Kilroy Realty Corp (KRC) 2003 Q4 法說會逐字稿

Please stand by for real-time transcript. Good morning and welcome ladies and gentlemen to the Kilroy Realty fourth quarter conference call. At this time I would like to inform you that this conference is being recorded 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 answer after the presentation. I would now like to turn the conference over to Mr. Richard Moran, Junior, EVP and CFO. Please go ahead sir.

Thank you and good morning everyone. Thanks for joining us. With me today are John Kilroy our CEO, Jeff Hawken our COO, Tyler Rose our Treasurer, and [inaudible] our controller. 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 pact for a statement regarding the forward-looking information mentioned 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 80-K with the FCC and are both available on our website. We released our fourth quarter financial results yesterday afternoon.

FFO was 62%. And for the year FFO was 341 a share, up 10% from last year and at the high end of our latest guidance range. John will begin with an overview of our quarter and conditions in our key markets. I'll finish with financial highlights and a look at expectations for 2004 and then we'll be happy to take your questions.

Thank you, Dick, and hello everyone. Thanks for joining us. California, like the nation as a whole, continues to show economic improvement. Consumer confidence is up as are new factory orders and production. Corporate profits are rising, the state's housing market remains robust and income tax payments to Sacramento continue to run ahead of projections. One area that has shown only modest improvement, again much like the nation as a whole, is job creation.

While the state unemployment rate has steadily declined over the last 12 months to 6.4% in December, reported payroll jobs fell by 35,000 during the same period. That said, southern California markets continue to outperform our counterparts in the north while unemployment rates dropped significantly in the Silicone Valley area over the past year. Analysts suggest the decline is more a result of people dropping out of the work force or leaving the area than job creation.

In contrast, the twin counties of Riverside and San Bernadino have been amongst the state's most robust job producers over the last 12 months, and both San Diego and Orange County regional economies continue to support solid job markets with unemployment rates below 3.5%. While the L.A. economy is lagging behind, it has shown signs of improvement and it's unemployment rate is down four-tenths of a percent from last quarter to 6.6%.

That dove tails pretty accurately with what we are seeing in our market as I will discuss. With that as a background KRC delivered a strong performance last year. FFO grew 10%. Across all our market we succeeded in capitalizing on opportunities as they arose and we overcame a number of challenging circumstances.

As we have previously reported our negotiation with Peregrine [sp] following its bankruptcy filing in late 2002 ultimately produced a 21.3 million settlement of which we have already received 18.3 million. We successfully repositioned the five building 539,000 square foot Peregrine [sp] campus from a single tenant to multitenant property. As we have previously reported our negotiations with Peregrine [sp] following its bankruptcy filing in late 2002 ultimately produced a $21.3 million settlement of which we have already received 18.3 million.

We successfully repositioned a five building 539,000 square thousand Peregrine [sp] campus from a single tenant to a multi-tenant property. And we re-leased substantially all the vacant space to high quality tenants in just over a year. Kilroy Centre Del Mar as the campus is now called, is now 99% leased with new tenants including Mimics, Scrips [sp] Health, Fair [sp] Isaac, and the law firm of Paul Hastings and Clifford Chance.

Similar efforts at our [inaudible] properties in Del bar are also yielding good results. The two properties totalling just under 160,000 square feet of space have been repositioned for multiple tenants and are now 66% leased. In our stabilized portfolio we signed new and renewing leases in 2003 on 1.4 million square feet of space at average rental rate increases of 7%.

And in our committed development pipeline we have one new development project [inaudible] and two redevelopment project under construction, collectively totalling 525,000 square feet. These three properties are currently 33% leased. Stepping back from our 2003 results I think it's important to note the impact that our achievements have had and will continue to have on the overall value of the KRC real estate portfolio.

Every action we take, whether it's the disposition of non strategic assets, the development of new assets, or renovations of existing properties, is taken to enhance the profile, marketability, and long-term profitability of our portfolio. Today after seven years as a publicly traded company our portfolio is not only larger and more valuable, it is also a better position to capture the next significant step up in demand on southern California real estate.

