay. John, can you talk a bit -- a little bit about your development starts for '07? Mix of build-to-suit versus spec, geographically, where do you think they'll fall, in terms of San Diego County or somewhere else? And then just, what's your comfort level with projects in the development pipeline? Is it 500, 600 million or you want to keep it around 3 or 4?

Well, starting with the last question, Lou, just so I get a clarification there, I'm unclear. Are you asking about the extent of our pipeline or about the maximum we'd want to do in a year?

Well, I mean, you've got 360 on the schedule right now. You're -- you could add another 150 to 300 to that. And say if you all did it on January 1, you'd have 660 million under construction at one time, theoretically.

Oh, excuse me, Lou. This is Dick speaking. Just to be precise, that 150 to 300 million we were talking about is not anticipated to be started this year. That is some -- that is our preliminary estimate of the range of starts for 2007.

No, I understand, but just in terms of, will you --

I think I got it. So, well, let's deal with that issue first, with regard to where do we feel comfortable. How much, if that's the question.

Right.

What we've done this year, is we've beefed up substantially all the areas within the Company, particularly in our development and construction and management group. We have a much higher level of capability than we've ever had before as a Company. So I feel very comfortable if we were to add another 3 or $400 million to what we've got going on now, that we'd be able to manage that very, very easily. And as we have in the past, very tight with the numbers.

In terms of the earlier questions with regard to where in San Diego, we're looking at doing a couple different buildings. There will be 2-story in Sorrento Mesa. That's a market that's had about 1.2 million in absorption so far this year. It has no spec space under development. There's one project that's under development in that market, it's Cardinal Health, 318,000 feet that's leased to them. We're doing that. And we have a number of users we're talking with, these are sort of 50 to 100,000 square foot buildings.

With regard to other markets, we're looking out at the I-15. We have a couple big build-to-suit transactions we're contemplating, and those would be driven by those build-to-suits. With regard to the 56 corridor where we have Intuit underway, we have a number of folks interested in phase two, or what would become phase three.

And we, as I said in my remarks, have the ability to go up to a little over 1 million square feet. We have 466 underway there, so we could very well see a project in that area. And then we're looking at the addition -- adding on to a couple of existing projects where we have entitlements beyond the square footage that we originally built.

Okay, great. And then, I guess the last question pertains to the Irvine site that you're rezoning. If you do get the residential entitlements, I mean, would you sell the land or would you look to JV it? What do you think the next step would be?

Well, let me just bring you up to speed for a second on that property. We've slipped a few, a quarter or two, with regard to when we thought we'd have development, or rather, entitlement approval. What's happened is Von Karman is the -- a number of the adjacent cities to Irvine. Irvine is supportive of what we and others are trying to do.

Some of the adjacent cities and a couple of the major industrial users challenged the city's EIR, where they wanted to do a supplement. What we decided to do is just go ahead and do a full blown EIR on our project. So that slipped the schedule a little bit. But, we can do either apartments or we can do condos.

We think the market is still pretty strong for the construction cost point that we'd be for condos, and we know it's extremely strong for apartments, so we think we can go either direction. Differentially, the cost or what people would buy for the land is somewhere in the 35 plus or minus million for apartments as she sits, and somewhere in the neighborhood of $45 million for condos, again, as the land sits.

Whether we go and do an outright sale, or whether we do a venture where we would achieve a fairly significant amount of whatever the purchase value would be up front, and then have a continued interest, a carried interest, we could potentially go that. We're not going to get involved in building the apartments at this point, or the condominiums.

Thank you.

And I might add, with regard to that site, there's 1.2 million square feet of retail under construction within a block or a couple blocks of that site today.

And your next question will come from the line of Steve Sakwa of Merrill Lynch.

Good afternoon. Dick, could I just ask you to repeat those amortization costs? You went a little quick for me and my pen.

Oh sure, sorry. It was $0.01 in the third quarter, and in the fourth quarter we estimated it to be $0.06 a share. And then in '07, between 20 and $0.25. 2008 would be 9 to $0.12 cents a share. And 2009 would be 3 to $0.04 a share.

Okay. So just to be clear, you'll have $0.07 from this plan in '06, and then, I guess, incrementally you would get up to -- I guess it would be a total of 20 to $0.25, or?

It would be a total in '07 of between 20 and $0.25.

Okay. And then it burns it back down. But if you -- if there's another plan in '07, that would be additive to this 20 to $0.25?

Yes. Yes, there's a -- the numbers bunch up in '07 a bit higher than they would have, simply because the portions that were approved late in the year under FAS 123-R, companies are -- do not account for those until they're formally approved. And since the formal approval didn't occur until September, there was a delay in the commencement [inaudible] of those costs. That is GAAP.

I would add that, just as a -- as an overall overarching point, while that's -- while this is obviously GAAP and it's the correct way to do it under GAAP, the overall incentive costs were related directly, in large measure obviously, to the success of the development program this year. So there is the way GAAP works, the meaningful earnings accretion as culled from the development program obviously begins in a big way in 2000, later in '07 and into 2008, those costs get amortized more rapidly than that under GAAP, just the way it works.

