Prologis Inc (PLD) 2004 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Quarter 1 2004 Catellus Development Corporation Earnings Conference Call. My name is Kristen, and I will be your coordinator for today.

At this time, all participants are in listen-only mode. We will be facilitating a question -and answer session towards the end of this conference. If at any time during the call you require assistance please press star followed by zero, and a coordinator will be happy to assist you. As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to Minnie Wright. Please proceed, ma'am.

Thank you. Good morning everyone, and thank you for standing for the Catellus First Quarter 2004 Earnings Call.

Before we continue today, I would like to state that this conference call will contain projections and other forward-looking statements regarding future events and 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 10K for the year ending December 31, 2003. These documents identify important factors that could cause actual results to differ materially from those contained in the company's projections of 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 all that said, I'd like to turn the call over to our Chairman and CEO, Nelson Rising.

Good morning. Welcome to the call. We're here together today with Bill Hosler, who will be speaking after my comments, and Ted Antenucci, who is the President of Catellus Commercial Group.

This is our first earnings release and first conference call as a REIT. The evolution of Catellus from a railroad land company to a diversified development company organized as a publicly-traded C Corporation, to a REIT primarily focused on industrial real estate is now complete and has produced very positive results for our shareholders.

In the first quarter, our EPS was $0.31 compared to $0.23 for the first quarter of 2003. Core Segment FFO for the first quarter of 2004 was $46.3m compared to $38.7m for the same period in 2003. On a fully diluted basis, Core Segment FFO was $0.44 compared to $0.38 for the same period of 2003.

Bill Hosler will review these results in more detail in his comments.

At quarter's end our rental portfolio totaled 40m square feet, up 1.8m square feet since the end of 2003. We added six new buildings, a 252,000 square foot building in Winchester, Virginia, a 450,000 square foot building in the Inland Empire of Southern California, three buildings in Atlanta, two of which were 342,000 square feet, and one 296,000 square feet, and an 84,000 square foot building in Portland, Oregon. This 1.8m square feet of new space that was added to our portfolio during the quarter is 100% occupied. It represents a total investment of $53.6m, with a projected return on cost of 9.9%.

Occupancy was up 50 basis points from the year end, to 95.7%. I believe this high occupancy rate is the result of a number of factors, including high quality of the portfolio, the relationship with our tenants, the skill of our team, and our focus on keeping the buildings leased.

Our development activities continued throughout the first quarter. At quarter's end, we had Core Segment construction in progress of 2.9m square feet, 1.9m square feet of which will be added to our portfolio. This consists of three buildings, a 617,000 square foot building at the Kaiser Commerce Center in the Inland Empire, a 758,000 square foot building, also at Commerce Center, and a 117,000 square foot expansion of a building in Chicago. We also had two buildings start in the first quarter, a 348,000 square foot building at our Stapleton Business Center in Denver, and 58,000 square feet of retail at the Pacific Commons in Fremont. That's part of the site that was successfully re-entitled for retail from office in 2003.

The anticipated total investment in the five building currently under construction that will be added to our portfolio is $73m. These buildings are 82% pre-leased, and when fully leased are projected to yield a return on cost of approximately 10.8%.

I'd like to make just a brief comment about our activities at Pacific Commons. The development leasing there for our retail development continues with great momentum. You will recall at the time the re-entitlement was completed we estimated that when complete and rents stabilized this would generate NOI of $9m on an annualized basis. We have now signed leases for half of this and have identified tenants for the other half, either with Letters of Intent or leases out for signature.

Looking forward for development activity for the rest of the year, we have a very high occupancy rate, and with the success we've had in entering into lease-extension agreements, thereby reducing rollover for 2004 and 2005, we are positioned for a more aggressive development pace. We anticipate approximately 2m square feet of development without pre-leasing. One million square feet of this would be in Southern California's Inland Empire, where our occupancy is 100%, and a building in Carteret, New Jersey, one in Denver, and one in Atlanta.

During the quarter, we continued to make progress on the monetizations of our non-Core Segment assets. We closed on a sale of another parcel at Santa Fe Depot in San Diego, leaving only one remaining site. We also closed on the sale of two parcels at Los Angeles Union Station to Lincoln Properties for the development of 278 apartment units. That's a very significant move in that we now are expanding the entitlement beyond office at Union Station to residential.

