Kilroy Realty Corp (KRC) 2003 Q2 法說會逐字稿

Good morning and welcome ladies and gentleman to the Kilroy Realty second quarter earnings Conference Call. At this time I'd like to inform you that this conference is being record and that all participants are in a listen-only mode. At the request of the company, we will open up the conference for questions and answers after the presentation. I would now like to turn the conference over to Mr. Richard Moran Jr., EVP and CFO. Please go ahead, sir.

Thank you. Good morning, everyone. Thanks for joining us. With me today are John Kilroy Jr., our CEO, Jeff Hawken, our COO, Tyler Rose, our Treasurer, and Anne Marie Whitney, our Controller. Some of the information we will be discussing this morning is forward-looking in nature. Please refer to our supplemental packet regarding the forward-looking information in this call and in the supplemental. This call is being Web cast live on our Web site and will be available on replay for the next seven days both by phone and over by the Internet. Our press release and supplemental package have been filed on the form 8K with the SEC and are also both available on our Web site. We've released our second quarter financial results yesterday evening. FFO was 78 cents a share, 13 cents ahead of consensus. Most of the increase is attributable to Peregrine, as I'll explain later in the call. John will begin with an overview in the quarter and conditions in our key markets, and then I'll cover the financial highlights and then we'll be happy to take your questions.

Thanks, Dick. Hello, everyone, and thanks for joining us. California's political drama remains the focus of most media stories coming out of our state these days with the ultimate out come of a recall still uncertain. The underlying economy is still holding its ground. Very little has changed since our last call. At 6.7%, the statewide unemployment rate for June is about where that figure has been since the beginning of the year. California experienced a small net increase in payroll jobs last month following four months of modest job erosion. It appears that the job market in northern California is stabilizing. That said, California must still contend with a challenging budget deficit and the generally weak national and international economic conditions that prevail.

In the Southern California commercial real estate markets, activity continues to be restrained and we see unevenness between submarkets. Having said that, while we've been experiencing our market during the last several quarters in which decisions makers were looking for reasons not to make decisions, we have a sense now that these executives are looking for reasons to make decisions. Based on this change in tone, our impression is that we are at the bottom and trying to move back up. In this environment, we continue to focus on our marketing and leasing program, control our cost, pay attention to the portfolio issues that are within our control, and take prudent steps to strengthen our market positions.

Carefully managing the trouble spots in our portfolio also remains crucial. Our recent settlement of our claims related to the Peregrine Systems bankruptcy is a good example of what can result when you stay deeply engaged in the process. Let me review the details for you. As you will recall, Peregrine systems filed a voluntary petition for relief last September. In conjunction with that filing, Peregrine rejected three of five leases it had with KRC and indicated that it would reject the remaining two leases in due course. That made us an unsecured creditor in the bankruptcy. On July 18th, the bankruptcy court signed an order approving Peregrine's plan of reorganization with a 10 10-day appeal period. That period expired yesterday. Under the terms of that plan, KRC will receive a payment of approximately $18 million in the third quarter, along with four additional payments of approximately $750,000 to be made annually over the next four years. Dick will give you the details on how we are accounting for this settlement in his remarks.

The other positive news is that as part of the settlement, Peregrine will continue to lease space in a portion of one of KRC's buildings at Kilroy center Del Mar. The Court approved Peregrine's assumption of 78,000 square feet or 60% of its original lease covering building 2. The new lease, which has the same terms as the original lease, is effective on August 28th of this year. It also includes a $2.3 million cash collateralized letter of credit and security.

Finally, the bankruptcy court also approved Peregrine's rejection of its lease covering building 5. The termination of the lease is effective July 31st. The building is currently 58% subleased to other tenants. This overall settlement is a result of KRC working with Peregrine to craft a plan that we and other creditors could support and resulted in a terrific out come for KRC given the circumstances. We receive $21 million ongoing occupancy from Peregrine to April 2012 for 78,000 square feet, and we've re-leased the majority of the remaining space in the complex to a diverse group of tenants.