It's a younger portfolio. The average age of our office properties with 21 years at our IPO, down to 12 years today. It's a better designed, more flexible portfolio, and it's a better located portfolio. With those of you who follow KRC on a regular basis already understand this, I think it's important to reiterate here our core business strategies.

We manage our portfolio to build value not size, we take on new development opportunities only when we're convinced location presents long-term competitive attributes and we operate our properties with the clear understanding of the needs and desires of modern corporate tenants and nothing demonstrates this more than our success in repositioning the former Peregrine [sp] and broback campuses.

Let's briefly walk through KRC's individual market. Starting in San Diego County, we believe the overall market there is amongst the strongest commercial real estate markets in the state today with brokers reporting over 5.5 million square feet of active demand in the central San Diego submarkets where we own our properties.

This demand is stronger and more diverse than it has been over the last few years. There has been a re-emergence of companies looking to have facilities built for them to satisfy expansion requirements. Given our favorable land position and the quality of our markets, we feel we should more than capture our fair share of leasing opportunities in 2004 and beyond. We are in the midst of several conversations with potential San Diego tenants about developing specific properties to meet their needs on a pre-lease basis.

This interest is focused on office, life science, and medical buildings. While we have nothing specific to report yet discussions, are ongoing and we hope it will translate into executed transactions with potential construction starts over the next 24 months. Moving on to market statistics, in the Rancho Bernardo and La Jolla UTT submarkets we compete in the two-story product type. Our properties are currently 100% occupied in these two submarkets.

Market-wide, Rancho Bernardo has an 8% direct vacancy rate, and a 12% total vacancy rate. UTT has an 11% direct vacancy rate and a 22% total vacancy rate. Sorrento May Star properties are currently 98% occupied. Overall the two-story product type that we compete in has a direct vacancy rate 15% and a total vacancy of about 24%.

While demand in the Sorrento market has become more diverse we are also seeing an increased demand from the traditional wireless companies and firms in related industries. Our fourth San Diego sub market is Del Mar which I've already commented on. Direct vacancy is currently 8%, total vacancy is currently 14%.

In summary San Diego is a good market with signs that it may improve further in 2004. While we are forecasting San Diego rental rates in the near future to be relatively flat Del Mar is a submarket that is already showing positive rent growth. This is principally due to an influx of new companies to Del Mar, including the ongoing migration of professional service firms from downtown San Diego. Moving north to Orange County our industrial properties remain 96% occupied and market fundamentals continue to improve.

In Orange County we have about 450,000 square feet of industrial space expiring this year. As we talked about last quarter we continue to see improvement in the Long Beach airport market. We have turned LOI's into leases and brought our occupancy in our 1,000,000 square foot campus from 80% at the beginning of 2003 to 87% at the end of the year.

We expect this number to rise further in 2004. Overall the Long Beach airport market that direct vacancy of 7% and total vacancy of about 11%. Continuing north the city of El Segundo has direct vacancy in the class A market of 17% and total vacancy of 23%. But these vacancy rates are down several percentage points from last quarter, and we continue to see signs of improvement.

At our 137,000 square foot 999 is Sepulvida [sp] project we recently converted a letter of intent for 29,000 feet or 22% of the building into a seven-year lease with Aon [sp], a large insurance company. They will take occupancy April. This project is now 26% leased and 31% committed with letters of intent.

In west L.A. our three-building 380,000 square foot Westside Media Center is now 64% leased and 69% committed with LOI's. The west L.A.market was very quiet during the last few months but we are, but we continue to make slow progress and we expect activity to increase this quarter as we complete a number of new amenities. Overall the west L.A. market has a direct vacancy rate of 14% and a total vacancy rate of 16%.

The L.A. times has also recently reported that the overall Los Angeles market is improving. They report a positive absorption of over 300,000 square feet in 2003 versus negative absorption in 2002. And most brokers are predicting a modest increase in rents towards the second half of this year as high-quality space gets harder to find. In terms of our overall outlook for 2004, we remain optimistic that the southern California real-estate marks will continue to improve as the year goes on.

In 2003 our efforts center on leasing and increasing occupancy and we feel good about our progress. In 2004 we will continue to focus on leasing, operating results and positioning ourselves to take advantage of development and acquisition opportunities as they arise. We will keep you posted as the year develops. That's an update on our markets. Now Dick will cover the financial results.

