Prologis Inc (PLD) 2002 Q3 法說會逐字稿

Ladies and gentlemen good day and thank you for standing by. Welcome to the Catellus Development 2002 third quarter earnings conference call. At this time, all participants are in a listen-only mode. Later there will be a question and answer session and instructions will be given at that time. If you should require assistance during the call, please press 0 and star. As a reminder, today's conference call is being recorded. I will now turn the conference call over to Director of Investor Relations Miss Minnie Wright. Please go ahead.

Thank you. Good morning everyone and thank you again for standing by for the Catellus third quarter 2002 earnings conference call. With us today are Nelson Rising, Chairman and Chief Executive Officer and Bill Hosler, Senior Vice President and Chief Financial Officer. Both Nelson and Bill will be making a few comments regarding the highlights of our earnings release this morning. Following their remarks, we will open the phone lines for questions.

Before we get started, I need to inform you that during the course of this conference call the company may make projections or other forward-looking remarks regarding future events or the future financial performance of the company. We refer you to the documents the company files from time to time with the SEC including our form 10-K for the year ended December 31, 2001. These documents contain important factors that could cause actual results to differ materially from those contained in the company's projections or forward-looking statements. The broadcast of this call is the property of Catellus Development Corporation. Any redistribution, retransmission or rebroadcast of this call in any form without the express written consent of Catellus is strictly prohibited. Thank you and with that said, it gives me great pleasure to turn over to Catellus Chairman and CEO, Nelson Rising.

Good morning and thank you for joining us. The results for the third quarter were in line with our previous guidance. Our earnings per share of 16 cents represents a 42.9% decrease from the third quarter of 2001. However, the growth in earnings per share in the first and second quarters of 2002 over 2001 more than offset the third quarter decrease. Resulting in the growth of earnings per share for the nine months ended September 30 of 20.3% over the same period in 2001. We anticipate that income from property sales and fee services in the fourth quarter of 2002 will come in at about the same levels as the third quarter and therefore our guidance for growth and earnings per share for 2002 is in the 15% range again depending on timing of some future sales. There are many bright spots I would like to highlight this morning from the third quarter.

Our net operating income was $49.9 million for the quarter, representing a 15.1% increase over the same period in 2001. For the nine months, the net operating income increase was 13.1% over the same period of 2001. This represents a continuation of a trend to increase the percentage of our earnings coming from net operating income from our portfolio relative to development sales and gains. Despite the fact that the fundamentals for real estate are very challenging, we added 2.1 million square feet to the portfolio in the third quarter. That brings our total of business to the portfolio from our development activities to 5.9 million square feet for the nine months end of September 30.

This is a very important implementation of our strategy to turn our large land portfolio into income producing properties generating recurring NOI. We are particularly encouraged by the fact that our completions in the third quarter are anticipated to generate a return a 10.4% on a cost of $67 million. This is at a time when market conditions are putting great pressure on margins. In the third quarter, we had construction starts of just under 1 million square feet, consisting of three buildings. A 346,000 square foot build-to-suit in Chicago for APL Logistics, a 171,000 square foot build-to-suit in Denver for Whirlpool and a spec building of approximately 470,000 square feet in Rancho Cucamonga. We decided to build that building on spec since we have virtually no available space in the inland empire market of Southern California where we have a total portfolio consisting approximately of 7 million square feet..

All the buildings that we started in the third quarter we anticipate will be added to our portfolio. We ended the third quarter with 1.8 million square feet under construction and approximately 1 million square feet started in the third quarter. And the balance started earlier in the periods. The projected cost of buildings under construction at the end of the third quarter is $175 million and when fully leased, we anticipate these buildings will provide a return on cost of approximately 12%.

We are very pleased by our occupancy levels. We ended the third quarter at 94.4%. That is the same occupancy rate we had at year end 2001. So we are pleased with the results of the third quarter. Now I would like to have Bill Hosler make a few comments.

Thanks, Nelson. Happy Halloween, everyone. I want to point out one item again in our supplemental package that we have up on the website, and I would encourage everyone who looks at NAV to start with page 8. Page 8 provides more detail about our balance sheet, including a breakout of other assets as well as our share count at year end. It's a good resource page to start with. I also need to point out a mistake in the supplement on page 7 concerning backlog. Someone pointed it out to me this morning in the form of a question. But the residential backlog which stated 168,000 and it should have been 168 million. That will be corrected on the website.