Moving to our development portfolio, we have two projects in lease up and one project under construction. These projects are 64% leased and 68% committed with LOIs. Our development project remains the same. Our redevelopment projects remain the same, four properties totalling about 471,000 square feet. These include one office project in Orange County, two properties that are office to life science conversions in San Diego, and our office redevelopment of the 909 building in El Segundo. Now let's take a more detailed look at our markets starting with San Diego.

We operate in four submarkets in coastal San Diego, a region that remains among the healthiest of Southern California's real estate markets. Our stabilized properties there had an overall occupancy rate of 89% at the end of the second quarter. We continue to see activity in all our remaining space in that region and rents that suggest that rent rates have stabilized. In the Rancho Bernardo and la Hoya UTC submarkets we compete in the two story product type. Our properties are currently 100% occupied. Market wide Rancho Bernardo has a 8% direct vacancy rate and a 9% total vacancy rate. UTC has a 9% direct vacancy rate and a 24% total vacancy rate. In Serano Mesa (ph), all of our properties are also 100% occupied.

Overall, the two-story product type that we compete in there currently has a direct vacancy rate of 14% and a total vacancy of about 23%. Del Mar is our fourth San Diego submarket. It remains one of the top office markets in Southern California and our properties there are among the premiere office buildings in the region, well located, highly amenitised (ph) and very attractive to the area's prospective new tenants. The strength of this market is evident by its year-to-date leasing statistics. San Diego office market has absorbed 645,000 square feet of space so far in 2003 as compared to only 100,000 square feet in the first six months of 2002, and while Del Mar market accounts for only 6% of the overall space in San Diego, it has accounted for over 15% of the net absorption through June. And KRC has been the principal beneficiary.

As we see in most downturns, there has been a -- to quality in terms of both product and location, and no place is it truer than in Del Mar. In terms of occupancy statistics, direct vacancy in Del Mar is 7% and total vacancy is currently 13%. Moving north from San Diego, our Orange County industrial properties remain fully occupied. Farther north in Long Beach, we signed new leases at the Kilroy airport center Long Beach that boosted the center's overall occupancy rate from 80% to 83%.

In the overall Long Beach airport market, direct vacancy is 10% with total vacancy of about 14%. Continuing north, the city of El Segundo continues to present our biggest leasing challenge right now. -- has yet to recover from the events of 9/11 and many of its tenants are historically found the submarket most attractive are struggling with difficult economic conditions specific to their industries. Direct vacancy in the class A market is now 22%, and total vacancy is 26%. Having said that, we've begun to see a substantial increase in the number of tenants interested in our 999 sub apartment building. During the quarter we signed our first three LOIs for space at that property covering 14% of the building. Although it is a little premature to handicap those LOIs given they are the first deals we've made at the property.

The good news is that we are beginning to see increased leasing interest. Conditions are also somewhat better in west L.A., where we continue to see a fair amount of interest in our west side media project. Although leasing results still come slowly and in small incremental steps. Overall, the west L.A. market has a direct vacancy rate of 19% and a total vacancy of 21%. To recap our progress at west side media center, phase one is 80,000 square feet and 100% leased. Phase two is 150,000 square feet and is currently 59% leased. Phase III also 150,000 square feet is 48% leased with LOIs 61% committed. And Phase III enters the stabilized portfolio as of the second quarter. Overall, the 380,000 square feet at west side media center is now 63% leased and 68% committed with LOIs.

Like many of our other markets, we've seen a recent uptick in prospective tenants on the west side. That's an update of our team markets. Now Dick will cover the financial results. Dick?