Thanks, John. FFO per share was .62 in the fourth quarter and $3.41 for the year. To recap the year, our 2003 results including two big one-time items, the Peregrine [sp] settlement which increased FFO by 57 a share and a lease termination fee from Ericson [sp] that was .13 a share. Excluding those two items, which total .70 a share, our FFO for the year would have been $2.71.

Occupancy in our stabilized portfolio increased to 90.3% of year end, up from 89.8% at the end of the third quarter. We experienced modest occupancy improvements in Los Angeles, San Diego, and Orange County. Our current overall occupancy rate's down to 94.5% in industrial and 87.6% in office and that's a reasonably accurate reflection of the comparative strengths for those two market or sectors today.

Fourth quarter same store NOI was up 5.1% on a cash basis and 1.9% on a GAAP basis. For the year same store NOI was up 14.5% on a cash basis and 11.8% on a GAAP basis. Excluding the Peregrine [sp] lease termination fee 2003's same-store NOI was up 0.3% on a cash basis and down 1.5% on a GAAP base. One piece of good news we had in the fourth quarter was related to our bad debt expense.

Our receivables collection experience improved and as a result we didn't need to increase our bad debt provision for the first quarter in over three years. One quarter obviously doesn't make a trend, but historically, improving bad debt has been a fairly good leading indicator of improving market conditions. Our G&A costs were $6.4 million for the quarter up from $4.8 million in the third quarter.

As we've discussed in prior quarters that trend is driven by incentive compensation programs that are based on absolute and relative shareholder returns that effect is particularly pronounced in the fourth quarter when our stock hit an all-time high. Based on all the leasing we did throughout the year our cap- ex continued to be high in the fourth quarter at 4.5 million. Our FAD payout ratio for the quarter was 104%, of which 9% was related to the repositioning of our San Diego assets that were affected by the Peregrine [sp] and broback bankruptcy.

Excluding those San Diego leasing costs our fourth quarter payout ratio show would have been 95%. Overall our payout ration for the year was 74%. Looking forward, we have about 1.1 million square feet of lease expirations in 2004 and we've renewed or released about 26% of that to date. The Boeing lease in El Segundo and 16 leases totally about 450,000 square feet in our Orange County [inaudible] portolio, make up about two-thirds of our total expirations this year.

As John note our committed development pipeline now includes one office project, two redevelopment project. The office project is a 209,000 square foot six-story building in Del Mar that is 84% leased to AMN Healthcare [sp]. It represents a total investment of $62 million, of which 59 million has been spent to date. Our two remaining projects in redevelopment are a life science conversion in Sorrento Mesa and the rehab of 909 Sepulveda in El Segundo.

We expect to spend about $32 million redeveloping the two projects, with about 8 million spent to date. Turning to the balance sheet we just completed an 81 million mortgage transaction secured by buildings one through four in Kilroy Centre Del Mar. The mortgage has an 8.5 year term, floats for the first six months and then has a fixed rate of 5.57% for the remaining eight years. Proceeds will be used to pay down our unsecured revolving line of credit.

In addition as we previously reported in the fourth quarter we sold $40.3 million of preferred stock at 7.8% and redeemed on $35,000,000 9 3/8% series C preferred units. Our fourth quarter FFO included the noncash charge of $.03 a share related to the write-off of the issuance costs associated with the redemption of the Series-C preferred units.

Finally let me finish with an update on our earnings guidance by saying that since it's still early in the year at this point we're simply reaffirming the range we established last quarter. That translates in 2004 guidance of 260 to 280 per share. That's the latest news from here. And now we'll take your questions. Operator.

Yes sir, thank you. 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 star 1 on your push-button telephone. If you wish to withdraw that question please press star 2. Your questions will be taken in the order that they are received. Gentlemen, please stand by for your first question. Our first question comes from Dave AuBuchon from A. G. Edwards. Please state your question sir.

Thanks. Can you review on the Kilroy Center Del Mar project the occupancy thats not yet taken a place on the income statement when the -- when are the expectations of that going to happen through '04, in terms of timing?

