Kilroy Realty Corp (KRC) 2009 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth quarter 2009 Kilroy Realty Corp earnings conference call. My name is Josh and I will be your coordinator for today. At this time all participants are in a listen-only mode. We will be facilitating a question and answer session towards the end of this conference. (Operator Instructions)

I would now like to turn the presentation over to our host for today's call, the Chief Financial Officer, Tyler Rose, you may proceed, sir.

Good morning, everyone. Thank you for joining us. With me today are John Kilroy, our CEO, Jeff Hawken, our COO, Heidi Roth, our Controller and Michelle Ngo, our Treasurer. At the outset I need to say 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 telecasted live on our website and will be available for replay for the next ten days both by phone and over the internet. Our press release and supplemental package have been filed in a Form 8K with the SEC and both are also available on our website. John will start the call with an overview of the quarter and our key markets, I will accent financial highlights and our initial earnings guidance for 2010. Then, we'll be happy to take your questions. John.

Thanks, Tyler. Hello, everyone. Thank you for joining us today. As we reported yesterday, we ended the year with some excellent leasing results. We delivered one of the strongest quarterly leasing performances we posted as a public company executing more than 1.1 million square feet of new or renewing leases in just three months. That number exceeded our results for the first three quarters of the year combined and boosted our total executed leases for all of 2009 to 2 million square feet.

The fourth quarter activity was deep and broad based, reaching into pretty much every corner of our portfolio. The deal split about half and half between office and industrial, and about half and half between new and renewal leases. In 53 total transactions, they include some large leases as well as a substantial number of smaller ones, our average office lease was 14,000 square feet, and our average industrial was 45,000 square feet. Overall we converted every LOI outstanding going into the fourth quarter into an executed lease.

In more good news, the leasing pace has continued into the new year. Through the first four weeks of 2010 we have signed leases totaling 122,000 square feet and have letters of intended place on additional 200,000 square feet. As we have discussed previously, we think this leasing success has more to do with the quality of our markets and portfolio combined with our balance sheet strength and long-term operating philosophy than with a definitive change in overall market conditions. Certainly the economic outlook has improved and companies are moving to capitalize on favorable terms, but historically any sustained improvement in commercial real estate markets is preceded by job growth which we haven't yet seen in our markets.

In addition, potential tenants are negotiating hard on new leases even in the best markets. This is evident in overall rental rate trends. Across the 1.1 million square feet of leases we signed in the period, average rents declined 4% on a GAAP basis and 15% on a cash basis. This is in line with what we are seeing in our marketing in general. So while we're delighted to report that we have out performed the market and increased our capture rate of current demand, we're not ready yet to forecast that a sustainable recovery has started.

We believe that 2010 is likely to be a choppy period for Southern California real estate markets. Given that our number one Company priority will continue to be our leasing of our vacant space and renewing our expirations. At the same time we continue to position the Company to take advantage of potential opportunities to expand our portfolio. It is difficult to predict with any certainty when or where those opportunities may occur, but at this point in the cycle we believe attractive acquisitions over the next couple of years are a distinct possibility and we are prepared to act under the right conditions. We also continue to focus on enhancing the entitlement of our existing land pipeline, preparing for the time when develop will again be economically attractive.

With that as a back drop, let's review our individual markets and our fourth quarter activity beginning in San Diego. As you all know, the region has been challenging for us over the last year. Our year end occupancy here was approximately 77%. The good news is that we had a significant amount of leasing success in San Diego during the fourth quarter and are off to a good start in 2010. Overall we executed lease in San Diego during the fourth quarter on 281,000 square feet of space, signing or renewing leases with such names as Hitachi, Fair Isaac, Foley Lardner, and ID Analytics. We now have leases in place for almost half of the space previously occupied by accredited home lenders along I-15 and two-thirds of the property vacated by Paul Hastings in Del Mar. In addition, in the first quarter we signed leases with Samsung for 50% of the Sorrento Gateway lot three office project and surgery center for 25% of the Sorrento Gateway lot one medical office building.