Thanks, John. FFO per share was 78 cents in the second quarter, up from 73 cents from the second quarter of last year. As I mentioned at the outset of the call, the increase is a result of factors related to Peregrine. First we'll receive approximately $21 million as part of the Peregrine bankruptcy settlement that's just been finalized. A portion of that settlement or about 8 cents a share is reflected in our second quarter results. In addition, Peregrine continued to pay rent through the second quarter on space in two of the five buildings covered by its original leases. That added about 4 cents a share in the second quarter. So in the second quarter, we reported FFO of 78 cents a share, of which 12 cents a share was special items related to Peregrine. That included 8 cents a share related to the Peregrine settlement and 4 cents a share in rent from Peregrine on buildings 2 and 5.

Now let me walk you through how the accounting for the settlement works. Under the terms of the Peregrine bankruptcy settlement, we're scheduled to receive a total of approximately $21 million in settlement of our claims. Peregrine has the obligation to pay us the first $18 million in cash in the third quarter with the $3 million balance to be paid in annual installments of approximately three-quarters of a million dollars annually over the next four years. The $18 million we're scheduled to receive in the third quarter will increase 2003 earnings by approximately $17.5 million after about $500,000 of legal costs. That $17.5 million translates to about 55 cents a share in increased earnings this year. The $17.5 million will be recognized in the second and third quarters as follows.

Our second quarter results include $2.5 million or 8 cents a share. That results from the reversal of receivable and other reserves that we took last year and are no longer necessary as a result of the payout we're set to receive from Peregrine. Our third quarter results will include the remaining $15 million or 47 cents a share of the $17.5 million dollar increase to our 2003 earnings. That $15 million will show-up in our third quarter results as a lease termination fee. Beyond this year, we currently expect that the remaining four annual payments of approximately $750,000 each will be reported as earnings in the periods, in which they received. Occupancy in our stabilized portfolio was 91% at the end of the second quarter, down from 92% at the end of the first quarter. Most of the decline is accounted for by Phase III of our Westside media project, which moved to the stabilized portfolio late in the second quarter with a 0% occupancy rate. Although, phase III did not have any occupancy at the end of the second quarter, it is now 61% leased or committed.

Our current overall occupancy rate breaks down to 96.5% in industrial and 86.9% at office. That is a reasonably accurate reflection in the comparative strength of the two market sectors today. Second quarter same store NOI was down 5.7% on a cash basis. The decrease was primarily due to lower occupancy and higher property expenses, which rose 13% primarily on higher repair and maintenance costs. On a GAAP basis same store NOI was up 3.6% likely due to the reversal of the Peregrine reserves. In terms of lease expirations, we have about 472,000 square feet of space or 4.4% of our portfolio rolling in the second half of the year. Of that, we have renewed or released 275,000 square feet already, leaving less than 200,000 square feet remaining to be released. We sold three non-strategic assets during the second quarter. Net proceeds from the sales are coming totaled $31 million and resulted in a gain of approximately $3.7 million.

As I mentioned earlier, the final phase of our Westside media center project moved to the stabilized portfolio late in the second quarter, so our committed development pipeline now includes three projects with a total investment of $137 million, of which $124 million has been spent to date. The pipeline is currently 68% committed, up from 63% last quarter. In addition, we have four projects in redevelopment, on which we expect to spend about $50 million with about $7 million spent to date.

In terms of capital expenditures, we spent $4.8 million in the second quarter, up from $4.1 million in the first quarter. We expect these amounts to be up somewhat in the third and fourth quarters, as we complete the tenant improvement work on the big leases we have executed in San Diego. Total 2003 CAPEX is projected to be approximately $20 million and $9 million, of which comes from four large leases. Excluding those four leases, CAPEX for the year would be about the same as the $11 million we spent in both 2001 and 2002. With respect to debt maturities, we are in the final stages of refinancing our $70 million term loan that matures in November. We expect to close a five-year, $80 million fixed rate mortgage at 3.8% in August. We have no other debt maturities this year.

