Kilroy Realty Corp (KRC) 2007 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth quarter 2007 Kilroy Realty Corporation earnings conference call. My name is Shaquanna, and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will facilitate a question and answer session towards the end of this conference. (OPERATOR INSTRUCTIONS)

I would now like to turn the presentation over to your host for today's call, Mr. Richard Moran. Please proceed, sir.

Good morning, everyone. Thank you 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 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 webcast 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 8-K with the SEC and both are also available on our website. John will start the call with an overview of the quarter and the year, and a review of our key markets, and I'll add financial highlights and 2008 earnings guidance. Then we'll be happy to take your questions. John?

Thanks, Dick. Hello, everyone, and thanks for joining us. While we are experiencing uncertainty in the economy and tremendous change in the Capital Markets, on the ground in 2007 was actually a good year for Kilroy. We had the benefit of a supportive economy with positive job growth. We operated in fairly good commercial real estate conditions, with generally declining vacancy rates and rising rents. And we experienced good demand from a range of potential new tenants for the high quality campus-style properties that represent the core of our stabilized portfolio and our current development. During the year, we added more than 750,000 square feet of new office space to our stabilized portfolio, all of which is fully leased and occupied. 1.7 million square feet of lease is commenced at average rents 15% higher on on a GAAP basis than expiring leases, and we expanded both our in-process development program and our long-term pipeline.

As we enter 2008, conditions in Southern California feel about the same as they were at this time, at the time of our last call. That said, there is no denying the increased uncertainty, even anxiety hanging in the air today. The markets face a number of political and macroeconomic headwinds going forward, and thus uncertainty. California's residential construction and lending industries have both been hit hard by the sharp decline in housing activity and related mortgage credit crisis. More broadly, California's state government is experiencing significant shortfalls in tax revenue, is now forecasting a budget shortfall. Depending on how some of these problems are resolved, we could face tougher real estate market conditions this year.

As I mentioned on our last call, we continue to see plenty of activity in our submarkets. Potential tenants are out looking, transactions are being negotiated, leases are being signed. But the time it takes to reach agreements is lengthening. And we sense a continuing caution among business decision-makers. At KRC, we're approaching the year with cautious optimism. We're not currently planning any significant changes to our game plan, but will be aggressively focused on fundamentals, strong leasing program, disciplined execution on the projects we currently have under construction, and depending on market conditions and preleasing, we will evaluate new development starts.

With that introduction, let me review some of the highlights of the fourth quarter. It was a productive period on a number of fronts. One of our biggest transactions of the quarter occurred in December. As most of you know, we have been evaluating our position in Seattle for several years and recently marketed the SeaTac office complex for sale. We received a very strong offer and closed the sale right at the end of the year. The all-cash purchase price was $79.3 million. Given that the project is 30 years old, 87% leased, and held as a lease hold interest, we were very pleased with the 6.8% cap rate. We also completed in the fourth quarter the acquisition of a 23-acre land site in Del Mar, where we are already the dominant landlord with 1.5 million square feet of existing fully leased office space. This is a strategic acquisition of what is considered the best remaining development site in San Diego county. This site is currently entitled for 500,000 square feet of office space and cost $88 million.

Taken together, these two transactions underscore our fundamental business strategy for enhancing long-term shareholder value. In effect, we sold a very mature portfolio asset located in a market no longer strategically important to KRC, at or near a market peak. We then reinvested the proceeds in a highly valuable and scarce asset in a market where we have the resources and the market position to maximize its long-term value. It was also another strong quarter for leasing at KRC at the of the year with a 94% occupancy rate, which is at the high end of the range we discussed in our last call. We have approximately 1.4 million square feet of space expiring in our stabilized portfolio during this year, including 900,000 square feet in our industrial portfolio. We now have release or renewed approximately 520,000 square feet of that industrial space and are in serious negotiations on another 260,000 square feet.