Adjusting for new leases and letters of intent we're now 85% committed in San Diego. The individual San Diego submarket vacancy rates and occupancy rates are as follows starting in Del Mar. Current direct vacancy is approximately 17.5% and total vacancy is 21.6%. Our stabilized properties in Del Mar are 94% occupied and 96% leased. South of Del Mar and Sorrento Mesa, KRC competes in the two and three-story office product. Direct vacancy for this product type is currently 12.9% and total vacancy is 15.4%. Our stabilized properties in the submarket total approximately 2 million square feet and are currently 74% occupied and with our recent leasing success, 79% leased. Further south in the UTC Governor Park submarket, we compete in the same two-story product type with properties totaling 431,000 square feet. Current direct vacancy is about 11.4% and total vacancy is 18.2%. Our occupancy rate is 55% although we have a letter of intent in place that would bring our Company or rather our occupancy into this submarket to 88%. Along the I-15 corridor east of Del Mar, KRC owns approximately 1.2 million square feet of stabilized office space. The two story product type here has a current direct vacancy rate of 12.4% and total vacancy of 13.5%. For Class A product, direct vacancy is 36.3% and total vacancy is 37.4% although our Class A properties are 97% occupied. In total along I-15 our stabilized properties are 67% occupied and with recent transactions 82% leased.

Now let's move north to Orange County where we have about 3.5 million square feet of industrial space. Industrial vacancy rates here have not risen as dramatically as office rates, but demand continues to be affected by the economy. The overall Orange County industrial vacancy rate was 5.8% while our properties were 88% occupied at year end. During the fourth quarter we made significant progress in our Orange County leasing efforts signing leases for over 550,000 square feet, adjusting for new leases and letters of intent we are now 92% committed in Orange County. Further north in Los Angeles our overall occupancy office rate declined slightly to 88%, but as with San Diego and Orange County, we also made leasing progress here during the fourth quarter. We signed approximately 273,000 square feet of leases in 29 separate transactions. This included leases with E-entertainment, Fandango, Shopzilla, and Internet Brands.

On the submarket perspective, El Segundo and Long Beach continued to perform well. Kilroy Airport Center Long Beach, our seven building campus immediately adjacent to the Long Beach airport is currently 93% occupied and leased. Overall Class A direct vacancy here is 13.7% and total vacancy is 16.1%. In El Segundo our stabilized properties now total 1.3 million square feet. Or 97% occupied and leased. Class A direct vacancy in El Segundo is currently 12.4% and total vacancy is 14%. Further north in West LA, our properties total 680,000 square feet, or 81% occupied and 90% leased. Overall direct vacancy in West LA is currently 14% and total vacancy is 19%. Finally, along the 101 corridor market which runs through northern Los Angeles and southern Ventura counties direct vacancy in a Class A product is currently 21.6% and total vacancy is 28.4%. Our properties in the market currently are 79% occupied and 80% leased. Adjusting for new leases and letters of intent, we are now 92% committed in Los Angeles. That's an update on our market conditions and activity.

In summary 2009 was a very difficult year that provided mixed signals to companies thinking about making facility commitments. Notwithstanding that we're very encouraged by our capture rate and the absolute level of leasing we achieved in the fourth quarter. It is difficult to provide clarity on where the markets go from here. Rents have declined, but seem to be stabilizing at current levels. An increasing number of companies have begun to make facility decisions and some are expanding. But fundamentals in our markets remain less than robust. We see 2010 as another challenging year continuing to favor high quality landlords with quality assets in quality markets. In that context our focus will be to build on our strong fourth quarter leasing momentum throughout this year. Now, Tyler will cover the financial results.

Thanks, John. FFO was $0.39 per share in the fourth quarter and $2.60 for the year. Included in the fourth quarter FFO was a cap gain of $0.04 a share related to the repurchase of $122 million of our convertible debt. We paid $115 million for the $122 million face amount of debt or an average of about $0.94 on the dollar. Also included in our fourth quarter G&A cost is a one time $0.17 charge related to supplemental payment. Occupancy in our stabilized portfolio was 82.8% of the end of the fourth quarter compared to 82.5% at the end of the third quarter and 89.2% at year end 2008. Our product type industrial occupancy rose to 88.2% at year end, from 84.6% at the end of the third quarter. Office occupancy slipped to 80.6% from 81.6% at the end of the third quarter. Same store NOI in the fourth quarter was down 8.8% on a GAAP basis and 11% on a cash basis. That decline largely reflects our lower occupancy.

For the full year NOI was down 9.2% on a GAAP basis and 12.1% on a cash basis. Office rents increased 22% on a GAAP basis and 7% on a cash basis for leases that commenced during the fourth quarter while industrial rents were down 8% on a GAAP basis and 18.6% on a cash basis. For the year office rents increased 15% on a GAAP basis and 6.5% on a cash basis. Industrial rents were up 9% on a GAAP basis and down 5.4% on a cash basis. For leases signed during the fourth quarter, office rents decreased 1% on a GAAP basis and 13% on a cash basis while industrial rents were 17% lower on a GAAP basis and 23% lower on a cash basis.