Now let me finish with an update on earnings guidance. Our 2003 FFO guidance last quarter was 265 to 285 a share. Leaving aside peregrine, we would tighten that range by five cents a share at both the top and bottom of the range to a new pre-peregrine settlement range of 2.70 to 2.80 a share. That includes the impact of lower quarter earnings from the second half of 2003 from the dilution cost by adding both Phase III of our Westside media center and 999 in (inaudible) Boulevard and El Segundo to our stabilized portfolio. The expenses previously capitalized for those projects will now be included in operating costs.

This offers some potential earnings upside for us later in the year and beyond as we lease up those buildings. As we mentioned, the peregrine settlement will increase our earnings this year by approximately 55 cents a share including 8 cents in the second quarter and 47 cents in the third quarter. Adding those numbers to the pre-peregrine settlement range of 2.70 to 2.80 a share that I just mentioned results in our new annual asset 2003 FFO guidance of 3.25 to 3.35 a share and that is the latest news from here, and with that, Operator, we would like to open up the call for questions.

Thank you, sir. The question and answer session will begin at this time. If you are using a speakerphone, please pick up the handset before pressing any numbers. Should you have a question, please press "*1" on your pushbutton telephones. If you wish to withdraw that question, please press "*2". Your questions will be taken in the order that they are received. Please stand by for your first question.

Our first question comes from Lee Schalop of Bank of America securities.

Could you help us understand the context of the peregrine settlement in relation to the rent that they were paying? If you were looking at it from a sort of a pure settlement perspective, how did it work out?

Good question, Lee. We wrote off $8 million, we took a write off of $8 million a year ago, when their bankruptcy was announced and they started to have difficulties. If you take that $8 million and you add to that the roughly add the present value of all the rent loss that we expect on a fairly conservative basis, including projections of lease up in the future on the space that has been yet un-leased, we would get -- the analysis I happen to favor, and we have many of them obviously, tends to indicate that we have losses in the $27 to $29 million range on a present value basis, and the settlement is 21 million, which nets to a little less than that because there's $3 million of which you have to take a present value. So the order of magnitude would be we cover two-thirds or three-quarters of our total losses if you looked at it that way. As I say, there's a range, a whole bunch of sensitivity analyses, but we absolutely did suffer an economic loss, and beyond that, of course, we get the settlement now, but now that they're vacating some space, we do now have more space to lease, and in addition, not all the space we have re-leased, taken occupancy yet.

The payments, the four future payments of 750 a year, is there any risk of those -- they put aside someplace safe where you have to assume Peregrine is around to make those payments?

We have to assume Peregrine is around to make those payments. And that's why we expect that we would record them as we receive them in the future. The exception to that might be, for example, in the event of a dramatic improvement in their credit, either from fundamental profitability or an acquisition or by somebody who has rated credit, for example, and that's just a supposition on my part. There's no -- we have no knowledge about anything like that. That might change in the future, but right now, we absolutely are at risk to their credit coming out of bankruptcy as to whether or not we receive those payments in the future, yes.

Dan has a question.

Just wanted to ask quickly about the lease up of west side media and 909 as you're talking about those in terms of potential upside. How are you looking at those in terms of leasing up through the remainder of this year and into 2004 at this point?

This is John, Dan. Its difficult to project when those going to release, we've got about 110,000 square feet within the complex. It's not committed right now. We've got somewhere in the neighborhood of 90,000 square feet where the tenants that we're negotiating with -- and that's, I think, about 10 different tenants, in varying amounts of space. It's just too difficult to predict when that's going to hit, but we're feeling pretty good about the level of interest we have.

Ok. Thanks.

Thank you. Our next question comes from Chris Hartongue (ph) of W.R. Hack Brekt (ph). Please state your question.

The recent appoint appointment of Edward Brennan to the Board, can we take that as a sort of closer focus from your standpoint on pursuing the life sciences industry?