In terms of new development, we started in the fourth quarter our Sorrento Gateway Lot 1 project. This will be a 51,000-square foot medical office building that has an estimated total investment of approximately $22 million. I might point out that it is the only medical office property zoned in the greater market. We're seeing a lot of demand for medical and office product and have several discussions currently underway to lease the property. We expect to complete construction in the fourth quarter. With that addition, our active development and redevelopment pipeline now encompasses approximately 600,000 square feet in six projects, with deliveries scheduled through the fourth quarter of 2008. The total estimated investment represented by these six projects is approximately $187 million and they are 41% leased.

Now let's review individual submarket conditions. In San Diego, the submarkets in which we operate are currently registering active demand for office space of approximately 6 million square feet, according to CB Richard Ellis. In Del Mar, where KRC is the dominant office landlord with approximately two-thirds of the top tier Class A product, current direct vacancy is approximately 8.7%. Total vacancy is 12.8%. Our stabilized properties in the Del Mar market are 99.8% occupied. In the Sorrento Mesa submarket south of Del Mar, KRC competes in the two and three-story office market. Direct vacancy for this product type is currently 6.1%, and total vacancy is 7.5%. Our stabilized properties here total approximately 1.9 million square feet and are currently 95% occupied.

South of Sorrento Mesa in the UTC Governor Parks submarket, we also competed in the two-story product type with properties totaling 430,000 square feet of space. Current direct vacancy here is about 6.9% and total vacancy is about 11.4%. Our only vacancy is the 141,000 square foot building recently vacated by Intuit. Along the I-15 Corridor, we own approximately 750,000 square feet of stabilized office space. The two-story product type here has a current direct vacancy rate of 8.5%, a total vacancy of 10.5%. In the Class A product type, direct vacancy is 17.9%, and total vacancy is 20.9%. Our stabilized properties here are 79% occupied.

Moving on to Orange County, our industrial portfolio is some 3.7 million square feet with 94% occupied at the end of the quarter. Our largest remaining vacancy in the market is the 157,000-square foot industrial project we are rezoning to residential. The Orange County industrial market remains strong, with a vacancy rate of about 4.1%. Further north, the Kilroy Airport Center Long Beach, our seven-building office campus immediately adjacent to Long Beach Airport is 94% occupied. Demand is steady with Class A direct vacancy of about 8.6% and total vacancy of 9.5%.

Moving north to El Segundo. Our stabilized properties here are 97% occupied. Market conditions have improved substantially over the last year, as direct vacancy in the El Segundo Class A market is now 10.5% and total vacancy is 11.3%. That's about half of where it was two years ago. In the L.A. market, direct vacancy is now 6.5%. That's west L.A. And total vacancy is 7.7%. Our properties in the market totaling 680,000 square feet are 99.6% occupied. Finally, the 101 Corridor market, which runs through Northern Los Angeles and southern Ventura counties, remains solid with direct vacancy in the Class A product currently at 7.5% and total vacancy at 7.7%. Our properties here are 98% occupied. That's an update on our recent activities and markets. Now Dick will provide the financial results. Dick?

Thanks, John. FFO was $0.85 per share in the fourth quarter and $3.18 for the year. Occupancy in our stabilized portfolio at the end of the quarter was 94%, up from 92.6% in the third quarter. At year end, our office occupancy was 93.7% and our industrial occupancy was 94.7%. We expect occupancy to moderate about 1 point or so in the first quarter, as we're currently working with an Orange County industrial tenant that's having financial difficulties. They occupy about 150,000 square feet. Vacancy in that building would impact our occupancy by 1.3%. GAAP rents increased 16% cash rates. Rents increased 2% fourth quarter. For the year, GAAP rents increased 15% and cash rents were up 3%. Based on our latest analysis, we believe that rent levels in our overall portfolio are about 15% below market and our 2008 expirations are about 10 to 15% under market. Capital expenditures in the fourth quarter totaled $6.8 million. For the year, capital expenditures totaled $25.4 million. Our 2007 FAD payout ratio was 82%. A medical office building start that John mentioned brings our active pipeline to approximately $187 million and -- of development and redevelopment and six projects that total seven office buildings and 606,000 square feet. We spent $126 million to date on these projects.