Our income portfolio continues to perform well. Occupancy ended the quarter at a little over 94% Was helped by two new tenants at two large buildings. One tenant Exel Logistics for 405,000 square feet in Southern California and the other, US Intermodal for 350,000 square feet in Woodridge, Illinois. And again, want to comment that although we've enjoyed very stable occupancy, our vacancy could bounce around a few percent as we have many buildings over 300,000 square feet and each represents 1% or more of our occupancy. The timing of the roll over could impact our occupancy figures without materially affecting our economics. Foe example, a building could empty right before quarter end and release two months later, which would be well within our proforma underwriting economics. However that one building alone could knock our quarter end occupancy down by over a percent.

On leasing, we leased 1.8 million square feet in the quarter to about the amount that expired or terminated early. Average rental rate increases for the quarter were a very high 12%. This is a bit of an anomaly as typically right now we would describe more of the rent activity we're seeing as flat to slightly declining. For the fourth quarter we have about 1.1 million square feet rolling over and of that we have about 500,000 committed to renew and another 200,000 a little bit more than that that we highly anticipate will renew. For year end. we expect occupancy just a hair lower what it is today around 94%. For next year we have 3.5 million square feet rolling over about 10% of the portfolio and most of that is spread pretty evenly in the first three quarters.

Same space growth for the quarter was up 3.9% over the same quarter last year after adjusting for some one-time items that are nonrecurring lease termination, etc. Because of both rental increases and lower expenses. Expenses were lower due to lower bad debt expense primarily as well as reduced GNA and some insurance savings due to the fact that we self insured some areas of our coverage last year. This is not likely, a lot of these savings are not likely to continue in the future. Our portfolio NOI growth continues to be driven by the growth in our income portfolio through development. For the quarter, NOI grew 15%, as we mentioned, on an absolute basis and 31% on a per share basis. Note that we added 2.1 million square feet of new development, four buildings. The buildings include one 1 million square foot building for Kelloggs in suburban Chicago, three buildings scattered throughout the west, primarily for Ford Motor Company.

Page 17 of our supplemental package shows the adjustments to NOI to affect the quarter, adding all these buildings as though they were added at the beginning of the quarter. We sold only one building this quarter. 70,000 square foot retail center in Corona, California for about $4.5 million. The center was only 74% leased and built in 1990. We had sold the property at an inline rent cap rate of 6.8%, but a stabilized rent cap rate of 8.5%. One other item of note is our GNA, total GNA this year is down about 16% compared to last year.

In terms of guidance for the year, Nelson mentioned we're projecting 15% growth in EPS, could be a little higher or lower depending on the timing of certain sales, particularly some desert sales. Last call I pointed out the lumpiness of our earnings. We saw that here in the third quarter. The fourth quarter will come in at or slightly better than the third quarter. Both in terms of EPS and EBITDA per share. With that, we will take questions.

Barb, we are ready for questions.

Very good. Ladies and gentlemen at this time if you would like to ask a question, please press the 1 on your touch tone phone and you will hear a tone indicating you have been placed in queue. You may remove yourself by pressing the pound key. If you are on a speaker phone please pick up the hand set before pressing the numbers. Once again, if you have a question, please press 1 at this time. One moment please for the first question. The first question in the queue is from the line of David Harris from Lehman Brothers. Please go ahead.

Good morning. Bill, a couple of questions if I may. Just a little bit more on the backlog and how we should look at that in the context of future sales activity. It looks as if the backlog totals around $240 million and we are now, you're telling us $168 million of that was residential. That's actually significantly up from the number of the backlog you were carrying at the end of the second quarter. Can you sort of give us a bit of color on how that matches with your sales expectations?

I will give you color. The residential, remember a lot of our activity there happens through joint ventures.

Right.

What we report in terms of sales backlog is actually the grossed up revenue for residential. So as opposed to say at last year, year end, we had a lot of backlog from our wholly owned project at Hercules that showed very strong margins. This $168 million of backlog we would anticipate net profits to Catellus somewhere around 10% on that. Even though the number is large, a little over half of it relates to a joint venture we own 30% in. In Tolega. It continues to see very strong activity. Another large chunk comes from Serrano up in Sacramento that sees very strong activity. So most of that backlog is in the form of joint venture backlog on land development sales.

Will you be commenting on '03 at all in terms of guidance?

At this point we are not prepared to do so. We are in the middle of our budgeting process for 2003. Until this is completed and our 2003 plan approved by the board, we will not be giving guidance.