From a regional perspective the rents on leases we signed in Los Angeles were up 6% on a GAAP basis and were flat on a cash basis. Rents in Orange County were down 17% on GAAP basis and 23% on a cash basis and in San Diego rents on leases we signed during the quarter were down 11% on a GAAP basis and 29% on a cash basis. Although it is difficult to make estimates about market rents, given our fourth quarter leasing experience we estimate that rent levels in our overall portfolio are approximately 5% to 10% over market.

Following the significant volume of leasing we accomplished in the fourth quarter, we reduced our 2010 lease expirations to 1.1 million square feet, about 22% of that is industrial and 78% is office. The office expiration included 286,000 square foot Boeing lease in El Segundo as we discussed last quarter we plan to significantly modernize and upgrade this building when the lease expires at the end of July. During the fourth quarter we transferred our one remaining lease up property a 51,000 square foot medical office building into our stabilized portfolio. As John mentioned, this building is now 25% leased.

Turning to the balance sheet, during the fourth quarter we completed a $173 million convertible debt offering. The notes mature in 2014 and have an interest rate of 4.25%. The non cash rate is 7.8% for GAAP purposes. We used approximately half the proceeds to pay down our credit line and the other half to repurchase a portion of outstanding convertible debt. We're also working on a new $71 million mortgage on a group of five office properties. The mortgage will have an interest rate of 6.51% and a seven year term. We will repay the $63 million mortgage due in April with the proceeds. At the end of the year we had $97 million outstanding on our $550 million credit line. We also gave notice to our bank group that we will exercise our option to extend the credit line to April 2011.

Now let me finish with 2010 earnings guidance. Given the numerous uncertainties in today's economy we remain cautious in our near term outlook. I must also caution that our internal forecasting and guidance reflects information and market intelligence as we know it today. Significant shifts in the economy and our markets going forward could have a meaningful impact on our results that we have not currently reflected in our analysis. Taking these caveats into consideration, our assumptions are as follows. Average occupancy of 84.5%, no acquisitions or dispositions, average LIBOR on our floating rate debt of 50 basis points, G&A costs of $28.5 million, which includes $0.03 a share of acquisition related evaluation expenses, refinancing of the 7.2% $63 million mortgage (inaudible) the 6.51% $71 million mortgage I mentioned earlier. And the continuation of our dividend at the current level of $1.40 a share. Taking all of these assumptions together, our initial 2010 FFO guidance is $2.10 to $2.30 a share. That's the latest news from KRC. Now we will be happy to take your questions. Operator?

(Operator Instructions) Our first question comes from the line of Erin Aslakson from Stifel. Erin, you may proceed.

Good afternoon. How are you?

Thank you.

Good morning, sorry. Thank you for taking my questions. The first question we had was related to capitalizing the interest expense. You haven't had that much under development at all, and we're wondering when do you actually plan to begin developing some of this land that's being capitalized and has been capitalized?

On the capitalization front we're capitalizing our Del Mar project as we work to reentitle that, and besides that there is only one other project where we're finishing up on some entitlement work. We're not capitalizing on any other piece of land.

So the Del Mar project and the Santa Fe Summit.

Correct.

And do you have a timeline for any of that (multiple speakers)?

In terms of development?

Yes.

Well, the entitlement -- this is John Kilroy speaking. The entitlement efforts at San Diego Corporate Center, the property in Del Mar, are going to go on for another year plus. That's just the nature of the beast, and Santa Fe Summit, I don't have that in my head, but one of the things we're doing at Santa Fe Summit is we have a medical group that wants us to do a long-term build to suit and we're having to go through a reentitlement effort on a portion of that property.

Just to clarify that in terms of the forecasted 2010 numbers, we assume we stopped capitalizing on Santa Fe Summit at the end of the first quarter.

Okay. I was wondering about that. So stopped Santa Fe Summit at the end of first quarter.

Yes.

Our next question comes from the line of Michael Bilerman, Citi. Michael, you may proceed.

Thank you. Can you just go over a little bit more on the 1.1 million square feet of leasing, was any of that included in the 4Q commencements of 500,000 or all of that is incremental?

