Prologis Inc (PLD) 2004 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q4 2004 Catellus Development Corporation Earnings Conference Call. My name is Candace and I'll be your coordinator for today. (Caller Instructions.) I would now like to turn the presentation over to your host for today's call, Ms. Minnie Wright, Director of Investor Relations. Please proceed, ma'am.

Thank you. Good morning, everyone, and thank you for standing by the Catellus Fourth Quarter and Year-End 2004 Earnings Conference Call. With us today are Nelson Rising, our 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. We will then open the phone lines for questions. Before we continue, I would like to say 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 10-K for the year-ended December 31, 2003, and our Form 10-Q for the quarter ended September 30, 2004. These documents identify 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 all that said, it gives me great pleasure to turn the call over to Catellus' Chairman and CEO, Nelson Rising.

Good morning, or afternoon, depending on where you are. And welcome to our fourth quarter and year-end 2004 conference call. I will make initial comments regarding our financial results, the status of our rental portfolio, our development activity and the progress with our--with respect to our non-core assets. Then, Bill Hosler will provide further detail on these subjects after which we will both be available to answer questions.

2004 was a very important year for Catellus as we completed our first full year operating as a real investment trust. Among the many notable accomplishments of the year, we completed development on and added to our portfolio over 3.3 million square feet of rental property. This was 100 percent leased. The total cost of development was $122 million and the return on costs was 10.5 percent. We acquired more land in northern New Jersey as part of our strategy to focus on the country's major distribution lines. We sold or placed under contract for sale the vast majority of our remaining non-core assets, freeing up capital for our investors and for our core business, and we paid regular and special dividends to our shareholders in the amount of $1.53 per share.

Earnings per fully diluted share was 71 cents, compared to $1.65 for the same period in 2003. And earning per fully diluted share for the year ended December 31, 2004 was $1.64, compared to $2.30 for the same period in 2003. The extraordinary year-over-year decrease in net income was due in part to the reversal of certain deferred taxes associated with the Company's conversion to a REIT in 2003. Without the reversal effects in 2003, EPS would have increased 44.9 percent year-over-year, primarily as a result of lower income tax expense in 2004, due to the REIT conversion, and higher gains from the sale of discontinued operations. Core segment FFO per share on a fully diluted basis for the fourth quarter was 33 cents, compared to 27 cents for the same period in 2003. Core segment FFO per share, again on a fully diluted basis, for the year-ended December 31, 2004 was $1.48, compared to $1.35 for 2003, a 9.6 percent increase.

At December 31, our rental portfolio totaled 40.5 million square feet and was 94.7 percent occupied. Approximately 90 percent of our 40.5 million square feet portfolio is industrial and this was 95.3 percent occupied at year-end. We feel very good about our occupancy for 2005, but only approximately 10 percent of the portfolio having reached expiration. And parenthetically, expirations for the next three years will be at about the same annual level.

At year-end, construction in progress in our core segment was 4.3 million square feet, of which 2.8 million square feet consisting of 11 buildings will be added to our portfolio. These buildings are a 758,000 square feet distribution warehouse in San Bernardino, California. We pre-leased 250,000 square feet of this building. Then we have a 545,000 square feet distribution warehouse at the Kaiser Commerce Center in Fontana. We have extremely strong activity from our leasing activities and overall the Inland Empire continues to enjoy phenomenal growth in space absorption. For example, in the past eight weeks, four buildings of over 600,000 square feet have leased or are under letter of intent, totaling 3 million square feet.

Catellus has approximately 9.5 million square feet of existing feet in the Inland Empire market with no standing vacancy. We also started construction on a 362,000 square foot building at Ft. Reading Business Park in Claret, New Jersey. We are optimistic about this market, but we have no leasing activity to announce at this point. We have a 348,000 square foot distribution warehouse under construction in Denver. It's currently 32 percent leased. We have 138,000 square foot expansion in Grand Prairie, Texas, and this building has been leased to an existing tenant. We have a 428,000 square foot distribution warehouse in Atlanta that's under construction. APL has signed a short-term lease for 150,000 square feet of--in this building. APL currently occupies 1 million square feet--approximately 1 million square feet in three adjacent buildings. We have four retail buildings at Pacific Commons under construction in Fremont, California, totaling 124,000 square feet. Approximately 90 percent of this space has been pre-leased. And then, lastly, we have a 49,000 square foot building in Glenview, Illinois that has been pre-leased to Delta [ph].

