Kilroy Realty Corp (KRC) 2003 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Kilroy Realty Corporation first-quarter 2003 earnings conference call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. At that time, if you have a question, please press the 1, followed by the 4, on your telephone. As a reminder, this conference call is being recorded Tuesday, April 29th of 2003. I would now like to turn the conference call over to Richard Moran, Executive Vice President and Chief Financial Officer. Please go ahead, sir.

Thanks very much. Good morning, everybody. Thanks for joining us. I am Dick Moran and with me today are John Kilroy, our CEO, Jeff Hawken, our COO, Tyler Rose, our treasurer and Heidi Roth, our vice president for financial reporting. At the outset, I need to remind you that some of the information we'll be discussing this morning is forward-looking in nature . Please refer to our supplemental package for our statements regarding forward-looking information in this call and in the supplemental. This call is being webcast live on our website and will be available for replay for the next seven 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 are both available on our website. We released our first-quarter results yesterday afternoon. FFO was 83 cents a share, 3 cents ahead of consensus. John will begin with some remarks on the quarter and conditions in our key markets. I'll cover the financial highlights. And then we'll be happy to take your questions. John.

John Kilroy, Jr.: Thank you, Dick, and hello, everyone. Thanks for joining us. The California economy, as measured by employment dynamics, changed little in the first quarter of the year. The statewide unemployment rate has hovered around 6.6% for three months running, and the aggregate number of payroll jobs statewide is about the same as at year-end 2002. With large -- large net job losses leveling off in recent months, some local economists have begun to shift from negative outlooks to a more measured wait and see tone. And there was some challenge -- or some encouraging news in the most recent employment report. Revenue collected by California in the form of personal income tax withholding payments climbed by more than 5% in each of the last two months. The ongoing loss of technology jobs also appears to be receding, although unemployment remains considerably higher in Silicon Valley than in southern California. In most of our markets, unemployment rates continue to decline in March, although the monthly rates are not seasonally adjusted and tend to jump around a lot. L.A. County's rate fell to 6.3% from 6.7% in February. Orange County's rate fell to 3.8% from 4%. San Diego's rate held steady at 4.3%. Job data aside it remains difficult to predict with any precision the temp Poe or direction of the state's economy right now. We appear to be moving essentially sideways. California must still contend with a challenging budget deficit. The general economic weakness apparent around the country, and the globe, and the yet unknown impact on trade from the SARS epidemic. All of these issues are likely to affect economic momentum through the remainder of this year.

Commercial real estate markets in southern California reflect the lack of conviction in near-term economic growth. Activity remains subdued, and lease negotiations are protracted. In this environment, we look for successes in base hits, not home runs, although we have some of both in the first quarter. Of greatest note, we executed two significant new leases in San Diego during the quarter, and are close to signing a third, underscoring the attraction of that even in these more challenging times.

The Orange County industrial market also remains solid. Farther north, we signed a few leases in west L.A., while El Segundo continues to be our toughest market. In this environment, our stabilized portfolio gave some ground, with occupancy decreasing to 92.2% from 93.7% at year-end. Within our development activities, we have three projects in lease-up and one project under construction. These projects are 60% leased, and 63% committed, with letters of intent. We also now have four projects in redevelopment, totaling about 473,000 square feet. The first project is an Orange County office building, two stories, where we've modified the building and upgraded the parking availability to be consistent with what now works best in that sub market. Two properties are office to life science conversions in San Diego, and the fourth project is the office redevelopment of 909 (inaudible) in El Segundo that we discussed last quarter.

