Kilroy Realty Corp (KRC) 2007 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q2 2007 Kilroy Realty corporate earnings conference call. My name is Jendi, and I'll be your coordinator for today.

At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session toward the end of today's conference.

(OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded for replay purposes.

I would like to turn your call over to Mr. Richard Moran, CFO. You may proceed, sir.

Thank you very much, and good morning, everyone. Thank you for joining us.

With me today are Jeff Hawken, our COO, Tyler Rose, our Treasurer, and Heidi Roth, our Controller.

Unfortunately today John Kilroy, our CEO, is unable to join us this morning. As many of you know, John's a competitive sailor and has been competing in a trans-Pacific race that was expected to be completed several days ago.

The race has been delayed by unusually calm winds and John probably won't be back into a port until the end of today. He sends his apologies and asks that we go ahead with today's call as scheduled rather than risk inconveniencing everyone by rescheduling at the last minute.

At the outset, I need to say that some of the information we will be discussing this morning is forward-looking in nature. Please refer to our supplemental package for a statement regarding the forward-looking information in this call and in the supplemental.

This call is being webcast live on our Web site and will be available for replay for the next seven days, next ten days, excuse me, by phone and over the Internet.

Our press release and supplemental package have been filed on a Form 8-K with the SEC and both are available on our Web site.

We released our second quarter results yesterday afternoon. FFO was $0.77a share.

Jeff will start the call with an overview of the quarter and our key markets, I'll add financial highlights and updated earnings guidance and then we'll be happy to take your questions. Jeff?

Thanks, Dick. Hello, everyone. Thanks for joining us.

Market conditions for commercial real estate in Southern California have changed little since our last call. Solid demand across the region coupled with limited new supply remains the norm, supporting a solid operating environment for our industry.

Economic conditions in the state also remain a net plus with continued positive job growth. As John mentioned last quarter, local forecasters expect the state to add another 240,000 or so net new jobs in 2007, with softness in residential housing largely offset by continued growth in other important California industries, including international trade, professional services, biotech, IT, and commercial aerospace.

Unemployment rates in Southern California continue to hover around historical lows and all regions reported positive job growth. Unemployment stands at 4.6% in San Diego County, 3.9% in Orange County, and 4.9% in Los Angeles County.

Here at KRC, we continue to see solid demand for office space across our submarkets. As I'm sure you've read, demand is particularly visible in West L.A., considered an essential location by many entertainment companies who are vying for talent under highly competitive business conditions. We've seen rental rates in West L.A. Class A properties double and they continue to rise.

More broadly, our portfolio continues to perform well and we will soon see the benefits of our development program, which will begin to impact our earnings in the third quarter.

In terms of leasing, we've now completed negotiations with Boeing concerning their new rental rate at our Sea-Tac project in Seattle. As we've previously announced, Boeing renewed their 211,000 square-foot lease, therefore an additional three years with a rental rate to be determined via further negotiation. We've now concluded negotiations with a new three-year rate that represents a 22% increase on a GAAP basis and an 18% increase on a cash basis.

Another piece of news I want to mention is the outcome of an El Segundo property sale we negotiated two years ago that is now paying off well for KRC. The El Segundo industrial property had been vacant for a couple of years when we sold it in 2005. We agreed to take half the $22.5 million sale proceeds in cash and the other half in form of is a seven-year note.

In addition, we entered into a profit participation agreement that provided with us additional upside to the extent the property performed above certain thresholds. Last quarter the property owner paid us $4.8 million to terminate the profit participation agreement. This is another example of how we've been able to generate additional value for our shareholders through the disposition of our industrial assets.

Let me review individual submarket conditions, starting in San Diego and moving north. Operating conditions for commercial real estate in San Diego remain consistent from last quarter.

Central San Diego County, the location of all of our properties in the region and all of our active development, is currently registering active demand for office space of approximately 6.4 million square feet according to CBRichard Ellis. Meanwhile, new office supply has not changed since the beginning of the year.

As of the second quarter, there was about 2.2 million square feet under construction in our core San Diego markets with 1.1 million of this representing our 82% preleased development. In Delmar, where KRC is the dominant office landlord with approximately two-thirds of the top tier Class A product, current direct vacancy here is approximately 4.4% and a total vacancy is 9.9%. Our stabilized properties in Delmar are 98% occupied.

