Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2011 Kilroy Realty Corporation Earnings Conference Call. My name is Towanda and I will be your coordinator for today. [Operator Instructions] As a reminder this conference is being recorded for replay purposes. I would now like to turn the conference over to Mr. Tyler Rose, CFO. Please proceed.

Good morning everyone. Thank you for joining us. On the call today with me are John Kilroy, our CEO, Jeff Hawken our COO, Eli Khouri our CIO, Heidi Roth, our Controller and Michelle Ngo, our Treasurer. At the outset, I need to say that some of the information we will be discussing is forward-looking in nature. Please refer to our supplemental package for a statement regarding the forward-looking information in this call and in the supplemental. This call is being telecast live on our website and will be available for replay for the next 7 days both by phone and over the Internet. Our press release and supplemental package have been filed on a Form 8-K with the SEC and both are also available on our website. John will start the call with an overview of the quarter and look at our key markets. I'll follow with financial highlights and initial earnings guidance for 2012. Then we'll be happy to take your questions. John?

Thanks, Tyler, and hello, everyone. Thank you for joining us today. The fourth quarter was another very active and productive period for KRC, capping what has turned out to be one of the company’s strongest and most successful years since our IPO, fifteen years ago. Throughout the year, we made significant progress in leasing, in the expansion of our franchise in the West Coast markets, in bolstering our management team, and in our capital recycling program. Results are evident in our rising occupancy numbers in improving financial results in the list of dynamic companies choosing to join KRC’s tenant list and the changing profile and long term growth potential of our own enterprise. We’re highly focused and motivated, we’re executing well and we’re building momentum in every market we serve. Our fourth quarter leasing efforts produce new or renewing leases on 1.3 million square feet of space in 48 transactions. That pushed us close to 2.6 million square feet of leasing for the year, our strongest annual leasing performance in the company’s history. The nature of many of these leases also says a lot about our growing stature in the market as a landlord who can deliver flexible creative workspaces, as well as global corporate headquarters to meet the unique needs of the individual tenants. In transaction like those with DIRECTV, TD Ameritrade and PAC-12 Enterprises to name just three, we are developing physical working environments in close collaboration with our tenants designed to advance their own creativity and productivity. Tenants such as these don’t view their new workspace as just real estate, but as a strategic advantage in their businesses, and that kind of commitment tends to make strong partnerships and long-term tenants. Our expansion into important West Coast gateway markets also continued in the quarter. We completed the…

Thanks, John. FFO was $0.66 per share in the fourth quarter and $2.29 for the year. That includes $0.06 of share in other income have resulted from a cash payment awarded through the bankruptcy court related to a 2009 tenant default. The fourth quarter also includes about a [indiscernible] of share in broken deal cost. We ended the year with stabilized occupancy at 92.4% that’s up from 89.1% at year-end 2010. Occupancy was impacted by the acquisition of 301 Brannan that is 66% occupied the disposition of the LA industrial property that was 100% occupied, and by moving the 2 San Diego buildings sold in January, both 100% occupied out of the stabilized portfolio. By product type our industrial portfolio occupancy was 100% at the end of the fourth quarter up from 94% a year ago. Office occupancy was 90% up from 88% a year ago. As of today, our operating portfolio is 94% lease. Same-store NOI continued to improve. GAAP NOI rose 10.1% and cash NOI rose 16.2% in the fourth quarter. For the year GAAP and cash NOI increased 5.7% and 8.2% respectively. Excluding the tenant default payment fourth quarter GAAP and cash NOI were up 2.2% and 7.4% respectively, and for the full year were up 3.6% and 5.9% respectively. We had a new paid store supplemental this quarter that provides details on the leases that were signed during the quarter, so we now provide detailed statistics for leases commenced and leases signed. As of today we have approximately 330,000 square feet of LOI’s outstanding all of which are for office leases and 50% are for new leases. We estimated that rent levels on our overall portfolio approximately 7% over market, down from 10% a year ago. We have approximately 1 .1 million square feet of leases…

[Operator Instructions] Your first question comes from the line of Michael Bilerman with Citi.

It’s Josh Attie with Michael. Just a quick question on the new stock plan, you said it was really performance based. Is it absolute stock price performance or relative stock price performance?