Now let's take a more detailed look at our markets, starting with San Diego. We currently operate in four sub markets in coastal San Diego, and our stabilized properties there had an overall occupancy rate of 90% at the end of the first quarter. In both Rancho Bernardo and the La Jolla UTC sub markets where we compete in the two-story product type, our properties are 100% occupied. From a market perspective, Rancho Bernardo has a 8% direct vacancy rate and a 9% total vacancy rate. UTC has a 6% direct vacancy rate and a 21% total vacancy rate. In [Serento Mesa] all of our properties are also 100% occupied. We took two properties in this market out of the stabilized portfolio during the first quarter, as part of office to life science conversions. One of these properties is already 100% leased. The other is the property formerly leased to Erickson. Overall, the two-story product type in [Serento Mesa] currently has a direct vacancy rate of 12% and a total vacancy rate of about 21%.

Our fourth San Diego sub market is Delmar. It continues to be one of the region's most sought- sought-after office markets, particularly for the premier office buildings that are well located, offer signage and amenities and are designed to meet the changing needs of the tenant base. It is also the market in which KRC has had two very challenging tenant issues. As most of you know, Peregrine filed for bankruptcy last year and the law firm of [Broveck], [Flayinger] and Harrison dissolved earlier this year. Notwithstanding this, we've made real progress releasing the Peregrine and [Broveck] spaces. Let's discuss Peregrine first. Last quarter we advised you that Peregrine had indicated its intention to reject the remaining two leases it has with us at KRC's five building, 540,000 square foot Kilroy center, Delmar complex, formerly called Peregrine systems center. While the lease rejections may still happen, Peregrine has delayed taking the action, and continues to pay rent on both leases. Peregrine is now indicating that while it intends to reject the building 5 lease, it would like to stay in a portion of building 2. This is a fluid process and we will update you when we have definitive news.

The good news is that we signed two full-building leases during the quarter, with a financial services firm of Fair Isaac and the international law firm of Paul Hastings, [Jenansky] and Walker. So at the moment, all five buildings are fully leased. Here's an updated summary. Building 1, the smallest of the five buildings, totals about 52,000 square feet. Its lease was rejected by Peregrine last year. In late March, we signed a five-year lease for the entire building with Paul Hastings law firm. The lease is scheduled to commence when tenant improvements are completed in the fall.

Building 2 is currently Peregrine's headquarters building. It totals 130,000 square feet. As I mentioned, it appears that Peregrine may want to keep a portion of this building for the longer term. Building 3, also 130,000 square feet, is another of the buildings that had its lease rejected by Peregrine last year. In another major transaction for KRC, we signed a seven-year lease in February with Fair Isaac and company for the entire building. Fair Isaac is a developer of data management systems and services for various industries, most prominently the financial services industry. The company intends to locate its regional headquarters to the five-story building and is scheduled to take occupancy August 1st of this year.

As we reported on our last call, the Memic group of global distributor of specialty semiconductors signed a 10-year lease for all of building 4, a 115,000 square feet property. They now occupy four of the five floors and will take occupancy on the fifth floor in early 2005.

Building 5 is 112,000 square feet and is also leased to Peregrine, although the timing is uncertain yet, Peregrine has indicated that it intends to reject this lease. This building is 58% subleased to third-party tenants and we expect that the rental obligations from the subtenants will continue when and if Peregrine does reject the lease.

Overall, we feel good about the progress we've made releasing the former Peregrine project in a fair and fairly short time. The project's location, multi tenant design, and amenities have been important in attracting new tenants. The project is now 67% leased to tenants other than Peregrine, and that's been accomplished in the six-month period that included a sluggish economy, the holiday season, and the uncertainty brought on by war. And we are optimistic that we can continue our leasing momentum as the Peregrine situation is resolved over the coming months.

Now let's discuss the second situation with the two buildings that were leased by the law firm of [Broveck}, [Flayinger] and Harrison. These two buildings, also located in Delmar, total 162,000 square feet. The first is a 72,000 square foot property that Broveck occupied since its completion in early 2000. The second is a 90,000 square foot building that [Broveck] leased since last September but never occupied. It is in Shell condition. In February, [Broveck] essentially dissolved and stopped paying rent. In late March, as part of the lease with -- agreement with Paul Hastings I mentioned earlier, the law firm also agreed to lease, on an interim basis, all of the first [Broveck] building. The lease commenced on February 1st. The date when [Broveck] defaulted on its lease.