Our balance sheet is in great shape and we continue to be conservatively leveraged. We have [$400 million -- $19 million] of debt capacity on our $550 million credit line and have only one $72 million debt maturity later this year. Our balance sheet strategy during the quarter was to sell a mature nonstrategic Seattle project and reinvest in a premier development site in Del Mar. The move was strategic by design since we essentially offset the cost of the Del Mar site with proceeds from the Seattle divestiture, so that the overall balance sheet impact was roughly neutral. Although the net impact will be dilutive to near term reported earnings, we think that it will clearly position us for significant earnings power and value creation over time.

Now let me finish with 2008 FFO guidance. Let me start with a few comments about some items that will affect our 2008 numbers. First, we're assuming that the 150,000 square foot industrial building I mentioned earlier will go dark and be vacant for the remainder of the year. That would lower our 2008 FFO by $0.03 a share. Second, the disposition of the Seattle property will be about $0.04 dilutive to 2008 earnings. Third, we expect that the FASB will release new guidance on how restricted stock affects the weighted average share calculation. Previously, we have used the treasury stock method, which results in only a portion of restricted shares being included in the share count. Under the new rules, all restricted stock would be counted even on vested shares. That would have approximately a $0.02 impact on our 2008 FFO. Fourth, we expect our G&A costs to move up mainly based on stock-based compensation costs. One element of the 2008 compensation program has just been approved, with a documentation to be completed later this week. Since there are other aspects of the '08 program that haven't been finalized yet, we've assumed a quarterly 2008 run rate of $10 million to $10.5 million, up from $9.4 million in the fourth quarter. And finally, we've assumed that our average occupancy this year will be in a range of 92 to 93%. That's based on the likely industrial building vacancy I mentioned earlier, and our cautious expectation that the uncertainty that's prevalent in the economy will lengthen releasing cycle times and moderate occupancy levels this year. Taking all these assumptions together translates into our initial 2008 FFO guidance of $3.30 to $3.50 a share, with a midpoint of $3.40 a share. That's the latest news from here. Now we'll take your questions. Operator?

Thank you. (OPERATOR INSTRUCTIONS) Your first question comes from the line of Lou Taylor with Deutsche Bank. Please proceed.

Thanks. Good morning, guys. John, can you talk a little bit about the Del Mar purchase, just on a per buildable foot there? Looks like a pretty high number. A, how did you get comfortable with it, and B, is there more square footage you can build there?

Yes, it's a good question, Lou. We got comfortable with it on its own merits for the 500,000 square feet that it's entitled for, but interestingly, with working with the city and working with the homeowner groups, that may very well turn into a significantly larger project. Both groups, the city and the homeowners, are indicating they would like to see considerably more square footage built there. We underwrote it based upon the 500,000, and based upon where we think rents are and where they are going. So I want to say again, that on its own merits, it worked for us. At the lower end of the yield spectrum based upon current rents from what we traditionally got, but we think that moves up over time. What we're really encouraged about is that on 23 acres, and at the proximity it has to retail and to residential, as well as in the heart of the office market, with what the homeowners and the city is saying, we're cautiously optimistic that that could turn into something many multiples of what's currently entitled.

Okay. Thank you. And the second question just pertains to the occupancy ramp for the quarter. What were some of the deals that drove the ramp in Q4?

Well, we talked about it in the third quarter, the industrial building that we were working on, and we signed that lease and they moved in in the fourth quarter. It was about 144,000 square feet. That was the big, the big change.

Right, thank you.

You're welcome.

Your next question comes from the line of Michael Bilerman with Citi. Please proceed.

Yes, John (inaudible) is on the phone with me as well. John, maybe you can elaborate a little bit more on the Del Mar purchase and I guess with the land basis at 177, where would you expect your sort of total construction costs to be? Where are rents today, and sort of what would that pencil out in terms of the yield?

Okay. Well, total development costs, depending upon lease-up and so forth for that project, are estimated to be in the $600 range.

And where would -- where are rents today on a net basis?

