GlobeSt.com: Let's talk market conditions in general at first. How's it looking?

Kincaid: The outlook is pretty positive in the sense that the office recovery has steadily gained steam since last year. There's a strong dynamic of good absorption and not a lot of construction outside of a few markets that are healthy enough to support it. So we've seen vacancy drop considerably. Suburban vacancies have dropped from as high as almost 20% to around 13.4% in the places where we do business, and central business district vacancies are down to 9.5%.

The other element I am positive about is that job growth is pretty diversified, unlike the end of the '90s, when it was heavily weighted toward telecom and technology. There's growth in traditional white-collar, office-based employment with no sector dominating. It may not be as robust as we've seen before, but it's very broad-based.

GlobeSt.com: Are we becoming less cyclical?

Kincaid: To the extent that the economy is becoming less cyclical. If you look at the depths of the past two recessions vs. 1980, '81 or the 1970s, you could argue that, yeah, it definitely is. But as goes office demand, which is really tied to employment, so goes the office industry. If there aren't enough jobs being created there won't be much demand. The bigger issue to me is that supply is staying far more in line with demand.

GlobeSt.com: So how does all of that relate to EOP?

Kincaid: As the largest owner of office space in the US, supply being inline and the job growth are very good things for us. Certain markets that previously had lagged this recovery and where we had a big presence--Boston, Chicago, San Jose, parts of Northern California--have started to turn a corner, Chicago being the biggest surprise.

GlobeSt.com: But you've shed assets in Chicago. How does that jibe with what you just said?

Kincaid: Two things are going on. Broadly speaking the investment market for institutional quality office space is completely on fire. There's an abundance of capital that's pricing these assets at far lower total returns than we would accept. Let's start with that.

There's actually a lot of momentum in the Chicago CBD because it has extraordinary access to labor. There's a highly educated work force and a great transportation system. In 2002, the city of Chicago gained population for the first time since the early '70s, and you're seeing a lot of people move Downtown, so we like the dynamics of Chicago, but it's always just a question of working our portfolio and adjusting it. At this point, we have a lot of square footage here and we would sell some of our older assets and re-invest.

GlobeSt.com: And what about the Atlanta exit?

Kincaid: Atlanta is a place we've debated for a very long time. Historically Atlanta had been a pretty good place to be, early in a cycle. It usually pulled the US out of recessions with very strong demand and absorption. That's not the case this cycle. It just has not generated the absorption it did previously.

At the same time there's roughly 3.5 million sf under construction in a market that still has an 18% MSA vacancy. So we debated Atlanta when we were looking at some of our markets, and our conclusion was that it probably skipped a recovery phase and jumped right into a development cycle. We don't see that vacancy going down, so we asked ourselves if we wanted that much capital invested in that market, and the answer was no. Broadly speaking, you're going to see us invest more into supply-constrained markets.

GlobeSt.com: What you've called the "better places" to invest. Where are they?

Kincaid: You can look at New York City, Washington, DC and Boston, certainly Northern and Southern California and the Pacific Northwest. We also still like smaller markets like Austin and Portland, OR, and we've entered Southeastern Florida.

But the big common denominator and the real delineation is where do you want to have infrastructure through the cycles. When you get to be our size, it's hard to implement a trading strategy with what at one point was 140 million sf. We want big positions in markets where we're comfortable having the people and the regional infrastructure. All of these places are supply-constrained, they tend to be very attractive places to live and work and they have the intellectual infrastructure to support white-collar demand long term.

GlobeSt.com: Numbers for 2006 look pretty good, better certainly than 2005. Was it that performance that drove the "streamlining?"

Kincaid: What's driving it is that, at one point we had 140 million sf and we had the infrastructure, frankly, of a company that was 150 million to 200 million sf. We've been shrinking steadily and could easily be under 100 million sf by the end of the year. When you're shrinking like that, you've got to keep the appropriate level of overhead and resources where you need them.

GlobeSt.com: You can't shed a city like Atlanta and not lose staff.

Kincaid: No, and if you're responsible you don't shrink even in core markets like Chicago without looking at your structure. We'll probably stay at a smaller size for a while since we don't view this environment, where there's an abundance of capital chasing deals, working it's way out soon. It would take dramatically higher interest rates, and even then there's a backup of allocations. We'll find deals, but we're going to be selling more than we're going to be buying.

Overall, we're getting down to a point where we'll be selling within our regions and hopefully we'll get to a more balanced investment market where we'll be recycling capital, selling in some places and reinvesting. Right now it's pretty out of balance, but ultimately we'll be net acquisitors.

GlobeSt.com: With more dispositions will more staff go?

Kincaid: No. We've put into place an organization that's right-sized for our anticipated size. You don't want to do this more than once. It's not fun.

GlobeSt.com: It's a very different EOP than 10 years ago. The perception is very different.

Kincaid: It's not a perception; it's a deliberate change. Even when I was CFO we had to ask ourselves what was working and what was not. We grew by 100 million sf in a five-year period of time. We had to ask ourselves how to make all of that work for us, and we found it didn't do us a lot of good to have a stray asset here and there. Where we did find both revenue and expense scale and real outperformance was in big market concentrations. It's clear as well that at least in the public market there's an extraordinary punitive multiple discount for some of the cyclicality of the less supply-constrained markets. It's true not only in office, but also in multifamily and retail. You've seen a lot of companies go coastal for that very reason. We weren't happy with our total returns and we determined that we didn't want to be in every market. Rather, we determined to be in fewer markets and in those markets be a leader. We started this process in 2003 and we've sold about $5.25 billion and about 35 million sf. It's been a massive repositioning. But the quality of the portfolio that's left is exceptional, and it will become more so when we finish what we're trying to do.

GlobeSt.com: So size isn't everything?

Kincaid: I'm not trying to put the company where it will win size rankings. We'd like to win more total-return profitability rankings. Size is not relevant to me. What's relevant is a great portfolio in the right markets that can perform better over time. I'm not going to apologize for almost 19% returns over the past few years.

GlobeSt.com: In broad terms, how does the new corporate structure look?

Kincaid: In the attempt to right size the company we've been pulling away some of the autonomy on those things where it didn't matter to be local. You don't have to reinvent service-level standards and contracts and vendor agreements in every local market. These could be centralized. The final step was to take away the whole regional SVP level, which was only one of the changes in the 360 positions we're reducing. And it works because we've got very strong VPs in these markets.

GlobeSt.com: You're cleaning your P&L. Given all the mergers and rumors of mergers, could there be an announcement in future months?

Kincaid: Who knows? We're trying to run the company so we can create as much shareholder value as we can. Everyone's in a very strong ownership position in this company, so we'd always do whatever is in the shareholders' best interest. But we're positioning the company to be successful long-term as a stand-alone public company. That's our focus, and that's what all of this is designed to do.

GlobeSt.com: Would you ever be in the market to buy someone else?

Kincaid: Again we would do whatever is in the best interest of our shareholders. Right now the arbitrage is more public to private. You've got total returns that are below the cost of capital for anyone in the public market. That will stop only when there's no more arbitrage. So I expect privatization will continue.