Of the 1.1 million square feet that we leased in the fourth quarter, about 22% of that or 250,000 square feet commenced in the fourth quarter.

And so the remaining is all further out?

Remainder is in 2010, about 375,000 in the first quarter, about 100,000 in the second quarter and about 400,000 in the third quarter.

That's in terms of when they commence?

Correct.

And then how much of that you talked about being new in renewal. The renewal leasing, was that 2010 expirees or were those further out in terms of expirations you renewed early?

The renewals that we did in the fourth quarter were a mix of that. It was some renewals in the fourth quarter and some renewals in 2010. The bulk of it was 2010 renewals.

So most of this 1.1 million square feet represented -- either represented vacant space or 2010 expirees, there was nothing further out in '11, '12 or '13 that you pushed out?

No.

Okay and then when you talked about the leasing, the spreads, down 4%, down 15% on a cash basis, that was in relation to the 1.1 million in total?

Correct.

Second question was just to go a little bit on G&A. Can you talk a little bit about what drove the higher than expected G&A than you were expecting in the fourth quarter? Is it effectively tied to the excess leasing that you did that goes back to the 2009 bonus plan?

Yes, the 2009 bonus plan has various metrics associated with it, one of which was leasing, and when we forecasted our numbers at the end of the third quarter, we didn't anticipate the level of leasing that we would achieve, and what happened was based on those metrics the incentive compensation across the Company was up about $2.5 million or so related to the increase in leasing during the fourth quarter. So that overall incentive compensation is down about 63% from last year, but versus our third quarter forecast it is up about $2.5 million or so.

And then when you're saying incentive comp down 63%, if we were to break out the cash and the stock comp in 2009 versus 2008, and I recognize some of the stock comp is previous year comp plans that also probably have stock price grants that were much higher and so you're accruing stock expense at a much higher rate, but let's put that aside. But if you were to look at 2008 versus 2009 and we strip out severance charge the cash comp was about $21 million versus $22 million last year and the stock comp was about $12 million versus $15 million last year, so total G&A is about $33 million versus $37 million. So I am just trying to break out your 60% number in relation to what?

The total awards that were granted in 2008 not was expensed, but in terms of the awards that were granted that some were expensed in 2008 and some were amortized over the next three years, and versus what was granted in 2009, again some were expensed in 2009 and some were amortized in the future, but the total award that was down 63%.

And that was when we look back to the original 2009 8-K from early 2009, it talked about the awards being set about 60%. So if you're saying it was down 63%, does that effectively mean that everyone hit the max award?

No, no one hit the max award.

And then can you break out, you talked about $28.5 million for 2010. Can you break that out between stock and cash and how much of that includes deferral from last year?

Well, in the $28.5 million, the share based comp from prior years is about $4.5 million in that number. As I mentioned we have $1.5 million still of acquisition costs we haven't had previously, so I don't know if that answers your question. But it is about $4.5 million of share based comp from prior year plan in that number.

Of a total of how much? So like if it was $12 million in 2009, you have $4.5 million from prior years.

I am not sure where you're getting your $12 million from. In the 2009 number prior year costs were about $9 million or so. (technical difficulty) prior-year plans. That doesn't include what was [granted].

Prior year plans. I was saying the total stock comp in the 2008 --

Yes. Prior year plus 2009 is about $12 million. In 2010 prior year plus what we estimate for 2010's plan is about $6 million. So it's down about $6 million which is what we said on last quarter which we said consistently over the last several quarters.

And our next question comes from the line of Anar Ismailov of Gem Realtors. Anar you may proceed.

Hi this Anar from Gem Realty. Couple quick questions. The $5 million termination fee, which tenant is this associated with?

Are you talking about the fee from last year in 2008?

I'm talking about the $5 million termination -- it's last year. Okay. Never mind that one. The other question is what is the status of the DeVry lease in Long Beach.

This is Jeff. The lease of DeVry is scheduled to expire later this year. I believe it is September 30th. That's the current status as we speak.

Do you know their intentions to renew, move out?

Their intention is to go to a different site, downsize about half of that current space and so that's the plan they're on right now.

Got it and last question, what is the status of the Intuit lease at your Governor Park property?

We have a letter of intent on that building for the entirety of it. Sorry, the former. I was speaking of the former Intuit building under 41,000 square feet. The 75,000 square feet they're in?

Yes. They extended that for a couple years.

[Extended]. Okay. Thank you very much.