Rents today, in that market, depending upon product, we are negotiating with somebody right now. We've just done a deal with somebody in the [mid 4s] in that market. So that would be [48 plus 6 is 54], less $8 for op costs. And that's for not as nice a product as we'll get developed there. We think rents move up pretty substantially over the next couple of years in that market. So based upon 500,000 square feet, if that's all we build, we think we're going to end up in the 8% plus return on costs and 100 to 125 basis points higher on a straight line. Again, it depends on the assumptions.

And then can you, the Rancho Bernardo project, I know you downsized that, as Jay Paul's already developing a multistory higher product and you're going to go more single two-story product. Can you talk about in terms of what your expected investment is now, how you foresee the timing of that project, and given your existing land basis, how you sort of see returns evolving?

Well, the -- we have a very low cost on that project, and depending upon the amount of square footage we build, you have a different set of assumptions. What we don't like -- what's going on in Rancho Bernardo now, with Jay Paul and a couple others, they build Class A buildings with parking structures and so forth, in anticipation of that market. That market's not nearly as strong as like the 56 or Del Mar for corporate users. You're not going to get attorneys, you're not going to get financial service firms and so forth out there. So we've rethought our strategy. Now, I want to say that we do have somebody that we're working with, and it's for somewhere in the neighborhood of 600,000 or 700,000 square feet that is interested in that site for some particular reasons. But we felt it more conservative to look at a lower density free of parking structure scenario, and in that case, our costs are somewhere in the neighborhood of early $400s as opposed to more like $600 when you end up with parking structures and all the rest.

And so you expect your yield--

And our yields, our yields based upon that are somewhere in the neighborhood of the mid 8s and the mid to high 9s on straight line.

And then just the last question, just on the two projects that are in lease-up. Can you talk a little bit about the negotiations that you're having there and how you see the leases for those assets going, given what's happening in your markets?

Yes, I think we're going to see a good year in leasing in San Diego based upon the deals that we're currently in serious negotiation on and the RFPs that we're getting for existing and (inaudible) projects under development. We have somewhere in the neighborhood of 500,000 square feet of pretty serious negotiations going on. Now, I want to caution everybody in this kind of a climate, you don't know that you're going to conclude those things or not until they happen. But they are real tenants in a diverse number of industries and that is -- when I say 500,000 feet, that encompasses both existing product we have that's vacant and projects that we have under development all in San Diego.

Okay, thank you.

You're welcome.

Your next question comes from the line of John Guinee with Stifel Nicolaus. Please proceed.

Well, John Guinee. I don't know who the other one was. Few quick questions. First, when you're quoting your GAAP and cash rollouts, are you quoting on a net rent or gross rent basis?

Well, both would be. This is Dick speaking, John. Both would be on a net rent basis on an NOI basis.

Okay, and throughout your supplemental, it's net rents, not gross rents?

Well, it depends on the market. In some markets, rents are quoted differently. I think in the supplemental, it's fair to say we state them with the way they are quoted in the market, but when we quote yields, we always deal with NOIs over development costs, fully loaded development costs.

Okay. Second quick question, in your land inventory, what projects are you expensing and what projects are you capitalizing, the interest carry?

Well, right now since all of our land projects are under active development prospects and since we're marketing all of them and planning and entitling all of them, we're capitalizing interest on each of them. Obviously if we stop those efforts on any project, we would stop GAAP loss.

The last question, John, to go from, on your Del Mar project to go from 177 for the land to 600 overall, what are you assuming your base building costs are and your structured parking costs are?

Yes, I misquoted that when I said early 600s. It's in the high 600s. The -- what was the question about building costs?

What -- are you building back--

You can back it out --

$90 or $150 a square foot, what are your core and [shell] costs and what are your structured parking costs?

Yes, it's going to be for that site, depending on how we execute it, we have the ability on that site to almost surface park it because of 23 acres. So it depends whether we go with structured parking and the amount of structured parking, but we haven't made that decision yet. We have a variety of alternatives and cost structures, again, depending on the parking scenario.

Okay, thank you.

You're welcome.

Your next question comes from the line of Michael Knott with Greenstreet Advisors. Please proceed.