In Building one they're in the building. That's Paul Hastings.

Right.

In Building 2, they're in the building. Excuse me, building 2, Peregrine's [sp] in the building, Clifford Chance is moving in shortly.

So Q1?

Q1, yes.

Okay and then on 4 and 5?

Building 5, which is the Scrips [sp] Building, they're moving in partially in November of this year, partially in July of this year, partially in November of this year, partially in 2005. And the last building, building 4, which is mimic, which is 80% occupied and they're moving in the other 20% March of next year.

March of next year.

Right.

Okay. Dick, can you review the mortgage, the refinancing one more time? What was the rate, the fixed rate?

I'm sorry, I garbled that. 5.57%.

5.57. And that was executed after the end of the quarter, fourth quarter?

Yes, just today, in fact. Just coincidentally happened at close today.

Okay. The Pacific Center Court, redevelopment, is that entire building slated to be life science or you just have one life science and the rest whatever you can do, or what's the strategy behind that building?

Well, that building is 67,000 square feet and we have very high demand there from the life science crowd and the building was initially developed to accommodate them as well as general users. Erickson came along, leased the building, we took last year, or the year before last, a lease buy-out from them, and we've been working on that building now with life science people.

It so happens which is, is so frequently the case we also have somebody else that wants the entire building, its a wireless company. So, it's...it's...as of right now we think it's going to become a life science building but it could very well end up being a traditional office building.

And the redevelopment that you have...the redevelopment dollar amount you have on the supplemental is just general purpose type of dollars or would that increase if it does --.

no, that's the life science conversion.

Okay. And then the rents on the Westside Media Center, some of the latest leases you've been signing, what general area are the rents on those leases?

It ranges from 2.70 to $3.

Okay. Thank you.

Plus parking.

Thank you, our next question comes from Keith Mills of UBS. Please state your question sir.

Good afternoon, or I guess good morning there in California.

Good morning.

Have a few questions for you. The first is, there was a building sold by the Equity Office Properties during the quarter in Carlsbad, [inaudible] bought that property, could you share with us if that's a property that you looked at and also kind of remind us what your opinion is of that Carlsbad market?

Well, as you may recall we sold our last building in Carlsbad this past year. And we sold it for a low seven cap rate with a tenant that was no longer in occupancy and a lease that was to expire next year, with an above-market rate. So our feeling about Carlsbad has been that it will become a great market someday, but we don't believe its day is today.

So we have not -- we look at everything that comes up, we had three buildings there, we sold them. And while we monitor the market carefully, we don't think it's the best place in San Diego to put ones dollars, from Kilroy's perspective.

Okay I appreciate that [inaudible] John. Next question is, can you just give us an update on the Boeing space, and if Boeing does move out what your estimate is for the approximate time of redevelopment of that property?

Boeing negotiations continue. We hope to have a decision reached fairly soon. As you know the lease expires at the end of July. They, of course, are a valued client and we've been negotiating with them for sometime. We're encouraged to -- as to the progress we're making, but we have not made a transaction yet, and don't wish to signal that we are making a transaction.

We'll signal that when we've made it. We are encouraged to see that the prospects are looking up in El Segundo. There's quite a few major users that looking for fairly significant amounts of space is and by that I'm talking anywhere from 30,000 to just shy of 100,000 square feet.

And we also now are beginning to see, and you may have seen in recent news publications, some of the projected impacts on both the current defense budget and the proposed defense budget and their impacts on many of the companies that are in El Segundo and elsewhere. So, if we were not to renew that lease, we would have a very extensive payment by Boeing to Kilroy for a renovation cost that we feel would largely offset the cap-ex associated with a new lease.

As to the time frame to reposition the property, I think we'd probably be looking at the better part, based upon what we see today, the better part of, you know, 18 months or so. But we're not at that point yet. We do feel that a decision will come down fairly soon, and we are encouraged by where negotiations currently stand.

John, on that Boeing expiration, is your gut feeling better today than it was, say, three or six months ago about the prospects for that to be renewed?