Well, I mentioned stock option plan, though that’s strictly performance of the stock. So if a stock doesn’t go up, there is no payment. I also mentioned that the potential restricted stock rents related to the restructuring of the employment contracts and that would still to be determined, but would be based on both a relative and an absolute basis as well as over, as well as time, that’s the workout.

Okay. And how do you think about the dividend longer-term? The coverage is pretty low today, but your balance sheet leverage is low and I understand that you’re leasing up a lot of assets, which requires capital. But over what period of time, do you expect the free rent to burn off and the CapEx to go down, when, at what point do you think you have got 2 more reasonable coverage ratio and then how do the asset sales play into that, because when you are selling fully leased buildings that’s going to probably be dilutive to near-term cash flow?

Yes. That’s a good question and we had the same question a year ago when we, a year ago, we saw it, by the end of 2011, we’ll be covering the dividend, but then we did a lot of leasing, we did the DIRECTV deal, which has leasing commissions in CapEx, which some of that hit in the fourth quarter of ’11. So, it’s hard to predict exactly what is going to come out. But our current projections show that for the year of 2012, we should be just about covering the dividend. It’s a little bit cyclical in a sense of quarter-by-quarter, but the DIRECTV income for the third building doesn’t really hit until fourth quarter or early next year. So that’s fairly accretive transaction. so that will clearly push us into the covering range, but as I said for 2012, we still think taking everything else the same that will be basically covering the dividend this year.

And is there a way to breakout what the free rent component of your straight-line rent is?

It’s usually about 90% of the straight-line rent.

It’s free rent.

Not free rent. Free rent of the straight-line rent.

Your next question comes from the line of Chris Caton with Morgan Stanley.

Two-part question on dispositions and acquisitions. First on dispositions, with regard to industrial what are the key factors and kind of when you either or now right say or JV and is - would that transaction be subject to closing acquisitions and then, John on acquisition front, you've talked about wanting to do and we just heard a little update on focusing on value-added acquisitions. Can you give us a sense of where these stabilized yields are in some other situations you're looking at? What type of spread you look for relative to more core acquisitions?

Okay, well Chris, I'm happy to do that. I've written most of this now, but if I miss one come back to me, will you? On the industrial, the factors that we are looking at are basically where we achieve the best pricing. We are confident that we can sell and achieve very good pricing if we sell out right. We've also had a number of players come to us that are on the pension thought fund side and have said, hey, would you consider doing some kind of a venture where it would involve us largely monetizing the industrial and then, having an activity to acquire additional industrial as we see fit with us having a modest investment in that ongoing activity. In a modest call with regard to do the acquisition of future properties. Now, I want to say that I've never been a big fan of joint ventures, but I don't want to rule them out. I want to do what’s best for the realization of the most dollars for the company. So those are the sort of the 2 bookends that we’re looking at. That process is probably going to take, Eli, how long?

I think that will take us a solid 4 months to kind of get to [indiscernible], knowing clearly where we’re headed.

Right. And one of the calculations there is it’s in the context of a venture if we view that to be a good situation intellectually. But we’re able to, let me give you an example. If at the end of the day it was 85% or 95% realization of repatriation if you will, of the value of the industrial, but it was at a lower overall valuation then we would make the equation that’s not a good trade. So that's kind of where we're going on industrial. We have a lot of people that have approached us on our industrial; it is just amazing how many folks are out there, where we receive so many unsolicited offers frankly at values that are greater than what we valued the industrial at. On the second point with regards to stabilize yields and what we've achieved to date I mean, we've announced that before, but you heard us speak to the assets, value-add we're sort of looking at anywhere from 7.5% to 8.5% stabilized with our near double-digit or better on core and I almost speak to core. We don't see ourselves as being big buyers of core, because it’s been too pricey. The one exception would be is if we could be successful, we don't know that we will be, but if we could be successful in a profile, which included a big discount for replacement cost and rents in place that were significantly below current and below projected future rents when leases role then that could be interesting, if it's a strategic asset. But I want to say that our entire investment acquisition thesis is predicated upon investing only in the very best markets where we do receive discounts to replacement, where we do achieve what we hope to be superior returns. And for assets that has the physicality to meet the needs of the modern workforce, which the bones of the building and the systems are all important because you got to have legs for the value to grow up over time. And I think you had a third point, I'm not sure what it was.