South of Delmar in the submarkets of Sorrento Mesa, KRC competes in two and three-story office products. Direct vacancy for this product type is currently 7.5% and total vacancy is 12.2%. Our stabilized properties here total approximately 1.5 million square feet and are currently 91% occupied.

In the UTC Governor Parks submarket just south of Sorrento Mesa, we also compete in the two-story product type. Current direct vacancy is about 1.4% and total vacancy is about 4.6%. Our UTC properties total approximately 430,000 square feet and are 100% occupied.

On the I-15 corridor, KRC owns approximately 750,000 square feet of stabilized office space. The two-story prototype here has a current direct vacancy rate of 8.7% and a total vacancy of 11.7%. In the Class A product type, direct vacancy is 15.9% and a total vacancy is 17.2%. Our stabilized properties here are 89% occupied.

Moving north into Orange County, KRC's 3.7 million square feet of industrial properties are 91% occupied. The vacancy comes from three buildings including the 157,000 square feet industrial project we are currently rezoning to residential and two other projects for the leases recently expired. Overall the Orange County industrial market remains strong with a vacancy rate of about 3.8%.

Further north at Kilroy Airport Center Long Beach, our 7 billion office campus immediately adjacent to the Long Beach Airport is currently 92% occupied. Demand here is steady with Class A direct vacancy of 6.2%, a total vacancy of 8%.

Continuing north, our stabilized properties in El Segundo are now 94% occupied. Our only vacancy in this market is at 909 Sepulveda, which is now 84% committed.

Direct and total vacancy in the El Segundo Class A market are the same at 11.6%. This market continues to see improvement both from organic growth and spillover created by the dramatic rental rate increases in nearby West L.A.

Moving to the West L.A. market, direct vacancy is now 6.1% while total vacancy is at 7.2%. Rents for top buildings in this market have now pierced the $6 range compared to $3 a few years ago. Our properties in this market totaling 680,000 square feet are 98% occupied.

Further north is our final submarket, the 101 corridor running through northern Los Angeles and southern Ventura counties. It continues to perform well with direct vacancy in the Class A product currently at 6.5% and total vacancy at 6.9%. Our properties here are 96% occupied.

That's an update on our second quarter activities and markets. Overall, we continue to operate amid market conditions that are healthy and stable. The diversity of California's economy has been very much in evidence with weakness in housing more than offset so far by strength in other business sectors.

We remain pleased with our under construction development program as Intuit, Cardinal Health, and DirecTV begin to move in this month. Our San Diego land sites continue to generate interest from perspective tenants who are looking to expand in the area. We will update you on these discussion as they progress.

Now Dick will cover the financial results. Dick?

Thanks, Jeff.

FFO was $0.77 per share in the second quarter and $1.52 for the first six months of the year. Occupancy in our stabilized portfolio at quarter end was 92.7%. That compares to 94% at the end of the first quarter and 95.8% at the beginning of the year. Our office portfolio was 93.6% occupied and our industrial portfolio was 91% occupied.

As Jeff mentioned, the lower industrial occupancy reflects two vacancies in our Orange County portfolio, totaling 192,000 square feet, as well as the impact of our residential rezoning project in Irvine that accounts for 157,000 square feet, or 4% of our industrial vacancy rate.

The decline in our office occupancy was mainly in San Diego, which ended the quarter at 94%. The primary reason for the vacancy decline was the move-out by the prior tenant at our Lusk Avenue building. This building has already been released to Cardinal Health, which is scheduled to move in October.

Second quarter same-store GAAP NOI was up 2.2% and cash NOI was up 6.9%. For the first six months of the year, GAAP NOI increased 3.4% and cash NOI was up 6.2%.

GAAP rents increased 17% in cash, rents were up 4% in the second quarter. For the first half, GAAP represents increased 25% and cash rents increased 9%.

The strongest rental growth remains centered in the West L.A. and El Segundo office markets. Based on our latest analysis, we believe that our overall portfolio rent levels are about 10% below market and our remaining 2007 expirations are 15 to 20% below market.