I'd say my gut feeling is about the same. And I'll just have to stick with that. I think you can all appreciate it's very difficult on a conference call to be talking just where we are there until it's done. A lot of people listen to these conference calls.

I understand. And then finally, if you could just share with us your feelings about mergers and acquisition activity in 2004 and kind of what your views are on that for this year. As it relates to your company, as it relates to your space.

Well, are you talking about acquisitions?

Yeah, exactly, mergers or acquisition within the office space, within those exposed to California, and what are your views on that at this point?

Well, I mean, that's a philosophical approach. Right now, just from a standpoint of acquisitions, properties, cap rates are pretty dog-gone low, and it's hard, from what we've seen, to make investments accretive over the near term. We, frankly, think that there are some buyers out there that are a little too frothy based upon what we would think they'd have to be figuring into their calculus to pay the prices they're paying.

On the other hand, the demand side is generally up across all markets, and as we signaled last quarter, we saw very strong demand or far stronger demand and far more diverse demand in all markets in San Diego.

We're beginning to see that same trend apply to our our sub markets here in California, so we think that bodes well for occupancy and ultimately for value. With regard to the issue of mergers as between companies, I don't really want to touch that one.

Appreciate the feedback. Thanks guys.

Our next question comes from Dan Oppenheim of Banc of America Securities. Please state your question.

Thanks, just really wanted to ask a question about potential for development going forward as you look at your land inventory. Do you -- how much do you expect that you could be starting later in '04 and in '05 based on some improving demands there, and have you seen the recovery and demand for office space, any interest in some of your land inventory out there from other developers?

Well, from other developers, we're really not talking with other developers.

No,no just if there's been anyone who's approached you about selling off some of your land parcels.

Well yeah, we've got a couple things going on. One, there are those who have expressed interest, particularly those in the multi-family business with regard to acquiring various parcels that we own.

San Diego has recently decided in certain areas that it wants people like ourselves that own industrial or office land, they want to encourage us to also include more of a multiuse flavor which would include multifamily and not reduce the entitlements associated with the office or industrial, and we're evaluating that, and we have some very key parcels that some of the multifamily people would very much like to buy.

The hotel industry, some of the suite operators are also looking at various properties. But with regard to the first part of your question, what we're seeing in terms of demand or interest from those that need new facilities, they, we are in the early stages of negotiations, and I can't say that those will come to fruition, but we have far more under discussion right now than we've had at any time since the year 2000, and putting that into square footage of office space, we're discussing vastly more than 500,000 square feet of building suites with a variety of users.

Great. Lee Schalop is on as well.

Guys, could you talk about cap rates? There's been a lot of debate out there about if cap rates have continued to go down or if they've started to go back up. I'm just interested in your perspective.

I haven't seen them go back up, Lee. I'm not saying that there aren't isolated incidents where that's happened. We monitor this stuff, at least within the various markets that we're in, and the cap rates seem to be drifting downwards fairly -- much across our markets.

There are those instances where you see something that might trade at a little bit higher cap rate than some of the other properties where a building has some issues or some substantial lease roll-down or something, but by and large cap rates have been very firm.

And that would be -- so that's true for both office and industrial?

Yes...yes.

Okay, thanks.

Our next question comes from John Perry of Deutsche Bank. Please state your question.

Good afternoon. First question is, can you brake out the non-recurring cap-ex for the quarter?

The non-recurring cap ex?

Yes.

You're speaking of maintenance cap-ex?

No, the non-recurring. Or if you, or if you know, if you could just break out the, you know, TI and LCs from the recurring.

Well, yeah. Yeah, ff you look at page 13 of our supplementals there's a whole breakout of recurring and non-recurring. There's one non-recurring expenditure which you'll see is footnoted, there's some work we're doing in West W Center 2 for a change in use from office and restaurant use.

That was it?

That was it.

Okay, um, and then can you talk a little bit about, you know, some of the dynamics that drove the big rent-- or, you know, the relatively big rent increase for the fourth quarter leases? Is there some amortization of above standard TIs built in there, or is it just rent bumps? Maybe you could just talk about that a little bit.

I think it was just a factor of not that many leases were signed in the quarter and we had a couple of leases that had some specific situation where there was rent growth.