We also have 108,000 acres of desert land remaining, and have entered into several transactions that we have under contract for substantially all of this. As we pointed out at year-end, the monetization activities are lumpy quarter-to-quarter, but we think we are having a significant amount of activity on this front.

With that, I'll turn it over to Bill for his comments.

Thank you Nelson. Good morning or afternoon, everyone, depending on where you are.

As you know, we report FFO for two different segments. The first is our Core Segment, which reflects that portion of our business that we anticipate will be ongoing after we fully transition the assets and operations of our company. The Core Segment corresponds directly to what we have historically provided as FFO, and reflects the income property in suburban development business. Our other segment relates to urban, residential, and desert assets. That segment didn't contribute any earnings this quarter.

We have historically, and will continue to focus primarily on the Core Segment, as we feel that best reflects the operations of a more typical REIT. The contribution over time from the urban, residential, and other segment, while important and valuable, is very difficult to predict, will be volatile quarter-to-quarter, and will eventually disappear as those assets are sold and those businesses wind down. As that happens, we will generate capital, which can then be invested into the Core Segment, providing fuel for growth in Core Segment FFO.

All of the FFO numbers we have provided for 2003 are adjusted by the hypothetical tax savings and tax impact of the conversion as though we had been a REIT in 2003.

As Nelson mentioned, in the Core Segment this quarter we earned $0.44 per share versus $0.38 per share last year on a hypothetical REIT basis. As mentioned in the year-end conference call, our first quarter was projected to be outsized, as almost all of the development sales activity projected for the year occurred in the first quarter. Last year, we earned about $0.04 per share in development gain, net of tax and G&A in the Core Segment. And this year, we expect to earn about $0.06 per share. But all of that and more has happened already. In fact, our Core Segment development gain is projected to be zero to slightly negative over the next three quarters due to G&A costs with very limited sales activity.

One item that added to sales gain for the quarter was the completion of the sale of our interests in a development in Vail, Colorado. And although we booked about $5m in gain, most of that turned out to backed out of FFO as it relates to profits on a Wal-Mart and Home Depot we had built in the venture. And thus, we've classified the gain as income property sales gain, and pulled it out of our FFO.

In our last conference call, we posted point estimate guidance for Core Segment FFO for the year at $1.42 per share. We're now projecting slight improvements in interest cost, primarily due to less debt, and slightly higher G&A than we had last call. And so I'd guide you to a couple of pennies higher for the year than I did the last call.

We expect to come in at $0.33 to $0.34 a quarter in Core Segment FFO for the remainder of the year, although I will point out in advance the third quarter always seems to be one or two cents lower than the others, all other things being equal.

With regard to our income statement, I want to point out the increase in G&A expense for the quarter. Our G&A cost has come down about 10% excluding equity compensation plans. All this is in line with our forecast. However, two factors involving equity compensation plans are affecting our numbers. First, as you remember, we provided employees the ability to exchange stock options for restricted stock last year. Under GAP Accounting we were required to take a charge for the newly-issued restricted stock but the company derived no accounting benefit from eliminating the options that were cancelled last year.

Also, the exchange offer triggered variable accounting on any remaining options that weren't exchanged, and so we've had to make to [markos] to market every quarter. The net effect of all this is a charge for Q1 of about $3.7m in the G&A line item that wasn't there last year. This will decrease over time but some number, $2 to $2.5m will run through virtually every quarter for the next three years. However, all of this is posting through non-core as opposed to Core Segment FFO and so it's not affecting the Core Segment FFO.

The other equity plan affecting numbers is the new compensation plan put in place effective Q1. This plan reduces Senior Management cash bonus potential in exchange for a performance-based equity award that rewards management for monetizing non-core activities over the next three years. There is a little bit of a discussion on this in the Proxy on page 20. The way the plan is structured triggers variable accounting and so front-loads expense, the next three years' expense, front loads a lot of it into this first year. And I could explain this further if anyone would like some details. This charge does run through a Core Segment FFO, and it was not included in our guidance on the last call.

Also notice that interest income is up from Q1 '04 due to higher notes receivable from the notes that we've taken back on some of our non-core sales. This will likely drop a little over the year as some of those notes pay-off.