What Jeff said is they extended that for a couple years.

Our next question comes from the line of Chris [Catten] from Morgan Stanley. Chris, you may proceed.

Thank you. My question is around the occupancy guidance you gave, 84.5%. Do you see it at what is it, 83% now, 82.5%, and what's driving the increase here? Is that based on leases you have already signed or incremental new leases you think you may sign? Can you provide some additional commentary around that?

Yes. It is a combination of all of that. We hope to do more leasing obviously in 2010. We just did a bunch of leasing in 2009 that's going to come into play, but we also have expirations in 2010 that we'll need to deal with and we're not going to renew all those. So combine all of that together and we're estimating average occupancy of 84.5%. As I mentioned earlier some of the fourth quarter leasing doesn't come in until the third quarter of 2010. So from an average perspective it won't hit the numbers until the third quarter.

That's helpful. I guess the follow-up question is that it sounds like there are some leases to be commenced that have some writedowns in rate. How would you characterize the negotiations with expiring tenants? Are they just really pushing for rate? Is it move out of real tenable situation, or that type of comment?

This is Jeff. Obviously the tenants have been negotiating very hard on all leases, whether it is renewing or new space. They're very focused on the bottom line. They're looking as they compare renewing versus moving, what the cost of that would be. Again, we're very well-positioned with our assets and location and have a leg up on our competition where tenants want to stay, but they're focused very much on the bottom line.

The other thing they're very focused on, this is John speaking, is that there is quite a movement by tenants in their tenant rep brokers right now to take advantage of favorable economics to try to lock in more favorable economics for a longer term. There is a movement towards quality. There is certainly a movement; what we're seeing very strongly is a movement towards certainty. So while they're looking at value all around, they're also looking at certainty of their landlord and that sort of thing, and that's what's driving decisions right now.

Our next question comes from the line of Michael Knott of Green Street Advisors. You may proceed. Michael, your line is open. You may proceed.

Hello. Can you hear me?

We can hear you now.

This is [Enrique Torres] on behalf of Michael. Question about -- during the call last time you mentioned that San Diego kind of had seen a bottom, but LA was still struggling. If I look at the signed leases, it seems rents are rolling down more than on the signed leases versus the commence. So can you give a little more color on what you're seeing in the San Diego and LA markets and if rents have bottomed there and are they kind of bouncing back a little or do they still have some more room to fall?

This is Jeff. I think as we talked earlier in this call the rent decline was less than the first three quarters and we're seeing a little bit more in the fourth quarter. I would characterize it as there is still downward pressure in certain markets, certain buildings, but I think we sort of have seen hopefully near the bottom of that. Again, as I said earlier there is a lot of pressure on negotiated leases, tenants are pushing very hard to get the best deal they can, but it seems like we're probably at the lower end of that range.

Are you seeing San Diego have more momentum right now than LA in terms of activity?

That's a tough one. This is John speaking. Tough one to answer. What we have seen for Kilroy is our -- that at the level of activity in San Diego has picked up dramatically from a year ago. That's reflected both in the leasing results we've had here particularly in the fourth quarter and early in this 2010 as well as in the transactions that we have under negotiation. So we have seen a significant increase in people willing to make decisions in San Diego. We've seen a significant increase in folks wanting to take advantage of the market, but by no means are we in a robust market in any of the submarkets in which we operate.

Okay. And then just one quick follow-up. If I look at the property list, what's in the supplemental that we see 16 properties that are currently vacant in San Diego out of your portfolio. Can you give me an idea of what this looks like pro forma for all the leasing activity that has not yet commenced? About how many of the assets of ones that are currently vacant are you seeing activity or that leases were signed at those properties?

Tyler, I know in the remarks we were talking about the occupancy of 77% in San Diego, and based on the leasing we have done that number moved up to 80%, 85%.

In terms of the number of buildings, I would have to go back and count them up, but we can do that off line at some point for you.

Which is -- were you seeing a lot of activity in the empty buildings or are you just kind of also just feeling more occupancy, more assets that are currently occupied?

We're seeing -- this is John. We're seeing both. We've been able to renew folks. We've been able to lease existing vacant space. And the demand that we're seeing right now is principally for buildings that are currently vacant.

Okay. That's helpful. Thank you.

Our next question comes from the line of George Auerbach from ISI Group. You may proceed.

Good afternoon. Of the office leases, I am sorry, of the leases signed in the fourth quarter, which did not yet commence, what percentage were office leases?