It's a relatively small sample size, John. Just 2% or so of our portfolio.

Right.

If you only have 8 or 10% of your fort folio [inaudible] so it's a relatively small sample size. To get to the actual one part of the question we haven't touched on, there was no amortization of specialized TIs, no.

Okay, and then finally can you talk about the retention rate for the quarter on the office side, why it was a little lower than average?

Yeah, I think it's the same answer. It's a small sample size which happened to be very low. As it turns out the though rents were up but the retention rate was low. [inaudible], but I don't think it's any systemic pattern there because we did look at that carefully. It's just it happened to be a small sample size.

Okay, all right, thank you.

Gentleman, our next question comes from John Stewart of Merrill Lynch.

Dick, I had just a couple of follow-up questions on the guidance. I guess given John's comments about where cap rates are, I assume that you don't have any acquisitions baked into the numbers.

No.

Likewise with dispositions?

We have $50 million in dispositions modeled in the middle of the year.

In the middle of the year? Okay. Anything else as far as, you know, timing, how you might see sort of the breakdown by quarter play out, anything else we should be aware of?

In terms of guidance?

Right. In terms of the quarterly breakdown.

I...I don't think at this point, John, we're prepared to go through quarterly guidance. I think we're more comfortable just giving annual guidance.

Okay. And then can you give us some indication of what occupancy assumptions and also the, you know, where you peg the sort of the rent roll on the 1.1 million square feet you have expiring during the year?

In terms of occupancy, as we mentioned last quarter, I think we're projecting an average occupancy in the 93ish% range. And on the 1.1 million that's rolling, as you know we're working on the big lease in El Segundo which as we talked about, will have some roll-down in this number, and so for overall we're probably in a roll-down of around 10%, so that's 1.1 million.

Okay, thank you.

Our next question comes from Frank Greywitt of McDonald Investments. Please state your question.

Hi, I was wondering about downtown San Diego. There's been a lot of talk about condo construction in that market.

Sorry, could you repeat that? You're coming in very -- we couldn't hear you.

Is this better?

Yeah, that's far better.

As far as San Diego, downtown San Diego goes, there's been talk of a lot of condo construction. I was wondering if you expect that that office market might begin to compete with some of your suburban.

Well, we don't see it. The fellow who is in charge of our San Diego go operation, Steve Scott, who is an executive vice president with our firm, been a broker down there forever, sort of knows everybody, and keeps pretty close tabs on what's going on with the various brokers and so forth, and there are some folks who are hoping that San Diego...downtown San Diego will have a significant increase because of things they're doing with the baseball stadium and things within the condo market and so forth. We don't share that enthusiasm.

Okay. As far as a broBeck claim are you still pursuing that? or how is that looking to work its way out?

Well, we're in the early stages of that, but we are pursuing it. It's too early to tell how that's going to shake out.

Okay. [inaudible] a good G&A run rate down from the 6.4 is -- where do you expect that to be for '04?

Frank, when we do modeling we give guidance, we tend to give guidance in total and tend to not give individual guidance on line items simply because when we do our modeling, just the nature of it, we don't do single point estimates, we do a lot of sensitivity analyses on all the key line items, so we've incorporated in our guidance, a range that the bandwidth might be [inaudible] in a quarter on G&A [inaudible].

Finally was there anything in the property operating expense spiking them up a bit this quarter or was that just?

Actually, that's a...a lot of that is just passed through to tenants. even thouth there was an increase [inaudible] as well.

Okay, thanks.

Our next question comes from Jim Sullivan of Green Street Advisors. Please state your question.

Thanks. John, when you were talking about macro economic conditions you pointed to the robust housing market as a signal of strength. Can you comment at all, when I think about your key market, San Diego in particular, west side of L.A., what's going on with home price, I'm concerned -- or are you concerned at all that the lack of affordable housing could crimp some of your development opportunities, particularly in San Diego?

Well, Jim, you know, I have had a concern about housing prices since the 1970s. And I don't mean to be flippant by that answer. It's always been astonishing to me where housing prices are, the number of people who can afford to pay for them, and notwithstanding the increased cost, the fact that people do, in fact, continue to move into these various markets.