We paid taxes in Q1, although much less so now that we're a REIT, and this is due to the amount of development in land sales from the Core Segment that occurred in our taxable REIT subsidiary. In the Core Segment the tax should be near zero or negative for the next three quarters as we expect very little sales gain, as I had previously mentioned.

Nelson discussed our overall occupancy, which has been maintained at a very high level. In addition, in the first quarter we have reduced our 2004/2005 lease expirations by about 34%, or 2.9m square feet. The most significant impact was about 3m square feet of lease extensions we did with our largest industrial tenant. Of the 3m square feet 1.6m square feet was set to expire in '04/'05, and has been extended an average of 4-1/2 years at the same rents we had been collecting. As part of the deal we allowed a 15 month early termination of a 423,000 square foot building in Dallas, about 300,000 of which remains empty as of quarter end, and is reflected in our quarter-end vacancy numbers.

Without that deal, we actually would have reported a higher occupancy today but potentially would have had more trouble with rent and rollover this year and next.

In terms of our remaining vacant space of 1.7m square feet about 500,000 feet is either leased or under discussion. Overall, our expirations are well in hand, and we would expect our occupancy to stay around 95% this year.

With regard to same store, we were flat in the industrial sector but down 2.2% overall from the first quarter of '03, due primarily to office and retail. However, remember that we still have one more quarter of bad same store comparisons on the expense side due to the adjustment we made in the third quarter of last year to book all property tax expense related to assessment district bonds as property-operating costs instead of interest expense, where we had been booking it previously. So we're going to show quarter-to-quarter comparisons that are difficult on the expense side for this quarter, and of course, for the second quarter. And that alone accounts for almost all of the same store decline.

If we look at same store for Q1 '04 versus Q4 of '03 we actually saw same store go up quarter-over-quarter. However, we continue to see rent pressure outside of Southern California, especially in Texas and Chicago, and our average rents are rolling flat to slightly down in the industrial segment.

We've added a new page to our supplement, page 20, that provides a little more detail on our land leases and some individual detail on our larger office buildings. And hopefully, this will provide people a little more information. The concern on the office side, I want to point out, is a large rollover in Dallas of the JC Penney space in October of '05. That alone could reduce NOI by $3m to $4m a year beginning in '06.

And with that, I will open it up for questions.

Ladies and gentlemen, if you wish to ask a question, please key star followed by one on your telephone. If your question has been answered, or you want to withdraw your question, please key star, two. Please hold for your first question.

Your first question comes from Jay Leupp of RBC Capital. Please proceed.

Good morning, Nelson and Bill. Here with Jay Leupp. Just had a couple of follow-ups on your same-store comments, Bill. The expectations for rent growth, given the fact that you're at 95.7% occupancy in the rental portfolio, and 96.4% in industrial, you touched upon it a little bit in the second quarter. And with this Dallas expiration, should we assume that at best it's going to be flat or slightly negative this year, and/or what's built into your guidance for this year?

Yeah, our guidance is built into this is flat to slightly negative overall in the same store for the year. Again, we're seeing a lot of in-place inventory rents, particularly in the middle of the country markets are lower than they were three years ago and five years ago. So any leases we have rolling, we had put in place a while ago, are probably going to roll down. That's one of the reasons why we had started extending a lot of leases to the extent possible, and pushing them out of '04 and '05. We still see a lot of rent pressure for the next year or so due to the level of interest rates.

Okay, and Bill, one other follow-up on your comments on the development sales net income in Q1 and the front-loaded nature of it. Is it physically possible for you to do any more than you're expecting in the back half of the year in terms of even product deliveries? Is that why you're being fairly conservative for the rest of the year?

I think you know we have a pipeline, I think we're showing, there's a couple of sales that we're showing. When you sell a piece of land, it's seldom that you can get an offer out of the blue and close in a very short period of time. These things take a little while to put together. So we are showing activity again in the future. It just doesn't look like it's going to hit until the early part of next year.

Okay, and then Nelson, I just had one follow-up on Union Station and Santa Fe, the multi-family land sale at Union Station. Can you give us a bit of a description as to what they're going to be doing there? Is there going to be rental, or for sale, and is there potential to do more of this if it's successful? And then what are your plans for this last piece at Santa Fe Depot?

Well, the plan at Union Station is to do 278 rental apartments. And we have had additional interest from other residential developers. The downtown Los Angeles residential market is doing quite well. So we are optimistic that the results of this first apartment project that Lincoln Properties is doing, I think will be a stimulus to others to continue their interest. We've had more than just interest expressed on two other sites. So, we're optimistic about that.