I was asking about spreads, but I think you hit everything pretty specifically, so I appreciate that. Just one last follow-up, do you think on the industrial in terms of the value discussions you’ve had, you think you can hit a $100 of foot in terms of valuation?

I prefer not to comment on that, we'll have the portfolio out in the market soon, and we do not want to give any information right now, that's going to indicate to buyers what we see the valuation as. I'm very, very confident and, a very aggressive core like cap rate and if you were to apply that to our incomes associated with those, I think you can derive your own value and you certainly wouldn't be short.

Just to put in perspective, the transaction that we did roughly 192,000 square feet in El Segundo, which is industrial building. Although highly improved by the tenant. We sold that for $45 million which is $230, round number is $235 a square-foot. We were very pleased with that result, now that's translated to about $220 net to us. But we're very pleased with that transaction, that's in no way endeavoring to say that the rest of our industrial will command such a high price, but that particular asset the El Segundo property have rents, in place rents that were 38% above current market and we achieved very good pricing. So, we feel pretty comfortable that we’re going to get very good pricing on the balance of the industrial.

Yes, just not a third question here, but the supplemental on page 20; you do have a blended rent 685, is that in place or is that escalated and is that a triple-net rent or is there some expenses in there?

All those rents on that page are blended rents. For most of the industrial, it’s going to be triple-net, but it’s a blended number.

And in the footnote, is that escalated or in place?

That’s currently in place.

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

Couple of quick questions sort of Eli, the strategy that you’ve outlined, you and John have outlined sort of implies that once you’ve got DIRECTV tenancy in and Ameritrade tenancy in and those have got some lease term on them, but they would also be candid as for sale and to the extent, could you comment on that? And then also on your Scripps lease, which I think expired in 2027, just what kind of numbers are the, the private REITs paying these days for good buildings and good credit and long-term tenants?

Now let me deal with the first part of that John. We’re not going to comment on specific assets at this point until we announce an asset is going to be put up for sale or that we sold it. I don’t really want to speculate on what assets we might sell. There are some obvious assets within our portfolio where they are pretty well buttoned down for some period of time. so I think it’s probably realistic to think that in due course those assets might be in play. If there is any free rent we probably want to burn the free rent off first. But we also look at the balance between our portfolio and what kind of rents are in place in those transactions and what kind of rents we think that will occur in the future so more to come on that. With regard to the Scripps, lease expiring in 2027, are we talking about, is that the building we just sold or is that the one that’s also in Del Mar? So the cap rate on that was 5.4%.

Is that a private REIT buyer or some other entity?

It’s an institutional; not a private REIT, but it is an institutional level buyer.

Okay. And then Tyler, do you have any intention of redeeming your preferred stock that’s in the mid 7 to high 7s, your preferred shares?

Yes. I mean, it’s a good question. We’ve been looking at that, pricing for us has been in the sort of 7 3/8s range for a while. It looks like it might be going down a bit. we have the 780s out; it’s only $40 million. But as that pricing gets closer to 7 it becomes more compelling, when you, given you have to add-in the fees to do the transaction. so, I guess that’s our way of saying, we’re looking at that and we need a little more movement I think to make it make sense for us to do a lot of that, but something on our radar screen.

Your next question comes from the line of James Feldman with Bank of America.

Tyler, did you say what you think same store NOI looks like next year based on the guidance?

I didn’t but it's about 3%.

That’s in a cash basis?

Yes.

Okay. And then can you guys talk a little bit more about the development opportunities just frame maybe how many opportunities are out there and exactly what markets you're thinking about?