When would we might expect public comment on that, Nelson? With your fourth quarter results?

Yes.

Okay. In general terms, is it fair to assume that the lower sales contribution that we have seen for the third quarter and you are now forecasting for the fourth quarter will run on into '03?

I would say those levels for the third and fourth quarter were dramatically below the first and second. I don't know that I would necessarily straight line those out. Just as a reflective of the lumpiness we had throughout the year.

One of the points that is interesting to note, a part of the sales decline was the relative nature of build a sales -- build-to-sell buildings last year versus this year. We added almost all of our new construction this year to the portfolio last year we had two major build-to-sell that we didn't have. And that's really something that will vary from year to year.

Was there much by way of term fee inclusion in this quarter's numbers, looking at my notes from the last quarter, you suggested that there was going to be something in the second half.

I'm sorry. In terms of?

Lease termination fees.

We did book in this quarter, and I have that around somewhere. We booked now lease termination fees in the other line items. We used to book them through rental revenue. So we pulled those out now going forward. I think our lease termination fees for this quarter, maybe it's less than a million dollars. The other big one I know is on the horizon is one that's due now to hit I think in the first quarter. Related to HQ Global. That's a little over $1 million that will hit in the first quarter.

Is a $1 million a fair run rate to assume you will be booking on a quarterly basis?

In our forecast right now for the fourth quarter, we don't show really any material terminations, but I would say a couple or $3 million a year will be a normal -- wouldn't be abnormal. This year we had a large termination with Level 3 in the first quarter last year's first quarter we had large terminations with March 1. If you pull those out, I think we will run less than a million in a quarter.

A couple of bigger picture questions for Nelson. Would you care to comment on your current thinking on share buy backs? It looks like you guys didn't do anything in the quarter and I think that's right. I think you have not done anything for the first nine months of this year.

You are correct about that. We did not engage in any share repurchase activity this year. I think it all comes back to what we talked about at my last conference call. That management and the board is undergoing assessment of business strategies and until the board makes a decision on these matters, it would not be appropriate for me to speculate on whether we will have share buy backs or not. Or any other type of things that might be a part of that process review. So at this point I don't feel comfortable in speculating as to what may or may not happen with respect to share buy backs. As you know, it's always been a part of our thinking as to a capital allocation decision and that remains to be the case. At this point while the process is ongoing, reviewing our business strategies, we have no decision on that matter.

If I ask you a question on any comments on possible conversion to reach status, would that be provided with a similar response?

I would provide you with precise response.

Thank you.

The next question is from Greg White from Morgan Stanley. Please go ahead.

Good afternoon, guys. Can you talk a little bit about what you are seeing in general on residential sales trends in California? Specifically with the most recent quarter relative to the prior two. I know you had some Catellus-specific issues that I'm looking for a more general comment.

Generally the market is holding up quite well. You hear anecdotal reports regarding very high end sales. That prices may have peaked in the high end and sales velocity in volume in the million plus range. We are not quite as high. Maybe $2 million plus range. Not quite a high as it was before. One of the reasons for that, Greg, is that as we mentioned in previous discussions in the matter, we are very supply constrained in California. This year we are trending at less than 110,000 housing starts in the prior peak period as mentioned before. We were at 169,000 housing starts with a smaller population. Supply constrain is one and secondly,I think one cannot underestimate the impact of interest rates on housing affordability. So that even though the median income in a particular market relative to the median home price is getting very close to what it was in 1989 or '90.

The great disparity in interest rates between the two periods makes the houses today much more affordable than before. So I think supply constraints, low interest rates and there is a positive job growth in some of the markets in California that are the most robust. Orange County being one of those. I think for all those reasons, things are still maintaining. I recognize that there is a tremendous amount of speculation that residential boom cannot continue. At this point in the various projects we have in the specific sense and the general to answer your question, we are seeing encouraging signs, except on the very high end.

On a week to week basis, we are probably now two levels removed from the market and not only do we not home build anymore, but most of our properties are in joint ventures. The reports we continue to get have continued to uptick as opposed to flat line or downtick from the joint venture partners with regard to demand for lots. I think the demand for housing which has been good probably fluctuates a little more week to week and month to month, but I can tell you from the joint venture partners selling land to home builders, it's been a one-way trip.

Turning a little bit to Mission Bay, can you give us an update on what's going on there?