In San Diego, I think one of the sort of counter balances to the very high prices that we're seeing and the coastal markets is the increase in housing out in some of the areas like East Lake and Otai Mesa [sp] and so forth. and even there we're seeing fairly significant...a fairly significant house prices at the upper end, but the great majority are more at the mid range.

So the affordability issue is something that we think about a lot. It's something that we don't feel we've been bitten by. We seem to be in good shape in San Diego. I think San Diego the city, and I'm, you know, interpreting now, because I haven't personally discussed this with them, although our fellow Steve Scott is in conversations regularly, that the city of San Diego I think is very much aware of the fact that it must have housing availability, and as you, I'm sure, in your operation when you follow your apartment people, San Diego is essentially, as I understand it, full up.

They're not really -- particularly after these fires, and I think that's one of the reasons why the city is saying, hey, we need to produce more multi-family, in addition to single-family, so I think they've got their hands -- they certainly they recognize the long-term issue if they're going to keep the bodies and the job creation going they have to have housing, and I think they're taking proactive positions to make sure that they have that.

And on a related topic is there any increasing sentiment towards soaking developers with impact fees and things of that nature, given some of the traffic issues in San Diego I'm talking specifically?

Right. You know, Jim, I haven't heard anything that relates to our properties. In all of our properties, when we -- when we had them entitled we went forward, we rough-graded, we took utilities to the site, we did all the off-sites and on-sites, we paid all our traffic mitigation fees based upon the maximum development potential of the property so I think we're in good shape.

I haven't heard of anything. I'm happy to get back to you on that but I have not personally heard of any attempt by the city to use your words, soak developers.

Okay, thanks a lot.

You're welcome.

Thank you. Ladies and gentlemen, as a reminder, should you have a question please press star 1 on your push-button telephones. Our next question comes from David Cop of RBC Capital.

Good morning. Here with Jay as well. Most of my questions have been answered, but could you remind me when your series D preferred is callable?

Series D is callable on December 9th.

And so what's your expectation there in terms of your estimate, your guides for next year? Are you assuming that gets taken out in next year or the following year, '05?

Well, it doesn't really have much impact on this year's numbers but yeah, we're looking at taking that out but it really doesn't impact either.

Okay. And then with regard to the non core asset sales you talked about modeling about 50 million. Should we assume these are going to be industrial sales? Not that it mat aers lot from a modeling standpoint but just what do you guys think in terms of the industrial business going forward?

Well, the first part of that question I wouldn't assume that [inaudible] industrial sales. In fact we're working on the sale of an office building at the moment so it's a mixture of office and industrial. Just in terms of industrial market I'll let John abs.

Back to the office we're looking at non core things. We bought a portfolio years ago, one property was in Riverside, we're looking although selling that building because we don't have any intent to expand at this point office activities in Riverside.

With regard to industrial, as we have repeatedly over the last few years, we've sold non-core properties, properties that we think are tapped out in value, and that will continue to be something you'll see with Kilroy.

We very rigoreously each year look at what we consider to be the, you know, 10% -- you know, the bottom 10%, which might be great properties but may not have much legs or they might not be strategic or they may not be in markets that we think are going to have as much oomph and we'll make a decision to dispose of them in an orderly fashion.

Okay. Thanks, guys.

Thank you, our next question comes from Lou Taylor of Deutsche Bank. Please state your question.

John, in your discussions with Boeing about a range of outcomes, would any of the potential outcomes include moving some of their space into, say, 999 Sepulveda?

No.

Okay, thank you.

You're welcome.

Our next question comes from Dave Aubuchon of A.G. Edwards.

Yes, huh, the Peregrine [sp] payments this year is, I believe it's 750,000. Do you know when the timing of that will be?

August 7th.

It is August 7th. Thank you, that's all I had.

As a reminder, ladies and gentlemen, should you have a question please press star 1 on your push-button telephones at this time. Gentlemen, please stand by for any further questions. If there are no further questions, I will now turn the conference back to Mr. Richard Moran, Junior.

Thank you all very much for joining us. I know it's a busy time. We appreciate very much your interest in KRC, everybody have a good day. Thank you.

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