Capital expenditures in the second quarter totaled $4.9 million and $9.2 million year-to-date. Our FAD payout ratio in the second quarter was 65.6%.

We had no acquisitions or dispositions during the quarter, although as Jeff said, we did receive a $0.14 a share payment to terminate a profit participation agreement we had on an asset that we previously sold. The agreement was associated with 114,000 square-foot industrial building in El Segundo that we sold for approximately $22.5 million in late 2005.

As part of the original sale agreement, we received $11.3 million in cash. We carried back a seven-year note for the other half of the proceeds and we retained a promoted interest in the property under which we would share in the operating and sale profits of the property above certain thresholds.

The $4.8 million payment effectively bought out our carried interest. The seven-year note, which carries interest at 7%, remains outstanding.

The $0.14 payment is recorded on our income statement as a gain on a sale from a prior disposition and is included in our calculation of FAD since it reflects the buyout of our future profits interest in the property.

Our development program continues to stay on track. In aggregate numbers we have $384 million of development and redevelopment under way covering seven projects that total 11 office buildings and just over 1.3 million square feet. We've spent $269 million to date on these projects and they are 76% preleased.

Deliveries will begin in the third quarter as Intuit moves into its four buildings throughout July and August. Cardinal Health moves in beginning this week, and DirecTV moves in over the next few weeks.

Our balance sheet remains in great shape and we continue to be (inaudible) leverage. Variable rate debt is only 1% of our market cap. We have no near-term debt maturities and we have very substantial available liquidity and borrowing capacity.

Now let me finish with updated 2007 FFO guidance. Last quarter we provided 2007 FFO guidance of $3 a share to $3.15 a share. We're essentially maintaining our previous guidance, but tightening the range a bit. Our new 2007 FFO guidance is a range of $3.04 to $3.14 a share.

That's the latest news from here and we'll be happy to take your questions. Operator?

(OPERATOR INSTRUCTIONS) Your first question will come from the line of Michael Bilerman from Citigroup. Please proceed.

Hey, guys. John Litt's on the phone with me as well.

Dick, you talked about that [loss status] of 93,000 square feet, you've already released that. Can you go through some of the other vacancy lost?

I know you talked last quarter about occupancy dipping in the beginning and sort of the middle of the year and then you would expect that to go back up to 95% by the end of the year. Can you just talk a little bit about some of the other occupancy lost and where you are in the releasing prospects, getting up to that 95?

Sure. And I'll let Jeff talk about that in some detail but I'll just give you the overview.

Basically we, in substantiative form, remain on track with our prior projections. We're still estimating that our occupancy will -- here, I'll give you the numbers, including assuming that we continue to include the industrial rezoning site in Orange County that I mentioned, which accounts for basically 1% of our vacancy.

So we expect -- and I'll use rounded numbers here to go roughly from rounded 93% at the end of the second quarter to 92 at the end of the third quarter and back up to 94 at the end of the year. 94, that assuming -- that number assumes the inclusion of the Von Karman property we're rezoning. If that was gone by then it would up to 95 so it's basically, there's 1% in each of those quarters that I mentioned, and that series I just mentioned that accounts for the Von Karman vacancy.

And I'll let Jeff talk about the specifics, where we are.

Hi, Michael and John.

In San Diego, from quarter-over-quarter, we lost 162,000 square feet in occupancy and as Dick said, 93,000 square feet of that has already been released and committed. There was another 38,000 square feet in a Sorrento Mesa building that we've already released and is now committed and there were two-8,000 square feet spaces in Delmar that have already been released and committed. So out of the five spaces that came back totaling 162,000 square feet, we have one space that we have not yet released.

And where would the rents relative to prior rents on that space?

On the Lusk building, on a cash basis it was about an 11% increase over old rents and a GAAP 35%. On the 38,000 square-foot space it was about a 40% increase on cash and 64% on GAAP. And on the other two spaces, I don't have the numbers in front of me, but they were definitely higher than the old rents.

Jeff, was there anything in the quarter's leasing spreads, in the supplemental that caused those, I know first quarter was a pretty high quarter from that leasing activity. Was there anything in this quarter that sort of affected the spreads?