The projected development cost of these buildings is $136.8 million. In the aggregate, these buildings are 25 percent pre-leased and when fully leased are projected to yield a return on trust of approximately 10.5 percent. In northern New Jersey, we closed on the acquisition of two parcels in Woodbridge and this is adjacent to our previously acquired site in Cardaret [ph]. The combined assemblage of these three parcels will comprise the 3.5 million square foot Ft. Reading business partner. We plan to close shortly on the purchase of an additional site, this one in Elizabeth, New Jersey, and this site can accommodate approximately a 1 million square feet development.

When we announced our conversion to a REIT in 2003 with a focus on industrial, we said we would continue with development projects that were not industrial, but that were already underway. These projects included the retail at Pacific Commons, the redevelopment of Miller Airport in Austin, and Los Angeles Air Force Base. I'll give you an update on these three projects.

At Pacific Commons, you'll recall we successfully reentitled 1.5 million square feet of office R&D to over 800,000 square feet of retail use. In 2004, we completed 92,000 square feet and currently have 124,000 square feet under construction. We hope to have that completed in the first quarter of '05. The total cost for this 216,000 square feet is approximately $48 million, with a total NOI of $6 million resulting in a return on costs of 12.5 percent. In addition, we have entered into four ground leases generating a total of $2.3 million in annual NOI.

We are currently evaluating building up to an additional 200,000 square feet of retail space at Pacific Commons. If we do this, the NOI from Pacific Commons retail will be approximately $13 to $14 million, a significant improvement from our office use in a market that is far from robust for that product type.

In December, the Austin City Council approved a master development agreement for the redevelopment of Robert Miller Municipal Airport. The master plan for the 709-acre site includes 4,600 residential units, 2.3 million square feet of office, 1 million square feet of hospital medical office use, and 500,000 square feet of retail. Our role is to act as the master developer for the project. We plan to develop and hold a regional retail component consisting of approximately 300,000 square feet, much like our Pac Commons retail project we discussed a moment ago. We plan to sell sites for the other product types to third party developers. In that regard, Seton Health Care has acquired a 32-acre parcel on which it is currently developing the 450,000 square foot Dell Children's Medical Center of Central Texas, and they have the plans to build a 120,000 square foot medical office building. The infrastructure is well underway and the market appears to be very strong, particularly for residential as well as retail.

And then in 2004, we commenced construction on three buildings at Los Angeles Air Force Base totaling 544,000 square feet. The first building, a 17,000 square foot child development center, was completed in November 2004. The two office buildings, consisting of a total of 527,000 square feet, are targeted for completion by year-end 2005. In the fourth quarter of 2004, we closed on the sale of one of the parcels of land there for residential use for $41 million.

Our strategic focus on industrial development remains our primary commitment to what we believe offers the best opportunity for growing our rental income stream, but the combination of skills and experience that we've built allows us to apply our land development skills to selected opportunities that may not always be industrial. Especially projects that do not require significant capital investment on our part. I think these three projects are excellent examples of the positive results that can be achieved from this approach.

In 2004, we realized $411 million on our non-core activities and this is net of taxes and the continued investment required with respect to these assets during [indiscernible] 2004. Several transactions contributed to this. These included the sale of two parcels to Alexandria Real Estate Equities for biotechnology development, the sale of our interest to Mission [ph] Place. If you recall this was a 597-unit apartment complex with ground floor retail of 83,000 square feet and about 1,000 parking spaces. We sold our interest in this joint venture, but it remains subject to our non-subordinated ground lease, which continues to generate FFO of approximately $3.6 million annually. The sale of our remaining desert land, the sale of five-block site at Oceanside, and of course, the sale to an affiliate of Paragon Capital Management of a significant portion of the remaining urban and residential assets. At year-end, we still had $93.1 million of net book value to be monetized. This includes a 9.65-acre site at Mission Bay entitled for 1 million square feet of commercial space.