Hey, guys. Just curious, your outlook for share buybacks. I know it's a question we've asked before, but given stock has continued to decline along with the REIT market, how do you view stock buyback opportunities when the implied cap rate on your portfolio is as high as 7 to 7.5?

We've obviously been in a blackout period, still are at the moment. But beyond that, I think obviously as we've said before, we've been very cautious about making sure we first preserve the integrity of our capital structure in this market. But we view the current environment for buybacks very favorably and we'll plan to look at that very carefully once our blackout ends.

Can you remind me if the board has currently authorized any buybacks?

We have just over 1 million shares authorized at the current moment. And in the past, we've always said that we would be happy to go back to our board if, when and if appropriate beyond that in support of that concept within the framework that I just discussed.

And then can you talk about what's going on in the I-15 market? Obviously you're below market occupancy there, and can you just talk about the prospects in that part of San Diego?

Yes, if you go to the north end for us, putting aside Rancho Bernardo, we have the -- what we call our Innovation corporate center, where we have the Scripps building underway and other buildings that are leased. We have the 103,000, I believe it is, in two buildings. We're trading some proposals back and forth on that building right now with a well-known, nationally known company. If you moved further south to our Kilroy Saber Springs project, where we have under construction 143,000 square-foot, six-story building. We have some very significant interest in that project. I can't speak much more to that. And fairly adjacent to that, or one building away, we have our two-story Saber Springs corporate center, where we have roughly 100,000 feet, which we announced last quarter that we had done a deal with General Atomics for 20,000 feet. We have a number of folks that we're dealing with for that project. It's a lower cost structure than the six-story.

If you move down to Del Mar, we may or may not have Paul Hastings leave and roughly 50,000 odd square feet. That market is very strong, as you know, and rents in that building are somewhere between 25 and 50% below current market on a triple-net basis. Don't know yet whether they are going to leave for sure. Have a number of prospects for that building. We have, if you move down the road to Sorrento Mesa, we're dealing with somebody in that market for the 50,000 odd square foot building we have on our lot 3. On the medical office building that we just started, we have been working with brokers for the past year on that project, and we feel very good about the multiple companies that are interested in that space. It's the only zoned medical office building in the greater neighborhood, and it's right on the freeway. And then if we go down to our Governor Park project, where Intuit moved out of 141,000 square feet, we have two companies that are trading proposals with us right now. And so we're enthused about the level of activity we have. We're enthused about the run rates that we are negotiating. We just got to ink them. As we said earlier, everything's taking longer. The good thing is in almost every project, we're dealing with more than one company.

Thank you.

You're welcome.

Your next question comes from the line of Mitch Germain with Banc of America Securities. Please proceed.

Good afternoon, everyone. Dick, if you take the current run rate and add in the couple different factors, the vacancy, the Seattle transaction, seems like you skewed toward the bottom end of the range. What brings you back up to the $3.43 to $3.50 range?

I think it would be better occupancy than we would expect and somewhat better, just about -- it's sensitivity on slightly better everything else 00 but the main variable I think in our expectation would be occupancy.

Great, and you said that tenant is still occupying the asset, is that correct?

Yes, and it's not only that. I think it's the releasing cycle times. I think we all expect them to continue to be affected by the uncertainty that's so prevalent in the macro economy. That is consistent feedback we're getting back from everybody we're talking to. I guess for a lack of better word, the angst about the economy.

Have you seen a slowdown in demand, or is it just more or less the cycle?

No, not at all. As John mentioned, that's sort of the paradox. We're as busy as we have been in a long time with discussions. It's just that the, the -- there is a distinct ambivalence when people look at their actual space needs, it's very encouraging to us. When we then go through the actual discussion, there is the overall macro angst, as I say, and as John mentioned earlier. I think that's the only minus where we run into in these discussions. And in the good news is in the fourth quarter, we came in at the high end of where we expected to be and we, I think we had some hope that maybe the angst passes as the year develops. It's still there right now, though.

Great. Thanks a lot, guys.

You have a follow-up question from the line of Michael Bilerman with Citi. Please proceed.