As it relates to Santa Fe Place, there is one site left, and we will have that sold by the first quarter of '05.

The third quarter of '05.

The third quarter of '05.

And is it safe to assume that's going to be for sale, a residential product?

Yes.

Great, thank you.

Your next question comes from Jim Sullivan of Green Street Advisers. Please proceed, sir.

Thanks. Interested in this large lease extension that you did. The message we've been hearing from some of your industrial REIT peers is that markets are improving, rents are growing, '05 rollover is maybe a good thing, not a bad thing given rent trends. Yet, you've done a very sizable extension of some leases that would have expired during that timeframe. Do you just have a different perspective on where rents might be headed, and whether rollover is a good thing or not?

I think that it's difficult to predict always where rents are headed. I think rents now in those markets are a good 10% to 20% below where they were several years ago. So they can come up a little bit, and still have negative affect on peoples' portfolio.

Where we have kind of positioned the company, Jim, is that we've got very high occupancy. We have now extended our, we've historically had fairly low rollover. We generally have a longer average lease duration than others. We've extended now to even reduce our rollover, which puts us in a better position to do development over the next year or two. The build-to-suit market still doesn't appear to be robust, and so as Nelson mentioned, we're going to be starting more buildings without pre-leasing. And by extending rollovers, maintaining high occupancy, we think we'll be in good shape to do that.

If rents do move up substantially over the next year, that would be due to demand. We'd be in a good position to capture that demand with new buildings.

Okay, and then as it relates to the JC Penney space, I remember when you bought that office building, part of the strategy was hey, you knew Penney's was leaving, but you had a couple of years to work with tenants, and fill that space. Where do you stand in that process?

Hi Jim. Ted Antenucci, how are you?

Great.

JC Penney is still occupying the space, so we're not in a position to lease it right now. They're still going to be in the building for another 18 months. The space that they're not occupying, the balance of the building, we have focused on extending leases, doing new transactions, and positioning the assets so that there will be strong revenue when JC Penney moves out. And that's really all we can do right now. Probably in the next 12 months, JC Penney will start moving out of the facility, and that will give us some time to do some leasing.

Okay, thanks.

Your next question comes from Greg Whyte from Morgan Stanley. Please proceed sir.

Hi, good afternoon guys. I think you've been fairly clear in the past that the proceeds from the sales of non-core assets is one of drivers of growth as you re-deploy that. And so I'm curious to get a couple of things clarified. One is what progress you're having on accelerating that disposition program? And then two, Bill, to the comments you made about the executive compensation program based on that sale. If you were to sell the entire, I think it's roughly $300m, what's the costs associated with that on a [inaudible] basis?

I'm sorry, what's the cost associated, meaning?

Like, what cost [inaudible] of the higher G&A from the comp plan?

I think the total comp plan is, well it was done at a higher stock price, so I have to do a quick adjustment. The total comp plan is about $8m over three years - $8.5m. The way the accounting works, and I can go into detail if you like, but essentially a lot of that gets front-loaded, a little over half of it from an accounting standpoint gets recognized this year. And that has nothing to do with the timing of sales. It strictly has to do with a particularly arcane accounting function. So, we're projecting to take into FFO about $1m to $1.25m a quarter of charge related to that this year. That will drop to about $1.5m for the whole year, or $2m for the whole year next year, and about $1m and change for the year after that.

I hope I'm not confusing myself here, so what you've just been referring to is that the substitution plan following the exchange of the options? Or is that the plan that's associated with the sale of the non-core assets?

That's the plan that's associated with sale of non-core assets, and corresponds to a reduction in cash bonus potential.

Okay. So it's $8m in total over roughly a two-year period?

Yeah, and now it's going to depend on, it's variable accounting, so it depends on the ultimate stock price. But at today's stock price, that's about what it is.

And that would be offset by the cash bonus potential, which would have been there.

Correct.

So that's not a net increase of $8m?

No. Greg, to answer your question about the monetization of the non-core assets, as I mentioned, the Santa Fe Depot sale and the two Union Station sales happened in the first quarter. I also mentioned that we have of the 108,000 acres remaining in the desert; we have contracts with multiple parties, which we hope to close this year. We have been very aggressive in our attempts to monetize land at Mission Bay. We feel very optimistic about the market to be residential that we're finding there. We have nothing to announce at this point today, but we are very aggressive in pushing that, as well as the remaining residential sites we have.