We currently are in negotiations with the University of California San Francisco for a ground lease for their replacement hospital on this site. We had a retail condominium unit at Mission Bay that was sold in January of '05. We still have 3.6 million--excuse me, 36.5 acres of land at L.A. Union Station, entitled for 5.2 million square feet of office space. We have two sites--residential sites remaining in suburban Sacramento, Parkway and Sorono [ph]. We are marketing the--we continue to market the product at those two sites. And then, we have an office building currently under construction at L.A. Union Station, and we expect to sell that to the tenant that has released it in the first quarter of 2005. And lastly, we have cash flow from tax increment and profit participation at Victoria by the Bay in Hercules, California.

Lastly, in December, the Board of Directors and I agreed to extend my employment agreement through 2007. I look forward to continuing to work with the Management Team over the next three years and to ensure that an appropriate succession plan is in place at the end of that period. With that, I will turn it over to Bill Hosler.

Thank you, Nelson, and hello, everyone. Nelson mentioned we reported core FFO for the quarter of 33 cents versus 27 cents last year. This is probably a penny or two below where we thought it would come out on the last call, primarily due to a write-down we took on an income property in Dallas that we hope to sell, and some land in suburban Chicago. For the year, we're at $1.48, which is up almost 10 percent over last year. The write-downs in Q4 totaled $4.2 million in our core segment relating about $1 million to land in suburban Chicago and about $3 million to our office building in Dallas. You'll remember that we bought that office building over three years ago as part of an exchange out of some land we had. Its largest tenant is J. C. Penney, whose lease matures this November. Our original plan was to hold the building and re-tenant over the next couple of years, however, instead, we've marketed it for sale, which has led us to realize a write-down now. It's never fun to write-down assets, but the plan was always to make more money in the first three years than in the next three years in this asset. And we're hopeful that in today's market we'll achieve a good value and not have to take the risk of leasing. In the three-plus years we've owned it, our $12 million initial equity investment has earned over $11 million in FFO. And after taking into account the $3 million write-down, we generated about an 18 percent IRR. So stay tuned on that one.

For the portfolio, occupancy is in line where we had projected it would be at year-end at 94.7 percent. Of the 2.1 million square feet of vacant space, over 600,000 is under discussion or negotiation. Of the remaining 1.5 million square feet, about half relates to two buildings, one in Dallas and one in Stockton, which we talked about before, too, industrial buildings. Both of these emptied out in the last half of 2004.

Quarterly and full year same store results were generally flat, which we view as positive in the current environment. In the fourth quarter of '04 versus '03, same store rose slightly overall .2 percent. Industrial was actually down, due almost entirely to lower occupancy, again related to that stock in the Dallas buildings that emptied in the second half of '04. It's hard to predict same store or find much useful trend data in a given quarter, due to the terms of specific leases, timing of expenses, and how accounting charges impact a portfolio of our size. We'd rather look over longer periods.

Going forward, we currently expect to see same store over the next year decline about 2 percent in industrial and even more in office, potentially as much as 4 percent overall. We're seeing no evidence of any rental increase in markets outside of southern California, and in fact, rent pressures continue to be driven by low development returns. Demand seems improved over last year, but rents have continued to decline in most markets, again, primarily because of low development yields.

Much of our portfolio outside of southern California pays current rents that are at or above current market, and although we would expect occupancy to hang around 95 percent plus or minus, we expect to see continuing pressure on rents until cap rates increase or replacement cost of buildings increase even more. The good news there is that we are seeing development yields at record low spreads even to today's low cap rate. So it seems unlikely that rents will continue to go down unless cap rates fall further.

Over the last several months, our industrial rents on renewals and rollovers have rolled down over about 3 percent on average and we're fortunate that we've extended many of our leases early part of this year at flat rents. Our office rents have rolled down even more. The overall portfolio size is actually a little than Q3, due to the sale of a couple of buildings in Tuscan and Anaheim, California in North Orange County. They're both user sales where the buyers plan to build specialized improvements. The Anaheim building is 130,000 square feet with 30,000 square feet of mezzanine. And actually, a church purchased it and they are building a sanctuary in the warehouse. Tuscan is 67,000 square feet with approximately 15,000 square feet of mezzanine. An after-market car parts manufacturer purchased it. Both buildings were originally built-to-suit many many years ago and with the substantial mezzanine space could almost be classified as special purpose, which clearly makes them a challenge to release. They were both vacant with no lease prospects when we sold them. These assets were part of the portfolio we inherited from the railroad.