This interim lease will terminate when being 1 at Kilroy center Delmar is ready for Paul Hastings' occupancy. We also have more good news in that we are now close to making another significant step toward releasing the former [Broveck] buildings. We have signed a letter of intent for a 15-year lease with a prominent law firm for 100% of the first [Broveck] building and one floor, or approximately an additional 24,000 square feet, of the second [Broveck] building. The lease is expected to commence in the fourth quarter, following the relocation of Paul Hastings into Kilroy center Delmar. In summary, of the 162,000 square feet in these two [Broveck] buildings, we've signed an LOI for 96,000 square feet, or 59% of the project, within the three months of the [Broveck] default. In terms of the overall Delmar market, direct vacancy is 11% and total vacancy is currently 17% . With the LOI I just mentioned, we will continue to make a significant dent in the vacancy rates and bring down the direct rate to approximately 8% and the total rate to approximately 14%.

Moving north to Orange County, our industrial properties located there are fully occupied. While we do have some space available for sublease in our portfolio, this market has held up quite well. In Long Beach, market conditions remain soft at the Kilroy airport center Long Beach. The center's seven buildings Encompass just under 1mmmm square feet. It was 80% occupied at quarter end. In the overall Long Beach airport market, direct vacancy is 9%, with total vacancy of about 14%.

Continuing north, the city of El Segundo remains our most challenging market. Tenant demand was badly hurt by the events stemming from 9/11 and current economic sluggishness has hindered any meaningful recovery to date. Direct vacancy in the market is now 17%, and total vacancy is 21%. On a brighter note, we continue to see fairly steady interest in our west side media center project here in west L.A., although leasing results come slowly and in small incremental steps. Overall, the west L.A. market has a direct vacancy rate of 14% and a total vacancy rate of approximately 19%. To recap our progress at west side media center, phase 1 is 80,000 square feet and 100% leased, phase 2 is 150,000 square feet and is currently 55% leased, and with LOIs, 65% committed. And phase 3 also 150,000 square feet is 48% leased and with LOIs, 61% committed. In summary, of the 380,000 square feet at west side media center, we are now 61% leased and 71% committed with LOIs. This is up about 10 percentage points since last quarter. That's an update of our key markets. Looking forward, our outlook for the year hasn't changed since the beginning of the year. We remain cautious about the operating environment we see, and we are assuming little, if any, market improvement until next year.

A successful leasing program is clearly our top priority, and we continue to aggressively market our available properties. In summary, we've made significant progress in working through the challenges of a weak economy as they arise. Not all buildings or markets are the same, and our successes demonstrate the quality and location of our assets. However, the market remains choppy and is difficult to give a strong indication that they will improve this year. Now, Dick will cover the financial results and then we'll take questions. Dick?

Thanks, John. FFO per share was 83 cents in the first quarter, down from 89 cents in the first quarter of 2002. Both periods had nonrecurring gains that affected FFO and net income. In the first quarter this year, we had a termination fee of 13 cents a share on the Erickson lease and in the first quarter of last year, we had a one-time gain of 13 cents a share when we recognized some partnership preferred return that had previously been deferred.

Occupancy in our stabilized portfolio fell in the first quarter to 92.2%, mainly as a result of the [Broveck] default. That compares to 93.7% at year-end 2002. Our current occupancy breaks down to 97.6% in industrial, and 88.5% in office, and that's a reasonably accurate reflection of the comparative strength of the office and industrial markets today.

Mainly reflecting the Peregrine situation, first-quarter same-store NOI was down 6% on a cash basis, and 7.4% on a GAAP basis. The decreases were primarily due to lower occupancy and higher property expenses, which were up 13.8%. 11% of that 13.8% increase was from increased one-time legal costs associated with the Peregrine and [Broveck] situations, and refurbishment costs, primarily in our Long Beach project.