Well, the Avalon Bay first tower is nearing completion. They are marketing that project in anticipation of completion. The land we sold to the Signature Writing Partnership in the first quarter or second quarter of last year is now well under construction on 100 condominium units and they're optimistic about their sales potential. The infrastructure that has been funded with two previous bond issues and a third that's due to close in a week is coming very nicely. Our joint venture wit AEW on block N1 is well underway.

Our leasing on the retail has been very satisfying. With Border's Books and music on one corner and Safeway on the other and bank, coffee, that sort of thing filling out the space. That's encouraging and we are under construction on a site immediately across from the ballpark that will have 34 condominium units and that is well on the way for completion in the second quarter.

Maybe some granularity on the same store data in terms of the break down. Obviously, we saw the office lagging the retail and the industrial. You can talk about maybe trends going forward in terms of what you expect given the rolls that you are seeing in those specific units of the next couple of quarters.

We are still hopeful on occupancy although as I mentioned before, it wouldn't surprise to have a lease roll that we expect to renew, say near the end of the quarter to actually wait a couple of months. It can cause a drop in the occupancy number. We're not seeing any real risks on the horizon. I think we have seen a lot of what we will see in some of these markets. The east bay of San Francisco clearly is soft. We have vacancy there. And not tremendous amounts of roll going forward.

We released in one of our bigger office projects down in San Jose with MCI, we released that this quarter and they took a little bit less space. Clearly, they're in bankruptcy, but they're paying rent and appear to be moving people into the space as opposed to out. But we'll have to wait and see. That's clearly a risk over the next year. Overall, things are okay. We are fighting very hard to get tenants, to keep tenants. We are being competitive on rents and that will have its effect through the portfolio of the next several quarters. We are quite surprised at the level of same-store growth we experience. When you track it down, you can point to certain things. We released a couple of large buildings that I mentioned, we've had some reduction expenses due to some bad debt and bankruptcy we had same time last year that we didn't have this year. There's a few items that won't necessarily recur and the trend may stagnate or reverse.

There is one last question and again, it has something to do with the strategies under review at the moment. The cash position continues to build. Can you make any comments on that and what your consults are or should we expect to see that continue to build into the early part of next year?

I think it will continue to build until the board concludes on our capital allocations plans for 2003 and beyond. It's a good position to be in because it gives us options and alternatives rather to make strategic moves. But at this point I think that you can look to that until the end of the year.

The next question is from Steve Soqua from Merrill Lynch. Please go ahead.

Good morning. A couple questions. Nelson, just to follow-up on Greg's question. Would it be fair to say you would expect the board to come to some sort of a definitive conclusion with regard to the structure of the company by the next conference call or would that be too optimistic?

I would not want to speculate as to the timing on that. So I will leave it at that. The process is ongoing and until it's complete and the board has made some decisions, I really don't feel comfortable saying anymore.

Okay. And then either for you or Bill, could you provide us an update on the Austin as well as Alameda? And then maybe if there are any types of projects like that that are out there that you may be pursuing.

The Austin project, we have completed. The exclusive negotiating agreement with the city. We are now in the process of negotiating the definitive agreement and part of that process will be the entitlements and the land use issues will be also addressed as part of that ongoing process. A lot f energy and efforts being expended by both the city and Catellus and we are encouraged by the prospects that that project will offer.

So what does that mean in terms of starting on something? Is that an '04 event?

No. Yeah, maybe '04. Not '03. The idea or the concept of the exclusive rights negotiators during this period. We will complete the business arrangements with the city which really requires the entitlements to also be completed. It's not just a question of spending a year to negotiate an agreement, but spending a year plus maybe to complete the planning, the land plan, have entitlements and have a financial arrangement so that when it's completed, it can be implemented. And so I would say it's more of '04.

Well into '04.

It could be 18 months. But we are encouraged by the process. And so there seems to be a real momentum there. With respect to the second question in Alameda, we are in the process of working with home builders on the arrangements for the sale of development sites and residential sites and the market is very robust in Alameda. We are encouraged by that.

We're also in the final phases and stages of designing the offsite infrastructure as well as the onsite. That is moving ahead. It's like all projects like this, it involves the infrastructure and other related issues and may take a little more time than one would like them to. But we're encouraged by our progress there.

As you know, we don't own the land there yet and we have it under option and we will begin to exercise some options right around the end of this year and then we're anticipating now home construction starting probably sometime in the second quarter of next year.

So Alameda, Bill, should start to contribute to the land gains in '03?

Yes.