Just two follow-ups. I know transaction activity has been scant around your markets, but can you make any comment as to cap rates, and what you're seeing, how are things being underwritten?

We don't see a whole lot of things being traded right now, Michael, so the database, I guess you would say is pretty scant. I don't know what you can make from it. I know that we have quite a few users that would love to buy buildings at pretty nice prices. So I can't speak to the investment community, but we certainly read a lot about the lack of financing and so forth for some of the companies that have been big buyers. But we haven't seen that transcend into a significant increase in cap rates.

Right.

Everybody says it may happen. We're not going to debate that. We're not clairvoyant. If we were, we would know exactly what to do each and every day, but we haven't seen it happen.

And, Dick, can you just comment on the G&A and maybe drill down a little bit into the components. If you look at the '07 plan in terms of the contribution to the G&A, if I recall, it was about $0.56 for the year, and then it was going to be about $0.25 impact to '08. And so I guess now you have an '08 plan that has some additional contribution on top of just your normal G&A. And maybe you can just sort of help us put some boxes around how you think about overall G&A and compensation levels.

Well, I guess -- I'm a little reluctant to go too far into it simply because the feedback we've gotten so far is that we have a range of the way that things might, things might be approved. As I said earlier, there is -- there are other discretionary evaluations that are taking place as to what the structure might be. So I'm a little reluctant, just a little fearful that it might be premature. What we've done is we've taken a range of estimates as to what we think the way all -- everything should, could come out, and that's the way we did the bandwidth. We expected it based on everything we know now to be there, but I guess I'm just a little reluctant because there's a fair amount of if-then with different alternatives. I think we'll know a lot more in three months and be able to walk through it in detail.

How different is the '08 plan versus '07? I mean how is it -- is there major differences of how you've approached compensation, and I guess I'm just trying to step back and trying to -- your overall G&A continues to rise and I'm just trying to understand the different components that are factoring into it and what's really driving that increase.

I think it would be premature to answer that [in scale] other than to say that we expect it to be primarily, or essentially a stock-based compensation system, which is essentially what we've had. And I think some of those decisions are, as to the exact -- that would answer your question have not been definitively made yet.

Maybe you can just clarify then on the '07 plan what the allocation was for '07? And then what's embedded into your '08 numbers so that at least we can get a sense of what your normal executive, corporate G&A, and the executive LTIP from '07 and its impact to the year. You had previously talked about $0.56 in '07 and then that same plan contributing $0.25 in '08.

I recall.

And I was trying to make sure those numbers are still relevant or not.

I believe they are. Let us just confirm that to the -- as far as I know, nothing there has changed. I would point out that obviously those numbers are -- just the way GAAP works is that we're costing out stock in those numbers that, if I recall correctly, $88 a share and obviously just the way it works, you lock in an assumed cost structure at the time that, that the plans are approved. So the -- obviously the actual value of that stock today is considerably lower, not just a little more than half.

Does that get adjusted for in any way when the stock vests and delivers?

No, no, no. Once you start with GAAP, you keep using the numbers when it was approved.

Okay. If we can follow up just to make sure that we're understanding the--

I believe that the, I believe that nothing has changed from those assumptions, but we'll confirm that for you.

Okay. Thank you.

(OPERATOR INSTRUCTIONS) Your next question comes from the line of Steve Benyik with Credit Suisse. Please proceed.

Hi, guys. I was hoping to just get more detail on the tenant in Orange County industrial, whether the financial difficulties that they are experiencing will probably turn out to be an isolated event or kind of a sign of future weakness in the market.

I think that's the $64 question. $64,000 question. The -- at least so far, that is an isolated incident. I think that you see our numbers for the fourth quarter -- we took a slightly higher debt, bad debt provision and that was just in the, since we had learned of this difficulty right at year end, beginning of this year. And I think that that's something that we have and we obviously have redoubled our efforts on our tenant watch list. We, just as anybody else, would have a watch list, et cetera. That is the only significant instance we have seen so far and we're obviously watching that very, very closely. The way we look at it is that we try to maintain the best relationships we possibly can with tenants.