I don't know that there is -- I wouldn't say that we have a greater intent to pursue that. Being in San Diego, that is a fairly significant segment of the market down there and a growing segment of the market. We have a number of former companies and life science companies that are interested at any given time in various properties that we have, and we thought getting somebody like Edibor would be terrific because of his background in underwriting those kinds of companies and understanding them and understanding their management teams and the people that provide support to them and so forth, so we looked at it as a tremendous opportunity to get a great board member with a great operating background, a great science background and a knowledge reservoir that we thought would be helpful to our ongoing activities in San Diego.

Ok. And turning attention to the balance sheet for a second, with, the refinancing that's currently sort of taking place, how much of the debt outstanding is floating?

Well, in taking consideration the new piece of debt Dick mentioned, we'll be in the mid -- low to mid 80% range will be fixed rate and the remainder will be floating rate.

Given the current interest rate environment, have you guys kind of changed your standpoint on floating versus fixed at all?

No, I don't think so, Chris. We'll continue to extend maturities and we've always said that we'd be in the 75% to 90% fixed rate pay range typically on the thesis that investors more intelligently take interest rate risks in other instruments than by doing it solely, having us do it in our stock. So there's obviously -- you need to have some wiggle room to be able to prepay debt on a -- for cash flow purposes, but we'll continue to be largely a fixed rate payer.

Ok, great. Thank you.

Our next question comes from Louis Taylor of Deutsche Bank. Please state your question.

Thanks. Dick, can you just go over the guidance one more time? You've got -- you're adding the 55 cents for the Peregrine payment, but it looks like you're going to have about $3 million per quarter for third and fourth quarter less in rent from their campus than you did in the first half. Is that built into your 270 to 280 guidance, or do you have leases for that space? Just how does that tie into the overall range?

Well, our current guidance, Lou, reflects all the leasing we have done so far, and some of it has obviously time before it starts since we have to complete Tis. It also includes the assumption of a fairly conservative set of lease up assumptions on our remaining space that hasn't -- that did turn over, and it also includes the assumption that Peregrine will, as we announced here, vacate some of the space that they have been leasing. So there's a plus in Peregrine leasing that they will continue for a long time as a tenant, and we're pleased that they've wanted to stay as a tenant in our project. There is a near-term minus that as we always expected, they would be vacating some of that space. It turns out they're not vacating anywhere near all of it, but we do have to re-lease that space. So that's a long way of saying that our guidance includes all of the knowledge we have to date about Peregrine, and it includes the assumption that they will vacate the space that they have announced that they will.

Ok. Second question, just pertains to the two life science re-developments in San Diego. One, how did you decide to choose those two buildings for conversions? And then three, how many buildings do you have in the portfolio which would be candidates for conversion?

This is John, Lou. Well, one of the buildings we chose because we have a life science tenant next door in the adjacent building, and we had a tenant that was interested in the conversion in question, so that was pretty easy. The second building was formerly occupied by Ericsson - or excuse me, leased but never occupied, and we built that building initially as a prospective life science building, and so we felt that was the appropriate way to redirect it once we entered into the termination agreement with life science because of the interest that we've seen from others in that -- or for that location, for that building. As to the second question, I can't give you exact square footage, but a significant amount of the product that we own in San Diego and have developed in San Diego, we designed with the thought it could accommodate - this is the two-story product principally -- that it could accommodate or would eventually be able to accommodate life science. We thought that was a smart bet given the demand of that industry and given the fact that Kilroy unique Leones a significant amount of property in the zone in which life science Pharma companies want to be so that we always have the ability to have the physical characteristics of the building to convert it if and when appropriate.

Last question pertains to Boeing and just the status of discussions. How would you characterize them? Far along, preliminary, getting serious? Where would you put them in terms of a range of out comes?