Last year, if you recall, we did $96m net of taxes and reinvestment, which was a very good year. And I don't, at this point, have an estimate of what it will be this year. But I'm pleased with the activity level.

Okay, and then just one other question. On the last call, you gave details and spoke about a push into the New Jersey industrial market. Can you tell us how that's going in general, I mean it's a new market for you guys?

Well, we are under construction now, and soon we'll be under construction with a building in Cateret, 360,000 square feet. We think that's going to be a very good market for us. We have other sites we're working on. We're not prepared to discuss until we've closed, but we remain extremely enthusiastic about that market in the areas we're looking. And hopefully, in the not too distant future, we'll be able to talk in more detail.

Thanks a lot, guys.

Thank you.

Your next question comes from Chris Haley of Wachovia. Please proceed.

Good morning, how are things?

Good, how are you?

Good, thanks. Nelson, based upon your expectations to add a little bit more development, tract development for delivery in '05, and your progress in your sales program, what do you think your dividend growth potential is over the next three to five years?

Okay Chris, I'll take that one.

Oh, I wanted Nelson.

I know you did. What do we think our dividend growth potential is? You know, if we can grow FFO as we talked about this time last year when we converted to REIT, we were kind of in the mid to high-single figures. Over time, that should generally be reflected in dividends, as well. There are a couple of factors, though. One, as some people have pointed out, we have selected an initial dividend that is fairly full on our Core Segment AFFO, with the expectation that we will generally sell assets out of the non-core segment, use that to grow the Core, and we'll put a little more distance between AFFO and dividend.

And two, it's totally dependent on the timing of those sales. Now, I would say there are a couple of scenarios. If the sales are robust, and the investment alternatives aren't, the dividend could go up in big chunks on a one-time basis. But we're too early to know whether or not that's going to happen.

Okay, on the sales, I'm sorry, did I miss, is it the total dollar of non-core sales? And what was the margin on the sales?

The total dollar of non-core sales was, we sold some condominiums, our last condominiums of the project. So the total dollars, it's in the Supplemental, I want to say it's a little over $20m in total sales. The margins were low. Some of the sales, I think the margins on the condominiums run between 10% and 20% on the last few units there. The San Diego sale, as well as the Union Station sale are both deferred for accounting purposes, and we haven't recognized any gain yet, both because we have future costs to put in. The margins expected at San Diego run very high, north of 50% on the last couple of parcels. And at Union Station, the margins are closer to 10% or 15%.

And the spread there, I was going to ask about the LA transaction. Why is that tighter, Bill?

The cost basis is higher.

Okay. On the JC Penney Ted, my understanding was that your basis of the building on a per foot gave you a lot of comfort at least a year or two ago, before rent changes, were to be able to price below the market, Ted? Is that still the case?

Correct. I mean, you know, your point is well taken. Rents have definitely trended down, but overall, we bought the building for $55 a foot and we still feel very comfortable in where we're at, where we're positioned on that.

Okay, and Ted, where would you put marginal development yields today, back in build-to-suit?

We don't do marginal development.

Incremental?

We were talking about that a little earlier. If it turns into an all-out bidding war, and there are no advantages from a locational or site perspective, and you get ten developers all bidding on one site with good credit, yields are going to be in the 8% range. People believe they can sell buildings with good tenants in it for another 7% range, so you could push down pretty far. The returns that you're seeing from us right now are substantially higher than that. A lot of that has to do with our land position, and the way that we approach development. I think on a go-forward basis our spec product we're hoping to achieve in the 9% to 9.5% range based on today's environment.

Okay.

To give you an example, in Atlanta, which you would and probably should argue is a very competitive market to be thinking about a non-pre-leased building, which we are planning to start one there soon. As you know, we have the three buildings in Atlanta, and they're all leased for many years to come. We have a fairly attractive land position there, but we can offer rents that are very, very low even for the Atlanta market and still get, we think, returns in the low to mid, and potentially the high-nines.

My final question. Ted, would you expect your build-to-suit back backlog to grow commensurate with the amount of inventory of spec building that you've put in the ground?