I've already discussed our objective to try and sell our Park Central office building in Dallas in 2005, which represents our most significant leasing challenge over the next year. We don't have current plans to sell any industrial property this year. We have under contract a small retail asset in Arizona, and we're looking at the possible sale of some of our other large multi-tenant office buildings.

One acquisition of note that I want to talk about, we're under contract to buy the 50 percent interest in our Embassy Suites Hotel in San Diego that we don't already own. Now this does not represent a new foray into hotels for us, so please don't write a headline to that effect. Hilton will continue to operate the property, but have decided to sell their interest. Our joint venture agreement has a buy-sell feature which could have been triggered by the buyer of Hilton's interest. In our hotel joint ventures we have a negative tax basis, which essentially makes it very expensive to sell as a partnership interest and the prospect of having the buy-sell triggered by a third party was not attractive to us. However, once we acquire the other 50 percent interest, it makes it easier to sell or net lease the asset in the future. The economics are that we're paying about $16 million in equity for the 50 percent interest and assuming approximately $20 million in debt. That values the total asset at about $72 million and it's expected to produce somewhere between $7 and $7.5 million of NOI this next year. The benefit to us is that we're not forced to sell and we have a better chance of realizing the full value of the asset down the road through an exchange, rather than trying to sell a partnership interest and pay tax. It also helps clean up some of our disclosures that will eliminate one of our operating joint ventures.

In terms of core development, as Nelson mentioned, we started several buildings in Q4, most of which are in southern California. For 2005, we are estimating development starts 3 to 4 million square feet, mostly industrial, but also some retail remaining at Pacific Commons. At this point, we expect the majority of our starts to be build-to-suit, but that may change at the leasing of our existing construction accelerates. We're seeing very competitive build-to-suit markets with yields in the mid-7 to low-8 percent range. We are told of private developers competing at return on cost spreads to cap rates of as low as 25 basis points, which translates into just a dollar or two per square foot in profit to the developer. As you know, we are very focused on replacement value and replacement cost. And if that margin continues, you may actually see us buying new lease buildings, as we think it unlikely the cost of delivering buildings goes down significantly from here and the risk of developing generally warrants a much higher spread, particularly when your plan is to sell the building.

Nelson mentioned the activity in the non-core assets. Last November, we announced the sale of a large portion of our non-core assets to Fairlawn in a transaction we call Fossil. As part of that deal, we provide about $276 million in financing. Although the maturity of the loan is technically six years, the loan gets paid down as properties are sold, and given that a lot of it is under contract, we expect to be outstanding for just under two years. We've included yet another new page in our supplemental, page 12, which provides some detail of the existing notes we hold, their interest rates, and when we think they'll pay off. Note that on the Fossil deal, we have retained an obligation to finance certain property sales from Fossil to third parties, as discussed in the footnote on that page. As a result, although the Fossil note should pay down quickly, we will have other notes that last for another year or two, but at a lower rate than we're getting from the Fossil loan. We have also provided in our supplemental a page that lists the remaining non-core assets, that's page 31.

As we discussed last year, with the success we had on non-core sales, we generated a lot of TRS taxable income. When a portion of it was dividended up to the REIT, it gave rise to a special dividended of 45 cents a share that Nelson mentioned, which we've since declared and paid. We also discussed the Catellus dividend for 2004 was approximately half ordinary income and half qualifying dividend income. One item of note, we had a large cash balance at the end of the year. This was due to a large cash balance at the TRS from the Fossil sale. Correspondingly, we do own our credit facility at the REIT level so that we could finance the sale. For REIT planning purposes, we limited the dividend from the TRS to the REIT in 2004. We have subsequently in 2005 dividended out the rest of the cash and paid off our credit facility, so our balance sheet will look a little more normal in the first quarter.