No. I don't think there was anything in particular it's just the way the expirations fell.

Okay.

And then the last question was just on development. You remain 82% preleased in the development pipeline. What's sort of the progress that you're seeing on leasing up that remaining space and on potentially bringing new product to market given what's occurring?

Well, this is Dick speaking.

I think that the, obviously, everybody sees the same macro economic news and, obviously, circumstances at a gross macro economic level certainly seem to have changed as the years evolve. But the encouraging thing, at least for us, day to day on the ground is we continue the see demand, as Jeff suggested, both in our existing space, for our existing space we've had some significant releasing progress as we've had turnover this year and, additionally, in our new development pipeline, we continue to see and have discussions with prospective tenants and some existing tenants for our pipeline.

As we've always said, those deals involving large spaces often take a great deal of time to put together. There are some, there are obviously economic issues but also company internal issues related to companies moving and relocating and consolidating and so forth.

So some of those take time and they're inherently unpredictable as to their timing, but if you contrast our current experience with, say, several years ago, when we had these similar kinds of discussions at the onset of the last recession, I think if we went back, we'd find that we were reporting very little activity in terms of tenant interest. Today, we're seeing considerable activity.

So it's obviously the economy is obviously inherently difficult to predict, but the encouraging news, at least on the ground, is we are seeing good demand for our development sites in terms of discussions and for our existing portfolio where we have turnover, we are successfully releasing the space, at least so far. I think that's, overall, I think the news on the ground is encouraging given that the macro economic environment, at least at a national level, does seem to be somewhat different.

And how close are you on Saber Springs and Sorrento Gateway in terms of leasing that space for those developments?

Well, as we've always said, on Saber Springs, the space we have under development there is inherently multi-tenant, and multi-tenant space tends, in our markets, not to lease until it's up and done. So we've always expected that that space would not be leased to any meaningful degree until it was finished.

You start to see landscaping go in, that's when brokers and tenants tend to have an interest, when it's very visible. We do have one prospective lease in the Saber Springs market for new development space that we're very close on and we're hopeful that that will be signed shortly, but obviously, those things are difficult to predict.

And on Sorrento Gateway?

I think we have encouraging demand, more to come, but we don't have anything definitive to report yet.

And then in terms of your developments, new starts coming out of the shadow pipeline, is there anything that you feel comfortable yet beginning?

I think that's something we're looking at carefully, and as we always do. Obviously, when there's economic uncertainty, you have to look at things carefully and incrementally. But I think we feel very comfortable, obviously, with our pipeline under construction and very encouraged by the demand in our current sites.

I think we'll probably know a lot more within a quarter or two as to how the economy is progressing and whether this demand will translate in the near-term or not. But I think we're encouraged by the discussions under way, and obviously, we're going to key our starts to the demand with it and if we are, we'll err a little bit on the side of caution.

Great. That's helpful. Thank you very much.

Your next question will come from the line of Michael Knott of Green Street Advisors.

Hey, Dick, can you just update us on the status of any comp plan discussions?

There are no discussions going on at all.

So we shouldn't expect to see any type of multi-year plan instituted over the balance of the year?

We have no discussions going on. I'm always hesitant to forecast the future of which, where things might or might not happen, but we have no discussions going on today.

I don't know whether or not there's, as the annual cycle tends to be discussions in the fall so I simply can't predict what would happen later in the year. I just don't have the ability to predict that.

And then can you update us on your thinking with respect to share buybacks with the stock below 70 or trading probably around a 25% NAV discount? Can you just help us understand how you think about that from a capital allocation standpoint?

Sure. We have a 1.2 million share existing authorization and we obviously have substantial available liquidity and a conservative balance sheet, so we have the capacity and we've in the past not been afraid, not had any aversion to buying back stock when we thought it appropriate. It's obviously, it is a capital allocation decision comparing our capital investment alternatives and so that's something we'll be looking at carefully.

And then last question.

It's been discussed in the market that your friends at Maguire are possibly selling the UTC building there at a very high price we've heard, in the $600 a foot range, which is probably a sub for a cap rate I would think.

Can you just help us understand how you think investors would compare that property with your portfolio? It would seem that that would convey a high value on your San Diego portfolio even though it's in different markets.