The bulk of those refurbishment costs were related to some space where a long-term tenant had moved out and where we needed to do some cleanup and general maintenance to prepare the space for releasing. In terms of lease expirations, we will have -- we will have 612,000 square feet of space, or 5.6% of our portfolio, rolling over during the remainder of the year, just over half of that space is currently in serious negotiations.

We didn't have any acquisitions or dispositions during the first quarter. Before I get to a review of our development and redevelopment projects, I wanted to mention that we've expanded our supplemental package to include some additional detailed information about capital expenditures. On Page 13 of our supplemental, we show the breakdown of recurring and nonrecurring capex for our stabilized portfolio, and Page 22 is a detailed listing of our development and redevelopment projects and the related capital expenditures.

Our committed development pipeline remains the same at 4 projects, with a total investment of $196m, of which $162m has been spent to date. The pipeline is currently 60% leased, up from 53% last quarter. As John mentioned, we also have 4 projects in redevelopment on which we expect to spend about $49m, of which $5m has been spent to date. The first project is a 78,000 square foot office building in Orange County, the redevelopment work was completed last fall and the project is currently in lease-up. We're converting the 68,000 square foot former Erickson building in the [Serento Mesa] sub market of San Diego to life science use. Redevelopment construction is scheduled to be completed in the fall, and will Cost an estimated $10m.

We're actively leasing that property. We're also converting a second [Serento Mesa] building to life science use. This project has been undertaken at the request of a tenant and the project is fully leased during the redevelopment. The building is 79,000 square feet, and construction will also be completed in the fall, with an estimated cost of approximately $7m.

The fourth redevelopment project is 909 (inaudible) in El Segundo. That's the former Boeing building that had been occupied by a single tenant for 30 years and it requires a refurbished interior in order to compete in today's market. Our estimated incremental investment is approximately $25m. We'll have some up-front spending from marketing costs, medical infrastructure modernization with much of the costs to be incurred when and as we lease the building.

Let me touch on G&A costs before I cover earnings guidance. G&A costs in the first quarter were $3.8m, up from $3mmmmm last year. We're seeing our G&A costs go up, even though our employee headcount is down slightly. The cost increase is a function of higher legal, accounting and insurance expenses, and to a much lesser extent the transfer of some people costs from development to G&A. That's typical when our development program slows at the bottom of an economic cycle. First-quarter G&A costs were abnormally high at $3.8m. Going forward, we expect our run rate to be roughly $3.4m a quarter over the next -- over the rest of the year. That would take G&A for the year to approximately $14m, up from $12.6m last year.

Now let me finish with an update on earnings guidance. Our 2003 FFO guidance last quarter was 260 to 280 a share. We've made some real leasing progress in San Diego this quarter and so far, we've been releasing the former Peregrine and [Broveck] spaces more quickly than we were anticipating when we spoke with you last quarter. Although most of the earnings impact of that leasing will begin towards the end of the year, it will have a modest effect this year, so we're -- so we're increasing our 2003 FFO guidance by 5 cents a share from 260 to 280 a share to a new range of 265 to 285 a share. And although that's a modest financial change, we hope it's a sustainable change in direction. That's the latest news from here. With that, operator, we'd like to open up the call for questions.

+++ q-and-a.

Thank you. Ladies and gentlemen, if you'd like to register a question, please press the 1, followed by the 4, on your telephone. You will hear a three-tone prompt to acknowledge your request. If your question has been answered and you would like to withdraw your registration, please press the 1, followed by the 3. If you're using a speakerphone, please lift your handset before entering your request. One moment, please, for the first question. Our first question comes from the line of Lee Schalop with Banc of America Securities. Please proceed with your question.