We have posted on our website a page detailing our earnings guidance for the year 2005. We've provided an abbreviated income statement for both segments, which is reconciled to FFO. We've provided this guidance as a point estimate, the same that we provide to our Board. However, recognize that the actual numbers will likely be in a range around that. We're estimating core segment FFO estimate 2005 as $1.63 per share. That's up about 10 percent over 2004. You should note that although our overall interest in G&A incurred by the Company will be approximately the same this next year as last year, much more of it will hit the core segment as expense, as we had less overall capitalized interest and G&A due to the land sales in the fourth quarter, and will allocate almost all of our total G&A to the core segment in 2005 as we have fewer non-core assets. For non-core, we provided an estimate, but I'd expect this to be very volatile. It's highly dependent on certain sales that are difficult to predict with accuracy.

And finally, we've completed our Sarbanes-Oxley 404 compliance, expect a clean opinion from our auditors, and I am personally quite grateful for that.

And with that, I'll open it up for questions.

Candace, you ready for questions?

(Caller Instructions.)

Somebody must have a question.

Candace?

Our first question comes from David Shellman of Lehman Brothers. Please proceed.

Yeah. Hi, everybody. I have three questions. Do you have any idea what the fee structure from the Miller Airport in Austin is going to look like? The fees that you just roll off as being master developers since mostly it's going to be done for fee, selling the land and developing the land, doing the development, and you're only going to keep a small portion of it?

Sure, the structure is--from an accounting standpoint it will be interesting. We'll actually probably consolidate the property on our books, although it has from the--it has a zero cost basis to us. But essentially, what happens is we're entitled to 15 percent of the proceeds of any sale of any of the property. In return for that, we're providing infrastructure, which is fully reimbursed, again, at a 15 percent return. So the entire revenue scheme of the project is probably going to be somewhere in the $150 to $200 million worth of land. And so, you can think of us getting essentially 15 percent on that. Now there's a little bit on top of that. We get some, you know, what I'd call G&A offset fees. I think it's about $500,000 a year. We get the ability to capture part of the brokerage fee on some of the sales that could be up to another 3 percent. But that gives you kind of an order of magnitude. To the extent we put capital in for development, we get a 15 percent on that, as well as 15 percent of the proceeds of the--of all the sales of the property.

And is this going to start in '05?

The--we probably won't--we had one sale which was kind of cut out of the deal, the Seton Hospital, at the end of last year. I don't know that we planned on any third party sales happening this year, which would be the earnings trigger event. But retail that Nelson talked about, that right now we plan on probably buying the land from the city and we've negotiated--we're in the process of negotiating a price for that. Essentially, whatever price we negotiate as the fair market value, we get essentially a 15 percent discount to that, because we get the 15 percent of the sales proceeds. And then, we'd own that and develop. But there probably won't be an earnings event out of the Miller Airport this year.

So is '06 something--you could start getting something in '06?

Correct. And total expectations away from the retail development probably $30 to potentially $40 million.

Right. Over--that would be over like a five to 10-year period or something?

Yeah, I think that's fair.

Okay. Something--depending how fast it goes. You know, it could be sooner or later depending.

If the market stayed exactly as it is today, it would go pretty fast.

It will be three or four years maybe.

Yeah. But realistically, it's going to be a half a decade to a decade.

But then, as I mentioned, we are very encouraged by the interest that we have been getting from residential developers, both multi-family and single-family. And extremely encouraged by what we're hearing from potential retail tenants. So those two product types, three product types, rather, should come on quite nicely.

Okay. Now another question for Bill. Since you have--you dividended up from the TRS into--in January of this year, are we getting another special dividended this year?

No. You know, the last call we talked about there--if there is the potential one, it's maybe a nickel or a dime. So it's probably too early. You know, what happens when you dividend money out of a corporation, the first dollars are the taxable income generating NP, and the rest of it is the basis. So we had a lot of basis in the TRS that got monetized, and the loan came out of the REIT, so we ended up with a tremendous amount of cash there. And to the--as you also know, under the REIT, you can only take I think 25 percent of your income at the REIT can be TRS dividend?

Right.

So we wanted to be extra careful. And, you know, we probably could have dividended all the money up. There wasn't enough ENP to trigger that risk. But to be safe, we limited it to about $75 million. That's what gave rise to the special dividend. The rest of the money that came up probably only had about $10 million of extra--.