Okay. And then to go back to, kind of, the Irvine piece of land, John, are you currently contemplating or working on other sites beyond the current Von Karman site?

Well, we're -- just as we did with Toledo, and we are with Von Karman, we're looking at all of our different sites and we think we will be able to harvest more opportunities over the years. We can't say specifically when.

Okay, thanks.

And your next question will come from Dave AuBuchon of A.G. Edwards.

Thank you. John, you mentioned you bought 11 acres of the additional land in the Santa Fe Summit. Can you disclose the costs on a FAR basis?

Well, we're -- I said we're in the process of acquiring, and I'd rather -- I'm sure I'm going to be able to do that within the next couple days, but I'd just as soon not do it on this call.

Okay. Have you been able to triangulate, I guess, how much you will be building at the Unisys site? I mean that you still have a pretty big range in the supplemental, 800 to 1.5 million square feet. Have you been able to kind of, again, figure out what you may be able to put on that piece of property?

Well, we have. But we have a couple different plans. And that's, as you know, I think the only project we've ever really provided any substantive range to. And let me tell you why. We have the ability to go either low rise, like 2- and 3-story, or we can -- where there's no height limitation, or we can go with a tall class A building. If it's a million --1.5 million square feet, it's going to be 8 stories, it's a combination of 6- and 8-story buildings. And if it's 800,000 square feet, it's going to be 2-or 3-story buildings.

And the differential there is how much, what kind of a campus people want, and how much structured parking they want. And what we want to make sure is that we have the ability to go either way, depending upon where demand is. We're not going to -- we've always shied away from putting forth in our supplement or in our comments, the maximum that we can develop on a site unless we feel that's what we're going to develop. Because sometimes it doesn't make sense to build to what the entitlements, the gross amount of entitlements may be.

Right.

We have the right there, Dave, to go to 1.825 million square feet. And while we have a plan that shows that we can do it, I think that's an aggressive plan.

It doesn't strike me as an 8-story office building market, as I mean, most of the stuff around there is 2, 3 stories, max.

Well, actually, there's quite a few 5-story buildings in the market, one that's under construction right next to our site that's a multi-tenant project. I think what's going to happen, is just as we forecasted that Del Mar would become a fantastic market and it has, we're also forecasting, a ways out still, that Rancho Bernardo will redevelop into a substantive office environment simply because it is one of the few places that has the combination of freeway accessibility, access to both the decision makers and workers, and the availability of land as it gets repositioned. I think at this point, to build -- to base your economics on building to maximum entitlements would be foolish, in my opinion.

Any initial progress at Sabre Springs?

At Sabre Springs we have quite a few people that are interested in space. We have not made any new deals on the building that we started last quarter, the 143,000 square foot, 6-story building. And that's quite typical with multi-tenant buildings, but I think we're going to do quite well there. We're well under construction, and we're seeing very strong demand.

In that particular marketplace, and I mentioned that the vacancy rates are sort of - what were they in, bear with me for a second, in class A space, and that building that we're talking about, Sabre Springs, would clearly be class A. The direct vacancy is 11.4% and the total vacancy is 14.5% in class A. Very, very low single digits, 1, 3% on 2-story.

But if you take a look at that vacancy rate at the class A, a lot of that is our projects that were developed some time ago, that at the time they were developed, were considered class A, but are no longer, in my view, class A. They're class B and class C. And there's some decent buildings that are poor locations. So the vacancy that we believe exists for our kind of product is quite a bit lower than what that market statistic would show.

And rental rates are kind of eyeballing right now for that?

Well, rental rates for that I-15 corridor for 2-story product is around 275 triple net. And for the class A, asking rates are anywhere from 420 plus or minus plus utilities. So if you sort of back that out, it's in the mid 3s, triple net.

Okay. And Dick, one last question for you. What are your feelings about the convertible notes, exchangeable notes, capital that has been floating around the REIT space for the last couple quarters?

Well, I think we've certainly looked at it and are aware of it, that we don't have any current plans, but we think we're -- our debt ratios are in line, and we have plenty capacity to grow, as we said. But then again, obviously, we are well aware of what goes on and try to make sure we understand what's going on in the capital markets, but we don't have any current plans right at the moment.

Thanks.

[OPERATOR INSTRUCTIONS] Your next question will come from the line of Michael Knott of Green Street Advisors.

Hi. I missed the '07 guidance. Could you just repeat that, Dick?

We haven't given '07 guidance yet, Michael.

Okay. And the '06, was that 335 -- I'm sorry, 343 to to 348?

Yes.

Okay. John, can you just talk about the opportunity in Carlsbad and why that makes sense?

Yes. It -- we're buying a terrific piece of property that's going to have quite a bit of retail around it, that has great views, great visibility. So locationally, just a specific site, we think has some advantages in Carlsbad. And as I said on earlier calls, that's a 20, 24 acre site, we're buying it for $15 million, or about $15 a foot. And that is priced very favorably compared to what else has gone on in that marketplace, recent purchase down on Palomar Road, 7.5 acres, $26 a foot.