Well, you know, it's difficult to predict anything in terms of outcome. They've indicated they want to stay in space within the complex. Just a recap there, that's a three-building 690,000 square foot complex (inaudible). It's currently 99% leased. One building is leased principally to Direct TV amongst a number of other tenants and Hughes Aircraft Company has announced that they're moving their headquarters into that building. Boeing occupies two buildings within the complex. One is leased through 1/31/06, and I think the space you're speaking to is the roughly 285,000 square feet that expires in July of 2004. That space, we are working with them presently at their request regarding their continued occupancy. I characterize the negotiation as pretty typical between Kilroy and Boeing. It's certainly not at the end of those negotiations. We've recently responded to their request for proposals, and we're awaiting an answer from them at this time.

Ok. Thank you.

Thank you. Our next question comes from David Loeb of Friedman, Billings, Ramsey.

John, maybe a little more color on Boeing if you could, given what they've announced about basically the dismantling of the satellite division and casting those parts back to other divisions, and also their recent fines from the Air Force. Can you give us an idea of what they're using in that space, what you expect them to be using in that space over the next year, and then how would you view the prospects for their renewal?

I can't speak to all of the various things. I mean, I read the same articles I'm sure you read. Obviously Boeing is a company that's going through a lot of transitions. The facility that they occupy in our complex, our complex is literally next to where they manufacture all their satellites, and it houses a significant number of their senior executives there in El Segundo. As regards your complex question there, or compound question, I should say. As regards handicapping it, you know, I'm unwilling to handicap any transaction with anybody, and we always have been, and we think, you know, given the fact that Boeing has asked us to make proposals with regard to that space. We think that's an encouraging sign, more to come.

Have any of those encouraging signs come since the Air Force ruling? Or was this all predating the Air Force ruling?

Well, this is something that's going on weekly, and our last meeting with them was last week.

Ok. Back to west side media 3, the supplemental shows that it's 0% occupied. You've talked about 61% committed. Can you give us a breakdown on how much of that committed is actually leases signed versus LOI?

We had that number in our presentation. Hang on.

I may have missed it. Came in just a little late.

48% is leased and 13% is LOI.

And we now actually do have occupancy that's occurred here in the third quarter of approximately 22,000 feet, and construction, tenant improvements underway and a substantial portion of the remaining space, that that makes up the 48% that's actually leased construction is underway.

When you guys talk about committed, just sort of to follow up on what you said about Boeing, you're generally handicapping that once it's an LOI, that you think you're going to get it? Am I hearing you right on that?

David, this is Dick speaking. As a general rule, we don't put all of our LOIs in our numbers. We put the LOIs in which we have more confidence, and that doesn't mean at all that those LOIs, which we announce are sure to become leases. It sort of means the reverse. It means that we exclude from our numbers the LOIs in which we don't have enough confidence to speak about them yet, and there are some tenant classes, some types of tenants, some industry sectors where the LOI conversion rate is considerably lower than others. So I think you should take the LOIs we announce as just the way John was talking about them earlier. Some really are -- it's too soon to handicap, but we think it's useful information for people to know about them. As a general rule, though, in most quarters, there are some LOIs which we leave out of the numbers because they're just too uncertain to talk about yet.

That makes sense. I appreciate that. Two other quick things: West Side Media 2, the supplement says 50.6% occupied. Where is that in terms of committed?

Actually that's 59% leased. We didn't report any LOIs in that project.

So there's another 8% that's leased on that?

But not yet in process. Put it this way, if you came to our building now, these two buildings here where we're speaking from right now, if you drove into the parking garage in the morning, you would likely encounter construction workers one way or another because they're -- in both buildings, there's a fair amount of TI construction going on.

That's a good thing. One final accounting question; In terms of the Peregrine settlement, you had $18 million -- you said there was 18 million that you've received. $15 million of that gets booked in the third quarter. What happens to the other $3 million? How is that booked?