We have -- as those of who you cover us know, we have our people distributed throughout Southern California in offices that are right next to tenants so that we can be very sensitive to the tenants' needs and market to our customers with service and our market knowledge. But also we are very aware that, contrasted with the residential business, where people have to write a check every month, it takes a discretionary act for a tenant not to send a check.

So generally we'll get advanced notices, as in this case we did -- the tenant was very courteous and let us know they were having some difficulty and we've been in constant contact with them. But some -- once in a while, you do just fail to get a check and it's one of those things. The day, the day or two you don't receive it at the beginning of the month, you know you have a problem and you have an instantaneous reaction. I know that's more nonspecific color, but at least so far the only instance of note that we have is that one tenant.

Are you factoring in a lease term fee for that tenant or other tenants in the '08 guidance?

No. Our expectation would be that if they have financial difficulty and we would obviously pursue our remedies to the extent that we have them, and it goes without saying, but to be conservative for the moment, we've assumed that we won't get any more rent.

From that tenant, or any other in '08?

Right.

In terms of lease term fees.

Yes, thank you, correct.

And then just development starts or capitalized interest, can you provide further details on that in '08?

In terms of -- our overall outlook on that, and that's a good question, in this economy we're ready, willing and able and we're proceeding with all of our planning efforts because obviously you -- sometimes you can be affected and not have the ability to start for many months if you don't keep those efforts up. But at the same time, we, I think the way we look at the development starts is, I think as John alluded to in his remarks, we will look at development starts on an incremental basis based on the feedback we get from the market in terms of solid leasing prospects and/or preleasing.

It's not to say it's an absolute requirement that would have to have X% leasing done for anything, but we obviously, in this kind of an economy with this sort of uncertainty, aren't planning to start more inventory or space. The medical office building in the fourth quarter was a very isolated circumstance. Based on the unique zoning that John mentioned for that project and that market, and the encouraging response we've had from tenants. And its small size, of course. But beyond that, I think we're just going to let the market tell us its share about the development starts.

That's the only development start you have factored into the guidance?

That one was started just at the end of '07. But for the moment we don't have any other development starts. We're planning this year -- that doesn't at all mean that we're not ready, willing and able to do that, but it's just given the nature of the uncertainty and the economy, we just think it's prudent to say we don't have anything official planned yet.

Thank you, guys.

You have a follow-up question from the line of Michael Knott with Greenstreet Advisors. Please proceed.

Dick, can you give us an update on the Von Karman conversion process?

Sure, yes. Good question. The zoning on that project continues to be, the process continues to be quite sluggish. We don't know -- we don't know of any reason so far that would cause us to be, to rethink our ultimate, our ultimate success in that effort. On the other hand, I guess given the nature of the process, I suppose I should underline ultimate. We have assumed conservatively for the moment that we don't have that as a disposition for the year and that the building remains as is, a vacant building affecting our occupancy with a goose egg in it for the whole year. We obviously, still having said that, working actively and aggressively with the city to perfect the rezoning, and obviously in this market, we have -- although we've tried to preserve our options throughout, to use either condominium or apartment product there. Obviously the expectation would be that that would be an apartment site in any kind of an economic conditions we expect in the near term.

And can you break out between, I guess zoning-related and market-related challenges at that site? Obviously the process has gone a little slower than when you first mentioned it, I think a year ago or maybe two years ago.

Yes, this is John. What disrupted the process, as I understand it from our people to begin with, is that there are areas within the greater industrial complex. You know it well. You're down in that area, in which certain industries were against seeing apartments or condos, any residential use being dealt with. We are not in that area, but the city imposed a more rigorous EIR process than had first been contemplated and that ended -- that added well over a year to the process. The other thing that's been going on is the city is just slower than molasses, slower than we advised -- we have a consultant that has been pushing this thing for us who is well known in that marketplace doing business with the city on this kind of conversion.