--And how much money did we dividend up in January?

The bulk of it, $100 and--well whatever--essentially, wherever you see the cash on the balance sheet, all but about $50 million of that.

Okay. Now then, one question for you, Nelson. Going back to Pacific Commons. Have you had any further discussions with Cisco about what they're going to do with their leasehold there?

Not recently.

Not in the last several months.

But we are looking at potential use of that with Cisco for something other than the office park. And that--nothing's really come together on that yet, but those conversations I think will be more active in the future.

Is it fair to say you have to do some kind of JV going forward on something, a retail or residential type project there?

Well, certainly, those are the two uses that the market would respond do I think quite favorably.

Okay. Thanks a lot.

Our next question comes from Chris Haley of Wachovia Securities. Please proceed.

Bill, I was trying to write down the stuff on the hotels and coming through--your brevity was appreciated, but I wonder if you can go back on that for me?

Okay. The Embassy Suites?

Yes.

So this is a 50/50 interest with Hilton, it was actually with Promis [ph] a long time ago. I think it was--the hotel was built 1988. And then, Hilton bought Promis. So it's a 50/50 straight venture. The purchase price of the asset, the equivalent for the whole asset is about $72 million.

$72 million is the imputed price based upon what you're buying the partner out at?

We're buying half of it for 36. And then, the existing asset has secured financing on it of about $40 million. We're paying $36 million for half, less $20 million of debt we're assuming so about $16 million of equity. The NOI from the property this year is projected to be somewhere between $7 and $7.5 million.

In '05?

In '05. It's been fairly stable the last several years.

And that's through your equity investment lines. That's going to move through this line now?

Yeah, so right now we receive about $1.4 million of income in equity and income of operating joint ventures below the operating line.

$1.4 million a quarter.

$1.4 million a year.

Yeah, sorry.

The other big number there is the New Orleans build and nothing's happening to that. So about $1.4 million a year. What's going to happen instead is it will all come onto the balance sheet. It'll be reflected up at--up in the rental revenue line and operating costs and it will bring interest on, etc. The net impact, though, is probably essentially that $1.4 million plus a little depreciation add back on our $16 million investment.

Okay. Thank you. On your development pipeline, you said that you are unlikely to see more inventory adds or build-to-suit would be the orientation. However, for the last couple of quarters you guys have built up a pipeline through a high amount of spec or inventory work. So what has changed in your mind over the last three to six months to change your capital allocation to [indiscernible] back?

It's an ebb and flow, Chris. I mean, right now we have buildings without lease going on in southern California, Denver, Atlanta, and New Jersey. So the idea of building spec on spec doesn't seem to make a lot of--I mean, it's not something we would normally do. Although in southern California right now we do have two or three buildings going on. But that's a unique market. And then, the other markets that would be available in theory are Dallas and Chicago, both which have very, very high vacancies. So the amount of spec we build--we are hoping we can hit 3 to 4 million square feet of new starts this year in industrial. But I guess it would--to the extent it happened soon, it would be on the build-to-suit side. And there are some deals in the works that we feel relatively comfortable about. [Inaudible] we wouldn't start spec is just because there's not an available market without spec product available right now. If [inaudible] leases right away, I think we have the potential of starting another site there by the end of the year unless the market changes in Dallas or Chicago potentially.

Our [indiscernible], Chris, for example, at Kaiser. Certainly at Kaiser specifically and in general, in the Inland Empire, is that given the robust nature of that market, that we have had very good success of leasing buildings once we get them started. And kind of the nature of the market there is that the demand is such that people want what--they want to be able to know the precise date they can move into a building. So therefore, starting it gives us the real advantage there. So we--to follow that, yes, it's built without a pre-lease. Based on that market, we don't really view that as the traditional kind of spec development.

Is your comment flavored also possibly by longer lease up times versus what you originally expected three to six months ago?

No, we're still within our--well within our lease up period of the buildings that are under construction. We usually underwrite a year of lease up. We're not--on some of the buildings we're [inaudible] after completion. Most of the buildings aren't even complete yet. That southern California one just started, for example, in the fourth quarter. I think New Jersey is not delivered until June. So at this point, I would say we're still feeling like we did when we started them.