No, right now the build-to-suit market, in my opinion, is strong for larger buildings, because there are not that many of them out there. But in the mid-size buildings, smaller buildings, there is quite a bit of product, and there's a lot of money in building spec right now. So it's a market that if you want to lease space, you need to do some spec.

There's enough space out there that no one feels the need to think ahead and do a build-to-suit, unless you're looking for a very large space. And there's just not a lot of large space available out there, primarily because historically, there are just not a lot of large buildings. And buildings over 600,000 feet are somewhat of a new trend in the last five years. And prior to that, you really didn't see much of that.

So, we've captured a lot of activity in Southern California. We hope to continue to do that. But in most of the other markets in the country, there is more than enough space available to satisfy demand, and therefore, we don't see a lot of build-to-suit opportunities.

Great, thanks.

Your next question comes from Steve Sakwa of Merrill Lynch. Please proceed.

Good afternoon. Bill, if I'm doing my math right, I think the LA Union Station residential deal worked out to about $30,000 a unit?

That's what I've got written down, yeah.

Okay, and in my notes I also had that you kind of had FAR there for about $5.8m fees that you could build that was office?

I think it's a little lower than that, but you've got it close enough, $5.4m I think.

On an FAR basis I think this in the -- the FAR equipment, I think we're in the low to mid-30s here.

Okay, I guess what I'm sort of trying to figure out if all that space has converted to residential, roughly how many apartment units would you be able to put up there, and kind of just ballpark it at $30,000, sort of where that takes the aggregate value?

Steve, I don't think it would be realistic to think that it all could be, based on how some of the sites lay out. So I don't think I would go there. I would say that maybe there are 1,000 units potential, but I think that to think much more would not be realistic without major changes to our land use.

The density on the sites, Steve, breaks into two pieces. The train station side, where this transaction is taking place, the Prop Ten building is kind of planned for lower density. So this apartment project is type-5 construction. I believe it's stick on concrete podium. So therefore, it's not very high-density.

The other side of the site, which I don't know if you remember, is where the MTA office building is requires a lot higher density. So the market would have to move to high-rise apartment condominium there, which is not out of the question, but it certainly…

Building rental apartments, I think, doesn't seem to make sense. The building cost, I don't think would be supported by the rents that we'd get for rental apartments at that high density. I think realistically the advantages of doing our first residential project is that it makes it a more active site, and I think would make it more attractive for office use. The Prop Ten building should be delivered the first quarter of next year. The other 47,000 square feet, that would be our third office building at Union Station.

And I think it's part of an overall piece, but it would be, I think not correct to assume the whole project…

To extrapolate.

I wouldn't extrapolate any further, no more than 1,000 units.

Okay, thanks.

You're welcome.

Your next question comes from Rich Anderson of Maxcor Financial. Please proceed.

Thank you. Is it your sense that the non-core sales are starting to move faster than you thought maybe three or six months ago, considering the re-entitlement, the Commons and the continued interest in condo and residential market?

Well, I think the activity certainly continues to be very robust in the Bay Area. And so at Mission Bay, although we haven't closed on certain transactions that we're working on, we're very encouraged by the activity level for residential, very encouraged. In that case, it would be faster than we had thought before. But they haven't closed yet, so I'm reluctant to count those chickens.

But we're very pleased with the activity level there, and we're pleased with the activity level of our retail we're doing on King Street. And that will create a more desirable neighborhood I think, so the residential will be successful.

The Alameda residential project, the initial offering of units has been very well received. And so I think that's a great location and a very good product, and we have a very talented partner there as a homebuilder. So I think that is moving along well.

So I don't want to generalize it to a point where I give you a number on the monetization, except to say it's going to be lumpy, and we are encouraged by the activity level, but beyond that, I don't want to be more specific.

Do you have sort of a Plan B in place? I think of the condo market as being a sort of a short window, and to the extent rates rise, that opportunity may distinguish itself fairly quickly. What would you do like six months from now if you find that condo developers are less and less interested? Do you have a plan in place to reverse course?

Well, if you look at what we've done so far, we have 597 units, which we've developed. They are rental apartments. Alameda Bay has 250 units that are rental apartments, and another 280 rental apartments on the land lease that are for rental purposes. I'm not sure when their construction start will be, but that is a fully non-subordinated land lease.