Hold on one second. That did not yet commence?

Yes.

Well, only of all those leases that commenced -- of all the 1.1 million square feet, only 39,000 square feet of that was office leases that commenced in the fourth quarter.

Okay. And, Tyler, you quoted rent rolldown of 13% on those office leases that are signed, but didn't commence. Can you give us an idea where net rents are on those leases and also what the capital costs were on a per square foot per year basis?

Well, on the capital cost question I haven't calculated the per year analysis, but the average office CI for the leasing we did in the fourth quarter was about an average of $27 a foot. That breaks out between renewal and release in the various counties, but it is about $27 a foot on average for both renewal and release. Your first question was again?

Just trying to quantify the net rents in LA and San Diego on these new leases.

It ranges all over the place because you have got some triple net buildings, you have full service gross buildings and different two story and four story. I am not sure we really have an average rent number that we're prepared to give out.

Okay. And, John, you mentioned some just overall market weakness. What's your outlook for the direction of net effective rents in 2010 in office?

Well, as Jeff said, we think our portfolio right now is somewhere between 5% and 10% over market in terms of what the rents we're seeing right now. We also feel that rents have begun to stabilize. I have to say that every time we look at the Wall Street journal or turn our computer and see what's coming out of Washington or what's coming out of the rest of the world, it changes the views of decision makers and that has a often a direct impact, or at least a significant impact, on what demand is and therefore what rentals are going to be and so forth. I don't mean to be cute here. It is just that the crystal ball is not nearly as clear as it would be later in the cycle, and I think this is one of those periods where that where you just have got to meet the market. We try to do better than the market. The rents we're seeing right now we think, we certainly hope, are near the bottom, but I have learned a long time ago that if I had absolute certainty with regard to that, I would be in a different business.

Right. And finally, on the 325,000 square feet of leases signed and LOIs in the first quarter, how much of that activity is net new absorption to your portfolio compared to renewals and also can you give us an idea of what the breakout is office versus industrial?

On the leases signed it is pretty much all office. In terms of new and renewal on that space, it is about 30% renewal and 70% office or so. On the LOIs -- joint venture the LOIs. Do you have the LOIs?

On the LOIs it is predominantly office and most of it is new space versus renewal meaning currently vacant space.

Correct.

(Operator Instructions) Our next question comes from the line of Robert Salisbury from UBS. Robert, you may proceed.

Hi, how is it going? I was just wondering what the total current pipeline is for signed LOIs in square footage terms?

LOIs right now is about 200,000 square feet.

Okay. And also are -- you talked about DeVry lease and you aren't sure what's going on there yet, but I am wondering if you guys did have visibility on the other big planned move ins or move outs during the next several quarters?

In terms of our other expirations, we have 1.1 million expiring in 2010, 400,000 of that is Boeing and DeVry so it brings it down to 700,000 square feet. We don't have anything over 100,000 square feet in that category. So there is really nothing significant in that bucket. It is a lot of smaller deals.

All right. That's it for me. Thanks.

Our next question comes from the line of Mitch Germain from JMP securities. You may proceed.

Good morning. Just some background details on the types of customers that are in the market right now for space.

Jeff, do you want to take it?

It is pretty broad brush across the portfolio. It is financial. It is entertainment, software, some defense, it is pretty diverse.

Great. Thanks.

Our next question comes from the line of Dave Rodgers of RBC Capital Markets. You may proceed.

This is [Mike Terrell] here with Dave. Where is your demand coming from? Are there new tenants in the market or are there existing tenants moving around from different spaces?

It is a combination of both. About 60% of the tenants that we're seeing are folks that are taking advantage of the market, that they might be slightly upsizing or getting more efficient, and efficiency is the word you hear frequently and ever increasingly. So about how do they get more efficient, how do they make sure they have the facilities that work for them? As you know, energy is becoming increasingly a concern of people. Green buildings are becoming increasingly a concern. So all of these things enter into it. 40% of what we have seen in at least the fourth quarter are people that are actually growing that are increasing because their business is doing better. So that's kind of the breakdown. Whether that holds from quarter to quarter, I think it will probably bounce around, but that is sort of what we're seeing now.

Are you seeing any new tenants moving into your markets?

Well, yes, we have got a couple tenants that moved into San Diego, but I characterize most of it as tenants that is are in the market, some of whom, roughly 40% are expanding, and 60% of whom are wanting to get more efficient and/or move up into a higher quality building that they can afford in this market.