Thanks. Hey, guys. Congratulations on nice results in bringing up the guidance. Can you talk a little about what it is that's driving the strength of demand in your markets when the rest of the country seems to be suffering?

Hello, Lee, this is John. Well, first, as I said, our -- the -- each market has its own particular pulse at any given time. What we're seeing is, in Dell Mar San Diego, strong demand by larger national and international firms that require a significant amount of space. By "significant" in this market I'm talking 50,000 square feet or more. Typically, want signage, want to be in the -- you know, the latest, greatest building, and we've been fortunate in the two instances with Peregrine and with Broveck to have buildings that fit that bill. If you are a smaller tenant that needs 10,000 feet and you don't need to be in the best building and so forth, then you have many different locations.

I think here in west L.A., where we've been able to continue to improve our occupancy , it's been entertainment-oriented firms that like the environment that we've created here at west side media center. We designed this complex specifically with our -- or largely with that group of users in mind, and the environment here seems to appeal to them pretty terrifically. In our industrial properties, they're well located. They're where people want to be. They're at the right price point, the right size, the right amenity package and so forth. And I think we're just working hard. This is not an unfamiliar environment for us. We've worked through a number of cycles over the years. I think we know what it is -- or what it takes to make deals, so I -- I'd attribute it to all those factors. But I would also say that it is not even throughout each sub market. El Segundo, which historically is a very good sub market s having tough times right now, although we're beginning to see some significant interest. We haven't seen it translate to leases.

Can I ask you to talk about of the development pipeline that's currently 60% leased, where you think that may be by the end of 2003?

John Kilroy, Jr.: Well, I -- I think that in the current environment, the crystal ball is quite a bit murkier than it has been in prior years, Lee, and I'm just -- think that it's difficult to project where that number would be. I don't know if you want to amplify that, Dick.

I -- Lee, I think it's hard for us to give a number, but I think that we continue to chip away. Implicit in our earnings guidance is a -- is the notion that we'll continue to do what we did this quarter, which is to chip away.

Okay. Thanks.

Our next question comes from the line of Jim Sullivan with Green Street Advisors. Please proceed with your question.

Thanks a lot. Can you comment on the California state financial situation? It seems like every time we open the paper, the news is getting worse, rather than better. How is that impacting tenant decision-making? How is it affecting your decision-making with respect to your own capital allocation decisions?

Well, let me speak first to the tenant side, Jim. This is John. We don't hear a lot about it directly in a lease negotiation. So many of the companies that are here are here for the long haul. But I can't help but think that it is, and will affect, companies perhaps in the industrial side and so forth. Most of our industrial isn't down and dirty industrial. We're not hearing a lot about it directly related to a lease negotiation but I think it's on everybody's mind with regard to what is the long-term impact to all of us. So it's more of a general sort of topic that gets bantered around.

And the way we've thought about the capital allocation decision, Jim, is because we haven't seen -- you know, people don't run in and say, "Gee, I'm not going to do a lease because of this budget deficit." That's just not the way it's happening. But because we haven't seen that effect because -- but because of because the other shoe hasn't dropped, the thing hasn't been resolved yet, I think we've -- as -- we've tended to be very conservative on the notion of new starts. Which we would have been anyways at this point in the cycle, but I think we've -- we're tending to think that the best thing to do is to -- is to hunker down for the moment until we see how this gets resolved. The direct impact in the near term is probably -- there's probably an insignificant direct impact on us. It's just more of an intermediate and longer-term issue about does that affect how companies look at staying in California or relocating to it, because in San Diego part of the strength there, frankly, has been that there have been -- it's one of the few places where companies are still attracted to relocate to.

Thanks for that perspective. You talked quite a bit about your markets. Can you go into a little more detail as to what's happening in your -- your primary markets with respect to rents and most importantly what's happening to net effective rent after considering all the lease-up costs, et cetera ?