So we look at that as one where we're going -- not do the small buildings, like we've talked about before on our call, for sale or for lease like others are building in that marketplace. We're going to look at it in our traditional Kilroy context of either a campus or larger buildings for bigger users, and we are having discussions with some of those users right now. Whether we develop that right away or develop it downstream, our cost basis is really terrific.

Okay. And can you just touch on San Diego condition? There's been a lot of negative press on the direction of the office market. Can you just talk about that, and then the impact of new supply in the market?

Yes. There have -- I read an article just recently, and I think one of the things that folks often have a hard time with, is looking at macro data and applying it to the specifics of submarkets and the specifics of a company and so forth. I don't know where anybody's getting the idea that there is a negative development situation in San Diego at all. We see, at least in our markets, quite the contrary.

There's a report that recently came out that said there was 3.7 million square feet scheduled for delivery in the suburbs through early '08. And if you look at KRC's core markets, which are I-15, 56, Del Mar, Sorrento Mesa, and UTC, there's about 2.2 million square feet under construction or scheduled to be under construction between now and the beginning of the -- or between now and the, I guess, mid to late first quarter. Of that 2.2 million square feet, 48% is already leased. In fact, all but 80,000 square feet of it is under construction by Kilroy, and leased. It's the tenants we've talked about.

Demand in that same marketplace, the same submarkets, is currently running right around 8 million square feet. So that -- you've got a combination of single digit, in some cases very low single digit, marketplaces in terms of vacancy, very strong demand, and relatively speaking, fairly little product being developed. If you look at the property that's not committed, it's under construction.

It's about 1.15 million square feet in aggregate over a core base of 43.9 million square feet. And that's combined class A office and corporate headquarters. So the noncommitted component represents about 2.6% of the total core base. And lastly, I think it's important to look at the -- what's happening with absorption. Year to date, in our core markets, 1.6 million square feet year to date '06, which exceeds last year's absorption of about 1.2 million square feet for, again, for KRC's core markets.

We think, and in terms of our portfolio, we're particularly well positioned because we bought a lot of these sites early, and we've had people on the ground. I think we've made some pretty good decisions with regard to where our sites are. All of our sites are located in low vacancy markets. I think we have the best sites in San Diego. We have high visibility, great amenities, and we, of course, deal more with the corporate campus.

Even when it's multi-tenant product, it's more of a campus environment rather than one office that frequently don't have the amenities or may not have the accessibility that our sites do have. So that's what's going on from a construction standpoint.

Okay. Thanks, John. My last question, could someone just comment on the, what seemed to be a pretty sizable jump in the releasing cost per square foot per year of the lease, compared to second quarter?

I think that's mainly due to the length of the leases. We just happened to have, this quarter, shorter term leases. So on a TI basis, I think that the amounts are the same. I think it -- but on your calculation, it's the length of leases.

To me, it actually, when you divide it by the length of the lease, it actually looked like it jumped up on a per foot per year basis.

Yes, I think you're right.

And that's -- Michael, this is Dick speaking. We have a small enough base typically on our quarter to quarter numbers, that if we have a quarter, as Tyler suggests, where we have somewhat shorter leases it can -- it doesn't necessarily signal a trend as much as it does -- as it signals a small statistical base. We're not seeing in the market today higher TI costs. I think I'd regard the math you're talking about as more statistical anomaly than a market trend.

Okay. That's what I was looking for, thanks.

And your last question will come from the line of [Frank Graywit] of [Reef].

Hi, guys. The G&A hit from the comp plan, is that over and above the accrual that you had assumed in '06, or would the net number be actually lower?

I'm sorry, Frank, could you -- you cut out a little bit at our end. Could you say that again, please?

Sure. The G&A hit that occurred, or that you indicated for '07, '08 and '09, is that over and above the accrual that you have assumed in 2006? Or would the net number between the two be lower?

Okay. I think it would be the delta. In other words, if you took our prior run rate of G&A and add somewhat higher compliance costs and so forth, just normal -- a normal run rate, and then added the specific numbers I add, I think you'd be at the new.

Okay. And on the L tip, have you had any additional thoughts about the implementation of that going forward?

I'm sorry, say again?

The long term, maybe it's an OPT plan or the longer term plan. Any thoughts on implementation -- implementing that, or?

Well, I think what we're going to do is we're going to offer fourth quarter, excuse me, net '07 guidance when our objective is to have our '07 compensation plans completed early next year. And our hope is, and our objective and our plan is, that we will then offer '07 guidance at the beginning of next year, and we hope by then, by the time we have our next call, to have all of our '07 plans completed or virtually complete so that we can offer definitive guidance at that time, and we'll be able to comment then. Until then, we really -- we don't know what the plans will be that we -- we're about to commence discussions on those.

Okay, great. And then, you said then, '07 guidance would be in the fourth quarter call?

Yes. It will be first thing next year.

All right, thank you.

Thank you.

You have no further questions at this time. I would like to turn the call over to Mr. Moran for closing comments.

Thank you all very much on a busy day. We appreciate it. Happy Halloween.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation and you may now disconnect. Have a wonderful day.