So we've gotten both in a bureaucracy queue as well as the bigger issue of wanting to make sure that we had an EIR that was bullet proof. So those are the two primary things that have held it up. From a market standpoint, we still have folks in the apartment business that are approaching us that would like to buy the site, contingent upon the zoning. Our belief has been that we are better off to be free to negotiate with multiple players once we have the zoning. We think that that produces a better result for our shareholders.

Do you think it's an '09 event when all of this is resolved and maybe you can enter into an agreement?

Well, Michael, I would have, from everything that we are being told by our consultant, lawyers, and our people, I would have assumed that this would have happened by now. Right now we're just reluctant to put a date on it because it's forces that we don't control. We're we're pushing as hard as we can. It's a relatively small project. As you know, the scale of things in Orange County, but we're just keeping our fingers crossed and pushing hard to get it accomplished as soon as we possibly can. If we can get it done this year, that would be great. But for me to say it's absolutely going to be '09 or '08, I'm reluctant to say that. I would suspect that we get this thing resolved this year, but I suspected that we would have gotten it resolved last year and I was wrong.

Okay, and then my last question, also in Orange County industrial, I thought you had said last quarter you guys were close to tidying up a lease on the Main Street property, but it still shows vacant. What's the update there?

Yes, they leased the space and they are moving in this quarter.

Okay, thanks.

And occupancy, just -- it got delayed a little bit with the tenant improvements. That's all.

You have a follow-up question from the line of Lou Taylor with Deutsche Bank. Please proceed.

Thanks. Dick, I want to go back to the G&A question from Michael Bilerman earlier, maybe asked a different way. When you look at your G&A, looks like it's going to double from '06 to '08 roughly. On a percentage basis, how much of that is coming from kind of normal growth in G&A, and how much of it's coming from the comp plan, or plans?

I think -- Lou, I think that if you went back, I think '06 was abnormally low, only because that was the oddball year where the compensation year didn't get approved for the year until almost the end of the third quarter. So I think if you looked over a different span of years, I think the answer to your question is '06 was quite abnormally low. I think that that's the best to my recollection on that.

Okay, but in terms of, in terms of the growth in G&A, maybe pick a little bit different number. I mean how much is it coming from just growth in normal G&A? How much is it coming from maybe a different comp versus different comp year versus, you know, growth in the long-term comp plans?

Well, I guess would have to, I would have to go back and since we're dealing with ranges here, and we have that anomaly I just mentioned, I would have to go back. I don't have an off the top of my head answer to your question.

Thank you.

You have a follow-up question from the line of John Guinee with Stifel Nicolaus. Please proceed.

Hi, couple quick questions. On Von Karman, how many acres is that site and what sort of density are you trying to attain?

It's 8.51 net acres, and in terms of density for, what, the apartments, is that your question?

Yes.

It is roughly 450 apartments.

And fair market value for apartment sites, $40,000 a unit in this day and age?

Can't -- we're unwilling to say what the prices are right now because we are -- we've had various quotes, anywhere from the $30 million to $45 million range for the properties subject to zoning. Don't know if those numbers still hold or not.

Okay, and then the second question, John, your typical five-story product, just to get a sense of the building a development budget, is the core and shell, excluding TI, is that costing you $100 or $120 or $140 a square foot these days?

I would be happy to do a follow-up with you, but we include in our cost structure, we look at different -- we have a very detailed matrix that we go through that may not exactly be the same boxes that you would look at. We're happy to walk you through that in detail.

Great, okay. Thanks a lot.

You have a follow-up question from the line of Mitch Germain with Banc of America Securities. Please proceed.

Just to confirm, you said that the 47,000 square foot industrial site was going to be occupied this quarter?

That's right. They are moving in in March, I believe.

So net-net, if we do lose the [150], we gain the 47,000 or so?

That's correct.

Okay, thanks.

And they are also -- we leased a 90,000-square foot building in San Diego a quarter or so ago and they will also be moving in in the first quarter.

Great, thank you very much.

Which we've already talked about.

Yes, thanks.

At this time, there are no further questions. I would now like to turn the call back over to Mr. Richard Moran for closing remarks.

Thank you all very much for your time and your interest in KRC. We'll talk to you next quarter.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect, and have a good day.