We don't have a -- you know, if you look at the number of leases we did, Jim, we don't have a huge amount of data. We don't have a -- so, you know, we don't have a statistically valid sample. We're sort of the opposite of the spectrum from the OEP, say, in terms of the sheer volume of transactions in any quarter, so to some extent, my answer would be interpretive. We probably have seen some softness in west L.A., although it's not -- it's more soft. It's not in any way a pervasive, terrible weakening. But then again, as John said, we have a project that people seem to want to be in and the only place we're doing leasing here in west L.A. is in the west-side media center, so I'm not sure we're representative of the broader market there. In El Segundo, there's just not enough leasing to really provide a sense, but I think our sense would be that if there is a place where the effective rents would be down, it would be there. We'll just have to see. And in San Diego, where we've done the leasing, I think our sense is that when the dust settles on the leasing we've done , with we'll probably wind up close to where we were with Peregrine and [Broveck] , former tenancies on an effective basis.

Okay. And then finally, your projects that are in lease-up --

Yes.

Jim Sullivan-- when will you stop capitalizing costs on the projects that have not been fully leased yet?

When we just comply with GAAP there. A year -- a year following construction completion.

So second and third quarter, respectively?

Yes. Yes.

Thank you.

Our next question comes from the line of Frank Greywitt with McDonald's investments. Please provide with your question.

Hi. Just a quick question regarding the properties put into the redevelopment pipeline. Was any rent from these properties recorded in first quarter?

Yeah. I think we got one month's rent in El Segundo before that lease fee previously expired. I believe that's the case. Two months. Two months. I'm sorry. Heidi corrects me. Two months.

And on the -- on the specific science Pacific science center project, that building remains a hundred percent lease so we received rent on that one as well.

Frank Greywitt Oh, okay. All right. Thanks.

Thank you.

As a reminder, ladies and gentlemen, to register for a question, please press the 1, followed by the 4, on your telephone. Our next question is a follow-up from Jim Sullivan with Prudential -- or excuse me, Sullivan with Prudential Securities.

Yeah. This is the other Jim Sullivan. A question regarding the San Diego marketplace. You went through the sub markets there, John, and you had talked about [Serento Mesa] which, I guess is your biggest sub market in San Diego, and at the present time you're a hundred percent leased in [Serento Mesa] but what we're hearing is that [Serento Mesa] has been particularly hurt along with UTC and that there's been a significant amount of trading up, if you will, tenants moving from there to Delmar. And I'm just concerned here, looking out not in '04 but in '05, you have more material levels of lease expiration in that -- in San Diego, overall, but can you tell me or could someone indicate whether -- whether [Serento Mesa] becomes more of an issue in 2005 in terms of expirations and based on the pricing pressure that's taking place there, whether that's a sub market that you're concerned about maintaining your pricing, your current pricing.

Well, I don't -- you know, I can't speak to what '05's going to have. I'm just looking -- asking Jeff right here to hand me the data on our list of buildings. I don't think we have anything significant in [Serento Mesa] in '05. I think we have one building in '05 in [Serento Mesa], 130,000 feet, and the rent is below market.

Okay. Very good.

And the market -- that current rent is about 35% below today's market.

Okay. Very good. Thank you.

You're welcome.

Our next question comes from the line of Jay Leupp with RBC Capital Markets. Please proceed with your question.

Hi. Good morning, guys. Actually David came up here with Jay. A couple of questions with regard to your markets. Are you seeing any material changes in cap rates or property values in the southern California markets ?

This is John Kilroy speaking. The GAAP rates are still very low. There's still tremendous demand for product and, you know, we've seen a number of cap rates with 7's in front of them. for buildings that are leased. What we're seeing is, you know, there are a lot of smaller users that have bought buildings and then there's quite a few investors that I think have elected to put their money in hard assets rather than in the marketplace.

And so, you know, given those comments on those compressed cap rates, what are your views on share repurchase at this -- at this point ?