Yes well, this is John, Jimmy. In San Diego, I mentioned the Sorrento Mesa sub-market there. We have pretty strong demand for high-quality facilities are above the 60,000 square-foot, 70,000 square-foot range. And so, I could see starting something perhaps on Lot 2 of our gateway project for about $80 million. We estimate on, based upon the transaction we just did with TD Ameritrade that that would produce and I think I gave these numbers once before, but somewhere in the early 8s, 8.5, 9 on incremental costs and somewhere in the neighborhood of a 100 to 150 basis points less than that. On total cost that's a first year yield on leverage. We’re also beginning to have discussions now that we have a full operation in the Bay Area with development expertise, having discussions. We’ve been sought out by a number of folks in the technology related fields that are interested in having us take a look at building their campuses for them. Whether or not those things go together, they always take longer than one would imagine. But, I think that we’ve had a lot of tours of our Intuit campus and other campuses that we've done here in Southern California with some of the big users up in the Bay Area and I'm comfortable that in due course we’ll be able to be successful in that effort whether that particular initiative will happen this year or not I don't know. And then lastly I mentioned that we have a new hire that I’m unable to announce today, because of confidentiality agreement we have with the current employer. But we’re hiring somebody to run our LA value add and develop its strategy and with that individual, I'm comfortable that we're going to be able to see over time some real results. We think that developing to higher yields in some of these markets is a better play than just buying assets at considerately lower yields.

Okay, and then back to San Francisco -- would that be fee development or...

No, I'm not...

Give it any…

I won’t say, we want to do fee development, but I don't see us doing. I think it’s an inappropriate allocation of resources and takes talent and brainpower away from that which really creates long-term lasting values. So, if we do it, it will be to accommodate our existing client or is an entry into a larger relationship with another client.

Your next question comes from the line of Craig Mailman with KeyBanc Capital.

Jordan Sadler is on the line with me as well. It sounds like you guys have a pretty active acquisition pipeline in San Francisco and Seattle. I'm just curious, do you think the magnitude to get to what we’ve seen in '10 and '11 in terms $600 million or $700 million or is that just too much given were pricing is coming in and the opportunities you guys are seeing?

This is, Eli. It's hard to say. If you look at the pipeline and properties that are coming right now, it looks like 2012 will have more properties trading or higher overall transaction volume than we’ve seen in the past. If you look at the capital environment compared to call at the end of last year Q3 and Q4, I would say the capital environment kind of flattened out in Q4 and has remained flat starting into Q1 here. So I think we’re in a very similar environment that we were in the last half of last year. Probably some modest changes with respect to the amount of capital [indiscernible], modest changes with respect to the number of fields in the market and a little bit of modest amount of extra debt in the market. So all that nets out to me as the environment now is about the same as it has been for the last 2 months. And we'll be looking at everything for things that are strategic, for things where we can create value, where we can create NAV per share through our acquisition efforts and our pre-development efforts and put a number on it, I think it's impossible to put a number on it. And I know that's where you finding get to, but, I see has been act right now, I don't see the door being shut, there was nothing pushing pricing up further at the end of the year, last year, and in some ways moderated. And I think, there will be plenty of opportunities, the properties more in the value add, some in the core. So we’ll look at lot of opportunities this year, how many will execute is up to the nature of each opportunity.

Eli, I’ll add this on to it. That currently we have negotiations going on and I always want to comment that a negotiation is just that even though you might be in the final stages of the negotiation isn't a deal until you've signed a PSA and gone through all the due diligence and close escrow. So with that very specific caveat we have about in addition to the $77 million asset here in the Los Angeles area that we are confident, we’ll close in the second quarter. We have about another $300 million or so in active negotiation between the Bay Area and Seattle that we think we’re making very good progress on, they’re terrific assets and the yields are pretty much where our yields have been over the last year or 2 and these are killer assets. Again, we may or may not end up finalizing them.

That’s helpful. And then just the second question, with regards to San Diego portfolio, what percentage of the square footage or assets however you want to cut it up would be consistent with the medical office assets that you sold so from a price per square foot basis or potential cap rate basis? I’m just trying to get a sense of the breakdown of that portfolio.

That’s a mouthful. The only reason I say that because we own so many assets there, you really need to drill down. But I think what has been, what we’ve seen here is that assets begin to trade at higher dollars. There is a lot of activity in San Diego looking for product. And there is a great line of differentiation between true quality product and product that might be pretty good, but not quite a ground at [Maine and Maine] and I would think that the kinds of cap rates that were manifested here on our MOB would be likely to be manifested in our other 2 MOB properties as well as properties like our most significant portion of our holdings down there like Sabre Springs Corporate Center, like our assets in Del Mar, like the Intuit campus. I think all those, which rate in sort of that cap rate range based upon what we’re seeing today. And the others could be plus or minus.