Okay. Great. Thank you.

You're welcome.

Our next question comes from the line of Michael Bilerman from Citi. You may proceed.

John, I wanted to come back to acquisitions in the market place and I was wondering if you can spend time talking about the hiring of Chris and what that sort of means for the Kilroy franchise and what he brings to the table and what sort of things you're looking at today?

Yes. Well, that's an area that we're very focused on. I don't share the enthusiasm that a lot of folks have for current steals in the market place. There are some. There is not a huge magnitude of extraordinary deals like we saw back in the early 1990s in the market place. Whether that will change remains to be seen, but as you know, there is a lot of capital in the markets. Some of the things we're seeing right now have been bid up. There is a property here in the West side we think is going to trade at a ridiculous price given the quality of the market it is in and so forth.

But on the other hand in hiring Chris, we do see that there are opportunities, particularly over the next couple of years, some of those are not just buildings, but they're entity at the entity level and we're having a number of discussions right now very early stage with folks who know they are going to have a difficult time competing with companies like a Kilroy or a Douglas Emmett or whatever, and some of those companies are in LA. Some are in other markets. They recognize they've got equity. They may have some development opportunities as well, but they don't have the capital structure that allows them really to compete. So those kinds of discussions are exciting to us because what we're hopeful is we'll uncork a couple of Allen company type transactions and you know that worked out well for us down in San Diego.

On the specific asset situation we're looking at everything obviously and Chris brings with him a broad background in working in the acquisition area and what not of previously with a fund, but he has great relationships. We're not looking at doing a fund, but we are talking with a number of folks that are pension investors and what not that are looking at recalibrating their portfolio and selling assets and what not. So Chris brings with him a level of relationships and contacts that increases the breadth of what we had before. We take the acquisition side very seriously. As you know, Michael, in the past frothy part of this cycle Kilroy was not an acquirer. I think we quit basically in early 1998 doing any sizable transactions except for those periodically that had a real value-added play. We were not bubble buyers. We're not going to be bubble buyers, but we feel we need to have a real dedicated effort towards the acquisition area and that's where we're heading.

And you mentioned in your opening comments something about the right conditions that would need to exist to buy I guess given the fact that there is going to be a lot of vacancy in the market place, how do you go about pricing that vacancy and what sort of conditions need to exist for you to act?

Well, it is going to depend on obviously on the product and the specific market. So we could have a pretty long discussion about the hypotheticals there, but one thing that Kilroy is not going to do is buy assets that we feel uncomfortable with from a qualitative standpoint. We think that's a game that's very dangerous. We'll let others play that. We like our quality markets. It is not that we don't like vanilla buildings, we do, but they have to have various operating characteristics. One thing that Kilroy has of course is vertical capabilities of development and value add and so forth. So when we underwrite these things, we think we have a pretty good view as to what the real costs are to reposition buildings. We're very sober about that. We have a lot of assets that we have been tracking that we think are going to be interesting plays where there are value-added opportunities and by that I don't mean huge development, but where they require some corrective measures to make them the kind of buildings that will stand the test of time, and we think we're well suited to that.

Right now we're looking at a lot of things. We haven't made a specific move on anything. We're having a lot of discussions up and down the coast, and we're confident that over time those will lead to some successful acquisitions. We're not going to stray into crazy markets. We're not going to buy assets that are of a C level and so forth. If we can find a B asset and move it to an A minus and it is in a good market, that sounds interesting.

When you're saying up the coast, I assume you're just saying potentially up to northern California or you're venturing up to --

We're going to look as we said back at NAREIT to everybody don't be surprised if you see Kilroy looking in a lot of different markets up and down the West Coast. We think we have to to understand what's going on. That doesn't mean we're necessarily going to play in those markets, but we're having a lot of discussions and reviewing a lot of different markets right now from one border to the next. Don't get excited when I say that because it doesn't mean we have some big plan to go buy Portland or something we don't.

Right. Question for Tyler. If we look at guidance of $2.10 to $2.30 and if you take a look at fourth quarter, right, you produced $0.39 in FFO. If you add back $0.11 from the net gain versus the severance charge on the comp charge on Dick, you get about $0.50, and that's including about a $10.9 million G&A number versus $7.25 million which effectively in the quarterly guidance for next year, so about another $0.08. That gets you to $0.58 on a sort of run rate with an average occupancy in the fourth quarter of about 83% versus an average occupancy for 2010 of 84.5%. If you take the 58 and you multiply it by four and you get $2.32. I am just wondering what sort of gets you $0.20 below that at a sort of current run rate when occupancy is going up and I respect that there is some rent rolldowns as we head into next year, but I would assume 140 basis points of occupancy pickup on a average basis would more than negate that.