Well, I think that we --

Or possibly increasing sales.

Yeah. Obviously the -- we bought some stock in the fourth quarter , and we're -- our first priority, obviously, has to manage the balance sheet carefully and prudently, and so we're mindful of that. We still -- still are quite optimistic about the potential for our stock being a good investment, but we haven't been in the market recently , in part because we are just managing our capital allocation real carefully in this kind of an economy because we're just -- want to be super cautious, but -- so I think more to come going forward. It's something we look at month to month.

Okay. And then talking about -- a bit about your life science trends that you're looking at these days, what is different, if anything, in the way you want to rent those tenants versus a traditional office using user?

Well, we spend a lot of time analyzing the credit of a bioscience tenant. Obviously we're not scientists but we, you know, review their financials and what we really look for there is some kind of credit support because in many cases, the credit quality is not that strong, so we -- we build in lease -- leasing -- letters of credit and security deposits.

And you try and structure, David, the covenants in the lease so that you have some sort of early warning system, as best you can determine, so that you have a way -- in effect, it's -- we've just tried to mimic what lenders do to try and have a way, if we can, to get a tenant to the table if they encounter financial problems. Obviously, in the -- in the case of -- as we've seen and experienced directly, in the case of fraud with a tenant, there's really nothing you can do but in the case of just a deteriorating business condition, we do our best to try and -- if there is going to be a problem, to be able to have some leverage to at least begin the negotiating process early so that we can try and make any workout orderly. We haven't -- our life science exposure is very small compared to the total company, obviously, and we -- and we haven't had any difficulty yet but we're very mindful of it.

Yeah. I think from a facilities standpoint, the other thing that we are doing is we're making sure that we're dealing with very generic facilities . We engaged some time ago and update it regularly a really detailed thorough analysis essentially of all 10-plusmillion square feet that's in San Diego, of what really is generic, sort of 60, 70% lab, the balance office and support, the configuration, the type of air conditioning, everything else, so that the reusability of this product is what we are very interested in, what we call here life after current tenant, and that's whether a lease expires or whether a tenant has a financial problem or otherwise.

The other thing that we're doing is we're tending to bring in consultants and reviewing the particular companies that we negotiate with to review, as best they can, their science. We're very focused on their operating history and other companies and so forth, and so we try to take a pretty hard look at each and every one of those situations.

Thank you.

Ladies and gentlemen, as a reminder, to register for a question, please press the 1, followed by the 4. Our next question comes from the line of Ralph Bloc (ph) with Bay Aisle Financial. Please proceed with your question.

Yes. In these tough markets, are you seeing any difficulty in terms of lease negotiations in terms of softening some of the provisions you've normally included, rent bumps and that kind of thing? In other words, outside of T.I.s?

What do you mean by outside of T.I.s?e

We have seen a slight -- a slight, Rob, directional softening in annual lease bumps. It's -- we're still getting lease bumps, but there's been a slight softening depending on the market. It's not -- it's not a -- interestingly, it's not a real big change. Usually those things, in a real weak market, just go away. They haven't gone away, we're probably -- you know, if we could have gotten in a market three, we might be getting 2 or 2-and-a-half now.

Uh-huh. Okay. And do you have any kind of projection you could share with us in terms of what you might expect your occupancy rate to be at the end of the year?

Gee, we -- we really don't get into giving guidance, Rob, on occupancy. I think that's just -- we've -- in our -- in our earnings guidance, we've just obviously assumed a bit of a delta, plus or minus, from our current rate.

Okay. Thanks.

Mr. Moran, there are no further questions at this time. I will now turn the conference back to you. Please continue with your presentation or any closing remarks.

Well, thank you all very much. We recognize this is a busy time of the month for everybody involved on your side of the table, so thank you again for your interest in KRC and have a good day. Thank you.

Ladies and gentlemen, that does conclude your conference call for today. We thank you for your participation and ask that you please disconnect your lines.