Your next question comes from the line of Michael Knott with Green Street Advisors.

Couple of questions for you. Tyler, how come you’re going to end 2012 at only 93% occupancy given the percent leased is above that today? I was a little surprised by that. Is there some big rollovers coming this year that you don’t expect to retain, is that part of the math?

I mean we have 2 rollovers that are over 100,000 feet, one is a 144,000 square foot leased in Orange County with industrial, which we think we will retain and the other is HP in San Diego, which we think we will, we won’t retain, whether we get that leased by the end of the year, don’t know. And then the next one down is a 75,000 foot Orange County industrial building that is moving on here in the first quarter. So we do have expirations of a $1.1 million that we need to release and obviously as you get closer to that in 94% or 95% occupancy level is just harder to get that number up much higher than that. So maybe it’s a bit conservative, but we feel comfortable with it.

Okay. And then in terms of office industrial, just curious if you have broken out that portfolio mark-to-market given the unique circumstances of how your LA building traded, I think it’d be good for us to know in terms of trying to value the industrial? Is it still about 20% over a market and offices closer to zero, is that…

I don’t, do you have that number in your head Tyler? I know that in our industrial, we recall we had significant vacancy in the downturn because we have quite a few assets that were expiring at that time that had been leased in a more robust period and had 3% or 4% per annum adjustments and we had big roll down in our industrial portfolio. So maybe you could talk about it generally there, Tyler, you’ve got scheduled.

Yes. I mean, I quoted 7% over market for the portfolio and our numbers is showing about 6% over for office and 14% over for industrial.

However, I would also comment that what we’re seeing is industrial. The strength of demand moving quite rapidly and whether that 14% turns out to be 4% or whatever it turns out to be who knows?

Yes. We’re very close to that right now in selling our industrial portfolio and conditions are quite tight, I mean like they said earlier on the call, they can seize around 5%, there continues to be plenty of activity in demand on it and I think rents if we would have tried to mark them to a minute, I mean they are up and I think my expectation by the time, we’re selling this thing is that we should be selling values that people look at as the portfolio is near market right in the range of market might be a little better, might be a little bit worse. But given the activity we’ve seen by the time we get out there, I think people will view the market, people buying the portfolio will view it to be least largely a market.

Sounds like you already achieved that on the LA sale with 5% of the market there.

Yes. But that’s a sampling of one and we’re going to be out in the market looking at values here very shortly. so I think we have a much better indication of how accurate that 14% or whatever that number might be, it is indeed in this market.

Okay. And then just a similar topic to that, any thought about breaking out your same store NOI performance between office and industrial? You can obviously think about that but…

Yes.

Another question and then my last question would just be John, with regards to Seattle, you mentioned South Lake Union in your comments.

I did it. Yes.

Should we assume that some of the deals you’re working on out there are maybe in that submarket?

I am not prepared to comment on that.

Your next question comes from the line of Caitlin Burrows with Credit Suisse.

How does your guidance reflect your convertible debt given that cap collar they have in place and is there a share price where additional dilution would be more of a risk?

Yes, for every $2 of increase in stock price is about $0.01 a share and in terms of the stock price is around $36, but we have a collar on it, moves it up to about $42.

Your next question comes from the line of Dave AuBuchon with R.W. Baird.

John, relative to your comments regarding in senior level hire in LAs, you’re focusing on that value add development strategy. Was that roundup development or just sort of trolling for redevelopment opportunities within the broader LA market?

Still I think initially Dave it’s going to be value add, this asset that we are buying is $77 million asset, and assets just down the block recently traded for $500 a foot in round numbers, which is we think pretty close to replacement. We are buying that asset…

242.

242 a foot. we think there is some real opportunities to reposition that building not only, because it’s been just functional on its ownership and so forth and they haven’t had dollars for TIs, but the market has been very robust. And we think there’s retail opportunities and what not. so that’s a true value-add place I mentioned in my comments. We think there is some other transactions like that, that are out there, that we’re having some discussions on. Ground up development I think there is a ways a way in LA, but I think in the LA area, obviously you know the markets we lag. In due course, I think that, there may be opportunities there, but I don't see that as something that’s happening in the next year.