We ourselves only developed 34 condominium units, the Glassworks across from the ballpark. So there has not been a lot of condominium reliance on condominium sales to get to where we've been to date. We do have two sites we sold to Signature. One is just about completed with condominiums, and they're just about to complete construction in November on the second site.

So if you look at it from the standpoint the interest rate has an effect that rental becomes more soft if condominiums can be made more affordable because the interest rates are low. And if that reverses, rent will become more attractive. It's a very supply-constrained city, and I think between the combination of the two, and we have flexibility. Our entitlement does not mandate either residential, wholesale or rental other than 15% of the units must be rental, which we've already exceeded.

So we've got the flexibility of going both ways, and I think the residential market in total will be robust.

Thank you.

You're welcome.

Your next question comes from Rich Sweigard of KeyBanc Capital. Please proceed.

Hi guys, a couple of questions. Are there any changes in your thoughts to total sales gains in the non-core portfolio for this year?

When you say changes?

From guidance, I guess last quarter?

Yeah, I think when I pointed it out last quarter, we took a stab at something. It's as good a stab as any at this point, but it's highly suspect one way or the other.

All right, and did you recognize any lease-termination income during the quarter.

No.

No, all right, thank you.

Thank you.

Your next question comes from David Cody from Lehman Brothers. Please proceed, sir.

My question has been answered. Thank you.

Ladies and gentlemen, this conference is available for replay purposes. The replay telephone number is 1-888-286-8010, and the replay pass code is 5497112. Again, this conference is available for replay purposes. The replay telephone number is 1-888-286-8010, and the replay numerical pass code is 5497112.

And we do have one last question from Jim Sullivan, Green Street Advisers. Please proceed sir.

Got in under the wire.

Hey Jim, it's already over.

At least you guys are still on the line. I have a question for Ted. Ted, the biggest market on the industrial side is Southern California. We've seen an extraordinary cap-rate compression, and in the Inland Empire, we've seen building sales today that are $50+ a foot on buildings that probably a few years ago would have been in the high $30s. The question has to do with property taxes. How are leases written in the market in Southern California generally with respect to protection to the tenant property taxes? When the buildings sell for those high prices, the taxes get redone. Do those get passed through through the Triple net lease structure, or does the owner end up eating that?

Well, typically, the taxes are passed to the tenant. Most brokers in the market ask for Prop 13 protection. That would be very typical in almost all of our leases. Our intent is not to sell our buildings, and therefore, we're comfortable giving them Prop 13 protection, and that's an advantage to going with Catellus as opposed to some of the merchant builders.

The sale prices are so much higher than anyone anticipated. This issue is becoming a bigger and bigger issue. And it's pretty much automatic now that a tenant is going to ask for Prop 13 protection. Historically, it was not as big of an issue because building prices didn't go up that much from what their overall cost would be. Also our land basis is very low. And we're able to maintain a low land basis on the buildings that we develop.

So overall, our property taxes are typically lower than our competitors, and we see that as being good for us and advantageous when tenants are looking for Prop 13 protection.

Do we know where the building prices are, given what's happened to land prices in that market, what's your strategy in the Inland Empire? Are you going to go further east to get land that's cheaper? What are you going to do?

We still have approximately plus or minus 4m square feet of entitlement. Some of that is still under construction right now. The last comp that isn't closed yet, but it's under contract, is $9.00 a foot for land. We proforma'd $4.50 a foot when we did the Kaiser deal. So the numbers have gone up dramatically. Rents have not moved anywhere near enough to justify in our minds that price for land. And time will tell. If rents go up, that's great, we own, you know, 13m square feet of space out there.

And if land values have truly gone up by $5.00 a foot, that's $10.00 under the building if you've got good coverage. And at a reasonable return, you know, in theory that's going to take rent from $3.60 a foot to $4.60 a foot. And we'll enjoy a lot of up side if that occurs. I think that right now the market is overly enthusiastic, about either shooting for too low returns or assuming rents are going to go up too much. So I think we're looking for unique situations like Kaiser to invest in, and those are tough to find. But we've been successful in the past, and I think we'll be successful in the future in finding those.

Okay, thanks a lot.

Thank you.

There are no further questions.

No further questions. Okay, thank you. Well, thank you all for participating in the call. We look forward to the remainder of this quarter. And our next conference call will be at the end of the second quarter.

Thank you all very much.

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