Okay. All right. Thank you.

(Caller Instructions.) Our next question comes from Ross Nussbaum of Bank of America Securities. Please proceed.

Hi. It's Kristy McGiller here with Ross. Given the reallocation of G&A from non-core to core, is it a slow ramp up, or is it a one-time increase that would establish a run rate from there?

You know, you can see from our guidance the G&A in the core segment is going way up. The overall Company G&A is basically flat to last year. All we're doing is saying hey all the G&A we were allocating to the non-core--we're essentially moving all but about a million or two of that into core.

So in the core segment, it's all going at one time?

Yes, it was a one-time transfer. It happened basically November 24 when the Fossil deal closed. So in reality, there is probably a little more G&A being spent still on the--I would call the remaining non-core asset. But we've started to bring in--we've started bringing in fee income on the Fossil deal. So essentially, the fee income and the G&A will basically offset each other, at least for this year. And then, we'll figure it out going forward.

Okay. Aside from the Dallas property you referred to, what are you planning to sell specifically in '05 and are you looking to exit any markets?

We tend to think of things more from a property standpoint. You know, we--rather than a market standpoint. But we have two other large multi-tenant office buildings that we at last feel won't perform as well as they had in the past and that's the property down in San Jose and the property in downtown Chicago, the Rowe [ph] Exchange Building. I think in a perfect world we wouldn't own those. But we have to make sure we can not only get out a right price, but get into something else that makes sense. Both of those would have to be exchanges, as is the Park Central building. But if we were to achieve all of that, we would not just substantially reduce the office square footage, but we'd dramatically reduce the office exposure and rollover over the next several years.

And we feel that it's a good opportunity to look at this because there is some very attractive pricing for office product in those markets. So, we're going to look at it real hard. We haven't made any firm decision to do it, but it seems to us to be worth pursuing.

So what type of cap rates are you expecting?

The buildings are both, I mean, you know, the Park Central building is going to be 70 percent empty in November. So--and the other two buildings are probably 20 or 30 percent vacant right now. So the NOI is going to be lower on all of them. So when I talk about cap rate, it's probably more of a stabilized cap rate, which is definitely going to be a spread to industrial, but not the same spread historically you would have seen for that type of asset. It would be narrower. So, you know, it's a higher risk, slightly higher return asset. It probably makes sense now to go from that to a lower risk asset.

But the--yeah, but the challenge is going to be where we redeploy the capital. So our decision is going to require a valuation of the value we're receiving, and what we do with those proceeds. And cap rates seem to be certainly not going up on industrial. So we're going to evaluate it very carefully. We just wanted to alert you that this is what we're thinking about.

Hey, guys. It's Ross Nussbaum. Your stocks come in at about $5 year-to-date, which is, I would think somewhat surprising since you've actually increased the visibility of what the non-core stuff is worth. Would you consider a buyback at these levels?

The stock closed at 36 at the end of the year. So it's like three bucks, right? I guess five from the high.

Yeah, from the high.

We would consider, I guess, lots of things, but we don't have any immediate plans for that.

Thank you.

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

Hi, thanks. Just a quick one here. Do you have any plans to replace any--the senior--I think you had one or two resignations at the senior level? Any plans to replace in the near term?

You're referring to Tim Boden [ph].

Yeah, that's right.

Tim had been with us for 10 years and he has moved on as of the 15th of February. Ted Antanucchi [ph] has assumed the responsibilities that he had and so at this point we are not planning on making a--.

(Caller Instructions.)

--We have not planned to replace Tim. We have--.

--Rich, you'll remember at the end of 2003 is when we announced and Tim announced that he was going to retire in the first quarter of 2005. So it's been--the transition has been in the works for quite some time.

But we do have plans to expand our staff in suburban Chicago and Atlanta. And so those efforts are underway right now. Hello?

(Caller Instructions.) Ladies and gentlemen, this concludes the question-and-answer portion of today's call. However, there is a replay available for this conference. The replay toll-free number is 1-888-286-8010 and the replay access code is 94579183. Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a great day.