That's correct. Another project we talked about in the press release that we're moving ahead on is the L.A. Air Force Base project. That is one where we were selected and now are in the process of negotiating. We are encouraged because it's a great piece of land and a very attractive project. At this point we are in the process of figuring out what the field structure would be and we are just pleased we were selected.

Thanks.

The next question is from David Shillman from Lehman Brothers.

My colleague already asked my question.

Next question from Natol Hesnit from McDonald Investments. Please go ahead.

This is Frank Greer. I have a couple of modeling questions. You mentioned that the gain or the lease termination fee, what line that was in?

The first line that says other net. Development operations.

What contributed to the rise in the management and development fees? It was up about a million.

Just miscellaneous development projects we have going on. We have some projects going on with some joint ventures in Avon and in the joint venture here in Mission Bay. We still have some fees coming in from our development agreement with Cisco. Those are the primary areas.

Is that a good run rate, the 2.8 or should that back down?

Fair enough. They are individual projects. Some are ongoing and we will get new ones and we'll lose old ones.

One of the things to keep in mind. Our strategy is first and foremost if we have an opportunity to do a build-to-suit, we'll do it. If we can't do a build-to-suit, we'll do a build-a-sell, if we can't do a build-to-sell, we would sell the land and then hopefully have a construction manager build the building. We can't predict quarter to quarter how it will come, but that's the methodology we use in trying to pursue that line of business.

The interest expense was up, is that from the properties coming online?

Yeah. And slightly lower capitalized interest.

Thanks.

As a reminder, if you have a question, press 1. Our next question is from Christopher Haley from Wachovia Securities.

Good morning. Nelson, what is the shareholder approval level in percentage terms as a majority or two thirds for a corporate structural change?

Typically it's a majority.

Typically?

There is probably a whole lot longer answer to that probably depending on what you are talking about, but most things it's a majority.

Okay. Related to the cash level building and development activity, is there a certain level within the numbers side at the board and management feels uncomfortable with in going to meaning unproductive capital as a percent of total capital? Meaning how much cash do you want to hold on your balance sheet and how much development will you add that's not income-producing that suppresses results in a short-term?

There's no question that that is an issue that we are concerned about and focused on. You know what we did last year, the cash was accumulating and we reached a conclusion that given the opportunities that were available, to acquire new opportunities, it seemed a wise use of our cash to repurchase shares. And we made that calculation basically looking at what the earnings per share implication would be if we reduced the denominator versus what the earnings per share provisions would be if we increased the numerator. The opportunities that were available led us in that direction. The over all planning process is underway now and will lead us to a resolution of the question you are asking. At this point I really don't want to speculate that number.

What kind of run rate either semi annually or annually would your cash position build by based upon your current forecast and current structure?

It depends on how we performed and what we sold, et cetera. You can look historically I think our cash flow from ops the first nine months was --.

That includes Cisco.

Well, not this year.

That's right. Okay.

We are down $90 million this year from last year due to Cisco. We've got $61 million cash flow from ops this year so far and as you know, that includes not only the NOI top operations, but includes what we would consider land sale development operations, predominantly the residential business.

Is that a -- Bill, we could use whatever we want per your terms, but is that a fair run rate that you think you guys can generate on a nine-month basis and annualizing that, is that a fair recurring cash generation number? 200 million?

I don't know what you mean by fair. I would say it depends on a lot of the things being discussed now in terms of strategy going forward.

Okay.

Deseret sale activities, residential sale activities.

Okay. Moving along this path, besides what might, strategy are we talking about you guys being acquiring and looking at massive acquisitions or buying more land? Besides the corporate issue. What are the major structural items from a strategic item that you are looking at?

I don't feel comfortable in starting down that path. Because I don't want to convey an impression that is inaccurate. I think it's fair to say that we have been. We do it on an annual basis this year. We are continuing the process of looking at business alternatives. When the process is concluded by the board, then I can give you the direction. At this point we are moving ahead in our current format and producing the numbers that we suggested we have to date and will for the rest of this year.

Is the historical goal has been 15% after tax returns under the items that you might be looking at, would that change?

I guess you are going to ask --.

That's my last question. I promise.

Same answer.

Bill, just some numerical questions. You mentioned same store up just under three without the specific or nonrecurring items, the 3% does not -- is it adjusted for higher than average bad debt expense and insurance savings?

Those were generally lease termination fees and kind of obvious timing differences in cam or rental buildings. So for example this quarter, third quarter versus third quarter last year, if you just look at the income that came off the same store buildings, it was typically up closer to 6%. But when we adjusted it, it adjusted down three points.