Yes. I need to go through my model with you in detail if you would like, but the interest costs are up. We obviously have rolldowns in rent. The numbers we're coming out with in terms of our lease up and we have expirations coming. We have Boeing moving out. So we're comfortable with our guidance given that and I would have to check the math that you just went through and go through that in detail.

Is the 84.5% you're saying that's an average 2010 or an ending 2010?

Average.

That's average.

As I mentioned earlier to somebody else, a lot of the leasing we did in the fourth quarter doesn't start until the third quarter of 2010, so it will be lower than that in the first quarter obviously.

And where would it end the year then based on all the leasing traction that you have?

Well, assuming everything goes the way we plan it, close to 86%.

86%. Okay. And I want to make sure I have the numbers down correctly for the $28.5 million of G&A. You're saying the stock comp portion is about $10.5 million comprised of $4.5 million from previous year plans and $6 million from current?

No, no. The stock comp is about $6 million.

$6 million total.

Total.

And $4.5 million of that is previous?

Yes.

Okay. And then are you going to be releasing the actual targets rather than not just the metrics, but the actual targets as part of the 2010 bonus plan so that the street can be very well aware in terms of what your bogey is to earn those bonus payments?

We have never disclosed our detailed budget numbers and we don't plan to do that.

Okay. I would at least one man's opinion is perhaps providing that disclosure so that at least people know where those hurdles are relative to payments so that they're not surprised when the Company reports a higher G&A number and they didn't know why. So that's just my opinion. Feel free to ask others as well.

Thank you.

Thank you.

Our next question comes from the line of Stuart Seeley from Morgan Stanley. Stuart, you may proceed.

Thank you. First of all, Tyler, I am delighted to see that you, too, are competitive and can set a land speed record with your prepared remarks.

It has been a long time.

It has indeed. On the comment about the market rents being I think that you said roughly 5% to 10% in place being 5% to 10% over the market, is that on a GAAP basis or a cash basis?

Cash.

I am sorry, can you repeat that, please?

Cash.

Cash. And I guess this is a little bit of a follow-up on Michael's question. If we look at the 84.5% average occupancy forecast for 2010, that's a little up from where it was in the at the year end, but it is about 50 basis points lower than what the average was for the same store pool in 2009. What does your average occupancy translate into in terms of just an overall internal growth, same store NOI cash basis for 2010?

Well, our projected same store numbers for the year for 2010 are down 7% on a cash basis and down 2% on a GAAP basis.

Okay. I am sorry if I missed that.

I didn't say that before. You didn't miss it.

Does that include any forecast for -- and I apologize. I don't recall how you do this. Does that exclude the impact of lease termination fees?

Yes.

And are you forecasting any lease termination fees for 2010 at this point?

No.

Very good. Thank you very much.

Thank you.

Our next question comes from the line of Erin Aslakson from Stifel. You may proceed.

Thank you again. Wanted to ask about the cash gain on debt extinguishment. How exactly --

Erin, can you speak up? We can't hear you.

I am sorry about that. How is this?

Better. Thank you.

The cash gain on early debt extinguishment of $5.1 million, why is that so different than the what is it $1 million, 1 point something million actually reported on your income statement, $1.8 million on your income statement?

What we do from a reporting perspective is the under the accounting rules we adjust FFO differently than the full cash gain that we achieve. When we bought back $122 million of convertible for $117 million, that was a $5 million effectively cash gain, but from FFO reporting GAAP purposes we're only counting $1.8 million of that.

Okay. All right. I think most of your peers count that as a non cash gain. That's why I was asking. And then also the CapEx on the base building CapEx. Seemed to tick up significantly this quarter. What was the thinking or reason behind that?

I don't think there is anything particular. You are talking building maintenance costs?

Ye. Up $5 million in the quarter from maybe $2 million previous quarter?

Yes. I would have to let me look at this. We had a couple projects that came through in that quarter, one down in San Diego and one in West LA, that were a little higher than average. It is nothing unusual, just timing difference with different projects.

All right. Thank you very much.

Thank you.

At this time we are showing no further questions available. Tyler Rose, you may proceed.

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

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a great day.