Okay. And just sort of moving down to San Diego, can you give an update on your strategy or may be the activity that you're seeing in the [indiscernible] quarter generally, but Rancho Bernardo Corporate Center specifically, because you do have a lot of potential there I think. When you bought that asset there was a certain game plan in place not sure, sort of where that stands today?

Yes, that's an asset that frankly has been; we thought we would have that thing developed some time ago. We've had about 5 people to, 5 brides to the altar, and in each case, we were very close last year, but a company got acquired by another company and they haven’t made a decision whether they want to proceed with the plan and in that case it was going to be the existing 300,000 square feet plus up to another 0.5 million square feet of which half of that would happen concurrently with the initial transactions. That’s kind of on hold, we don't know where that's going? But we are happy to say that, J. Paul with their property, and I forgot whether they call if there did a number of transactions and leased that space. So, we think that bodes well for that market, there is no sizable real square footage available in that market. We do have a number of assets that are very well leased in a couple of smaller ones that are partially leased in that market that, we feel we had a go ahead and re-tenant those which were in the process of or at least the negotiation on. Rents have got to move a little bit for in ground-up development in that market whereas rents they just follow, we just have a TD Ameritrade and some of the discussions we're having with others in Sorrento Mesa, so we think they are for the larger transactions, larger development meeting plus or minus hundred thousand square feet. If you’re talking about developing a 20,000 square foot building I think you’d be out of your mind, because there is a lot of 20,000 square foot spaces that people can go.

So, I-15 is sort in the last market, some market to move in San Diego?

It’s funny about, if you go back and Mike [indiscernible] got pointed out to me a number of times over the years. And if you plot sort of I-15 and you plot Sorrento Mesa it means Sorrento Mesa is on fire I-15 for some reason in sort of the 2-story product chills a little bit until and then sort of the reverse when the I-15 markets may be on fire. It sort of amazes or chills a little bit. The difference I think this time and I'm always concerned about people saying it is different this time, because in my life and I've been around most longer than most people on this call. There is always something new that comes along and it can be good, it can be bad. But you've got to be watchful. What I'm pleased by is that with the technology-based companies it seem to be populate so much of the West Coast. They're really focused on the kind of workplaces and the kind of buildings that help them attract and retain their people, because you're dealing with high-powered brainy people. And they're not looking at space as has frequently been the case with other users as a commodity. They are looking at a campus or a building that sort of personifies the way they want to use space and the way they want - the image they want to have. We think that bodes well for Kilroy, because we’ve tended to have [indiscernible] high quality buildings. So it’s going to be uneven in San Diego, just as it is in LA, but we’re making great improvement down there in leasing and we think we’re going to see rental rates increase over the course of this year.

Okay, I appreciate that response. Just a few more random questions, is there any debt attached to the industrial assets?

No.

Okay. The provision for bad debt expense went up in the quarter. Tyler, the reason?

Yes, there was a couple of tenants, specifically that were on our watch lists, but we’re a little more worried about them, so we increased our reserve to 100% for those 2 tenants.

Any particular market or just spread out?

I think one was in Los Angeles; one was in the San Diego.

Okay. The bank term loan maturity that you're sort of looking at to take out the convert is what?

Probably it’s 4 plus 1.

Okay. And then pricing that you're hearing right now?

Yes, right now we're looking at floating rate. We haven't decided whether we would fix it or not, swap it or not, but on the floating rate basis its LIBOR plus 175 for 2.

Okay. And then thoughts about using your ATM and you didn't put that - you didn’t say anything relative to guidance, obviously you did use in Q4 a lower share price just sort of was [indiscernible] strategic or sort of maybe give your thoughts around the ATM program?

Yes, well I mean, we're trying to, we've been buying a property, we brought 2 properties in the fourth quarter. So the goal with the ATM was to de-lever a little bit, obviously it was very small amount. But, I think if nothing else changed we would probably continue to target to raise a little bit of equity capital over the next few quarters, depending on where we go with more acquisitions for us to be think that, but we want to manage our leverage and we're going to be hopefully closing this office building in the second quarter in Los Angeles. So that's one way to do that.