And you are adjusting for lease term fees?

Generally one-time lease billing.

Okay. And your tax rate?

I would say that's ordinary course of business and that contributes to same store growth or same store decline.

The last question on tax rate in the quarter. In the short-term in the short run, do you see any material changes with regard to tax rate?

The way the tax rate on a GAAP basis were approximately 40%.

Right.

You see the GAAP tax filtered in as a function of the pretax income for the quarter. While we paid less tax on the income statement this quarter than prior quarters. In terms of the split between current and deferred, a similar type process happens. You estimate based on our full year forcasted tax return, you don't file returns quarterly, you file returns annually. We have to estimate our full return and then we estimate our split for the year based on that. We use that same split every quarter and clearly it gets updated every quarter. You will see it generally changing, but because we've just put out these numbers, this is the last in terms of the split year to date.

Your depreciation recapture component was not included in your financial statements up until the first quarter and today you are including it?

Well, we produce a financial statement that's based on GAAP. So it will have the full gain from a property sale including what we've called historical appreciation recapture. And then we adjust the EBITDA we subtract that out. Now, where that gain is really showing up in 2002 is in discontinued operations. Most of recaptured gain is going to relate to the property sold.

That's great. I love to follow-up with you on that.

The next question is from Jordan Sadler from Salomon Smith Barney.

A couple left. Given the addition of about 6 million square feet year to date to the portfolio and the pending additional properties, could you estimate the percent of EBITDA being generated from the rental portfolio in '02-'03?

Clearly for '02 on a quarterly basis it fluctuates quite a bit for the full year, an off the top of my head number, it's closer to 70%, NOI 30% development and sale and fee activity.

Last year that was 67% and 33% from development sales gain and that trend as I mentioned in my earlier remarks, is going to move over time to a higher percentage of the total from the portfolio.

Right. You went through the status of Mission Bay pretty thoroughly. I just didn't catch what was going on with the gap. Did they start paying rent this month and did they sublease the space?

They started paying rent in the middle of October. At this point they have not subleased space.

Could you just remind me how many square feet they have?

183,000 square feet.

With regard to the property sales, the margin generated this quarter compared to previous or historical related to certain types of property sold in the mix I imagine.

Yeah, it jumps around quite a bit. We had sales for example in our Hercules project which occurred- two things take the number difficult to track. One is the mix of properties and just the profitability of individual properties. Our Hercules project showed margins 40% and had gone up from there. So very high margins and we had a lot of sales activity last year at the end and the first couple of quarters of this year. Other types of for example a build-to-suit sale type activity to the extent we had that with the building because now you have a very full cost with a new building your margins are closer to 8-12% on that type of activity. The other thing that's going to throw that off is when we book a sale like Hercules where the infrastructure work is not quite finished but the buyer's already paid us, we put up some deferred revenue on the balance sheet. So as that deferred revenue comes through, that will further affect margins and gains going forward.

Okay.

Make sense?

You wouldn't be able to estimate how much of that deferred revenue may have been included in this quarter? The margins seem like 70 something percent versus historically somewhere they were usually in the range of 40s like you said.

There is a fair amount of deferred revenue coming through on Hercules. Millions of dollars range.

Okay. Thank you.

The next question is from David Koff from RBC Capital.

A couple of follow-ups on GAAP if I could. You can run us through the final economics of that building.? I know there were some moving pieces on the cost side in terms of tenant improvements and what not that I assumed did not go in. Can you run us through the final cost and then the final yield on that?

I think what we have probably spent through quarter end somewhere excluding land in the mid-$40 million range. We probably have another, we have all the TI work and a little bit of contractor retention. So maybe as much as $15 million or more to go in the timing of that is not certain. The rent we receive if I adjust out for expenses and try to make it apples to apples is in the neighborhood of less than $1 million a month.

Then Gaps perspective they have been going through some of their own internal problems with management shake-up and what not and perhaps this building has been on the back burner from their perspective with a lot of that now settled and they have a new CEO, have you had renewed talk that maybe there might be a termination coming or are they going to endure this for a while?

We have not had those conversations and at this point we received the first rent payment in mid-October. It is our understanding that they are anticipating a sublease, but they have not entered into such a transaction at this point.

Okay. Thanks, guys.

Once again for any questions press 1 at this time. There no further questions in queue. Please continue.

I want to thank you for participating in the call and I look forward to speaking with you on the next conference call.

Barb, can leave the call back information?

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