The way it works is that first, we haven't gotten the $18 million yet. We are scheduled to get that this quarter pursuant to the settlement, and that should be reasonably soon of. Of the $18 million, that translates into $17.5 million of earnings after about $500,000 of legal costs. That $17.5 million is recognized in two quarters. $2.5 million was in the second quarter and $15 million in the third quarter. The $2.5 million is as a result of reserves we took a year ago for receivables and other costs. It's just the way the accounting works because we knew the reserves were no longer required. We in the second quarter had to reverse them. So the $17.5 million, just to reiterate one more time, gets broken down $2.5 million in the second quarter and $15 million in the third.

And the $15 million in the third is recorded as a lease termination fee?

Yes.

And the 750 that you get each of the next four years, is that a termination fee? Where will you record that?

You can call it a termination fee or you could call it other (inaudible). It will be treated the same way.

It would not show as rental income. Put it that way.

Ok. So when you give us your termination fees first quarter next year, it's going to have a quarter of 750, and a fourth of 750?

No, we would recognize it when we receive it, David, which would I think probably fall in the third quarter next year.

So every year in the third quarter, you'll get one lump sum?

Yes, that's what we're scheduled to receive, yes.

Ok. Perfect. Thank you very much.

Thank you. As a reminder, should have you a question, please press "*1" on your pushbutton telephones at this time. Next question comes from John Stewart of Merrill Lynch. Please state your question, sir.

Hi. Just a couple of quick modeling questions for Dick. First of all, Dick, could you give us a bit of color on the G&A line item and, you know, just what looks like a reasonable run rate going forward?

I'm not sure I can really -- I'm not sure I'm really prepared today to give you a definitive take on a run rate there. It's an interesting sort of irony, I suppose, as stock options have been eclipsed and acceptability and corporate America has moved away from them, we among some others, I suppose, have had our external consultants come up with compensation plans that are keyed off a variety of variables, and in our second quarter, we happened to have if you look at our performance measure any of the metrics, whether leasing results or relative or absolute stock price performance or earnings, we happen to hit sort of on all cylinders in those quarters, so we wound up having more expense than we might have anticipated, and that add more volatility to our G&A line than we were prepared for, I suppose, so that's something we're studying right now and trying to figure out. I'm not sure we'll have a pity answer for you today, and I'm sorry for that. So I'm not sure I can really give you a definitive answer on that.

Ok. And then just the jump in the straight line rent to $3.4 million, I presume that was attributable to the $2.5 million in reserve reversal?

Yeah, (inaudible) The straight line rent on a normalized basis would have been about $1.4 million, which is about what you can expect for a run rate, maybe a little higher than that, for the rest of the year.

That's it for me. Thanks.

Thank you. Our next question comes from James Sullivan of Green Street Advisors.

Thanks. Now that the dust is settling on Peregrine, I'm trying to figure out at the end of the day when you look at the whole economic package there whether you made money or lost money. And I guess the way I'm thinking about it is, if you look at what the buildings are worth today plus these various payments that you're getting through the bankruptcy process, does that end up being more or less than the capital that you've invested to date plus maybe what you've budgeted to fill up the rest of the space?

Jim, this is Dick. I'm not sure we've definitively modeled it that way, but my intuition tells me that given where we see rents and given that net rents have been very close when we release the space to where the Peregrine rents were, my sense is that if we did that in an exhaustive detailed way, that the answer to that, given where cap rates are, would be unequivocally yes, and probably with an exclamation point. I can assert but not prove that right now. It's a good question, and I guess we just haven't thought about it that way, but my intuition tells me that I think the answer to that is yes.

What if you did the same analysis for the West Side Media center?

I think that would be a much closer call. We'd probably be treading water.

Ok. Thanks.

Thank you. Ladies and gentlemen, as a final reminder, if you have a question, please press "*1" at this time. Please stand by for any further questions. If there are no further questions, I will now turn the conference back to Mr. Richard Moran Jr. to conclude.

Thank you all, as always, to your interest in KRC. We appreciate your time at this busy season, and have a great day. Thanks.

Thank you, sir. Ladies and gentlemen, this concludes our conference call for today. Thank you all for participating, and have a great day. All participants may now disconnect.