Your next question comes from the line of Ross Nussbaum with UBS.

It’s Jeremy Woods here with Ross. Just one quick question most of ours have been answered. Is anything with the industrial portfolio contemplated in the 2012 guidance?

No.

Your next question comes from the line of Dave Rodgers with RBC Capital Markets.

John, with the acquisitions you talked about that you’re looking at today both in Northern California and Seattle, you had mentioned early in your comments in the prepared remarks, mentioned a number of submarkets in Northern California. Are you thinking of moving down the peninsula and is there any change in your Northern California strategy? I didn’t hear if you had answer that.

Yes, I figured somebody would catch that, I’m sure everybody has and I sort of figured somebody would ask that question, so thank you. We don’t have anything in escrow in those markets today. We do have a transaction or 2 that we’re looking at. You might recall earlier, in an earlier conference call sometime this past year both when we hired, when Eli joined us as well as when Mike Sanford from San Francisco joined us, both of those 2 live in that Bay Area, have developed in that Bay Area. I think Eli has bought probably and sold more buildings in that area than any person alive, given his speaker days and broad ridge days. Mike Sanford, 10 years younger, but he has had similar experience. We like some of those markets. We probably should have been earlier in some of those markets, but we’ve been very focused on SOMA. And I don’t want to detract from SOMA, because we have some other things going on there. But I do like some of those markets and really when we look at it, your Palo Alto is ground zero, so I used that word is sort of the high price $800,000 or more per square foot for those assets and you sort of radiate out from there. we believe you want to stay in the influence of Stanford University close proximity to where our key decision makers live in terrific locations from accessibility standpoint and then, have a physicality of the assets that respond to the type of tenants that you see in that market. all those things coupled with price per pound and yield made for an interesting play. So I’m not going to say, we’re not going to do it, I’m not going to say, we are going to do it, but I can’t tell you that we have our ears and our eyes to the ground.

All right. And then last question from me. from an operational or maybe an AFFO perspective, are you still adding free rent at the same level I guess, to the AFFO statement we’ll call it, or are you seeing the burn off of free rent? Do you see any large burn off of the free rent during 2012?

We’ve got the DIRECTV free rent that goes through most of the year. So, not really I mean, there’s still a fair amount of free rent in our numbers through this year with the leasing we’ve recently done.

[Operator Instructions] Your next question is a follow-up from the line of Michael Bilerman with Citi.

It’s Josh Attie. On the industrial - potential industrial sale, can you just talk about what your tax basis is in the assets and what some strategies could be to offset any gains, because I noticed there wasn’t any acquisition activity in the guidance?

This is, Eli. I’ll take a quick crack at that. Our tax basis is very low and gains are something we’re going to have to manage very aggressively, very assiduously, which we’re doing, and we do have and we’re constantly in the middle of strategies of how to manage that with respect to gains as well as dilution having the properties go out and not having unidentified replacement properties. So, it's a very complicated matrix that, if you look back the last couple of quarters we had a similar level of activity going on where we were buying and selling several things at the same time. And I would just tell you that internally we have a team of people focused on precisely how to arrange these transactions, precisely how to time them, precisely how to provide, and this is the most important part, provide a high level of optionality both on what is going out and when and what is coming in and when. And it is very difficult getting to play in some respects but once you know how to play it, then you can do it, you can execute it very carefully I would say. Looking back on our execution through the end of this year we’re very pleased with it. It all worked out. We hit it exactly as we wanted it, minimized dilution, minimized any tax gains, distant 31s [ph]. We bought properties that we really wanted to buy, we didn't buy anything that we didn't want to buy just because we had to do a 1031, and so it all came together. So, the bottom line is it's a very rigorous process. We have the team and the system in place to make sure that that all happens and we’ll do the same throughout this year. And it will be a complicated transaction but it will be well managed.

Thanks, that's very helpful. And Tyler, just a quick question on the guidance, you mentioned ATM issuance earlier. Is there any ATM issuance contemplated in the guidance?

No.

And at this time I would now like to hand the conference over to Tyler Rose for closing remarks.

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

Thank you for joining today's conference. That concludes the presentation. You may now disconnect and have a great day.