Well, I'm not personally familiar -- I think I know the building you're talking about, but I haven't looked carefully at those numbers. I think the most directly comparable trade we've seen was a project that was sold in Del Mar not too long ago, which sold where the first digit was also a, was a low four, if I recall correctly.

So that at least today wouldn't surprise me and I'd imagine that, I think from what we've been told, our assets would trade at similar numbers. The cap rate -- the discussion about where cap rates are, I think our experience is that it seems a logical inference that interest rates influence cap rates and capital market conditions influence cap rates over time, although in, the empirical evidence is somewhat mixed, I guess, on that.

But in any event, the actual on the ground activity we've seen is no meaningful change in cap rates. If anything, we've seen -- we've admittedly, not the same frenetic pace of activity that we saw at the beginning of the year, but, if anything, we've seen somewhat at the margin probably, some of the lower cap rates lately.

Okay. Thanks. I'll get back in the queue.

(OPERATOR INSTRUCTIONS) Your next question will come from the line of Lou Taylor of Deutsche Bank.

Thanks. Good morning, guys.

Dick, can you talk a little bit about just expense reimbursements? Your operating expenses year-over-year were up around 9%, but your reimbursements didn't quite keep pace. Is there anything unusual going on there?

I think that's related on the reimbursement side to lower [can] billings versus the prior year. So if you adjust out that, the reimbursements are up about the same level that expenses are up. The [can] buildings are always bouncing around and makes that comparison difficult.

Okay.

And then second question is just, Dick, in the guidance it's 304 to 314 with six months to go in the year, really five months to go in the year, why is it still wide and what are the things that could swing it to the upper end or lower end?

Well, why is it still wide. I think what we generally, for lack of any other decision rule, I think we've always had a preference to start with a range at $0.20 and generally we've tended, I think, over time to ratchet it down $0.05 each quarter, plus or minus.

So that's really the logic there that life is inherently uncertain and we just want to have a, I think, typically at this time of the year, we've had about a $0.10 range and I think within that framework it's just -- the main variable at this time of the year is just when tenants take occupancy, when our releasing actually occurs. In the very near-term, it's just when does a tenant get in there.

We can take comfort that we've released space, but obviously if their occupancy is delayed or if we're slower in leasing the space than we expected, than obviously their occupancy is delayed. So it's, I think it's mainly a function at this stage of when occupancy occurs and there's obviously some expense variability in there, too.

Okay. And then last question.

Can you talk a little bit about construction costs? As you look at projects maybe to start second half of this year or into next year, what's the (inaudible) costs, how much are they up, and is that eating into your yields or how much do you need to push rents to justify starting new projects from here?

Well, I'll let Jeff touch on the actual experience we're having right now with construction costs.

I would say that when we look at our pipeline, both under construction, we segment it, obviously, internally, the way we do eternally. We have a set of the projects that are under construction where we have high bids and commitments and contracts and obviously a very detailed budgeting and estimate to complete system every month.

And then we have the second bucket, which is the pipeline for the future and we actually update the pro forma on every project every month in some detail and review it carefully. And right now, at least, basically on our pipeline that's under construction, our development under construction, our numbers would be plus or minus, actually slightly over 9% on the cash return and 10% on the GAAP return and the numbers in our future pipeline are the same.

And that's based on a detailed pro forma for each project based on current costs and current revenues. So at least right now, those numbers are holding.

And I'll let Jeff talk about the specific construction cost experience and how we build that into the pro formas.

Hi, Lou. It's Jeff.

I think over the last year, we've seen plus or minus 9% increase, and that's really in the steel and concrete. We've seen a little give back on the labor side, just with lack of demand on residential.

So as Dick mentioned, as we continue to look at our future development pipeline, we're constantly talking with our general contractors, et cetera, and I think we're feeling pretty confident that the construction costs, at least for now, have sort of settled down. I don't see, at least for the foreseeable future, a major increase.

Great. Thank you.

You have a follow-up from the line of Michael Bilerman. Please proceed.

Was there anything in the same-store numbers -- was the lease term fee included in that number?

Yes.

And so what -- when you back that out, the GAAP number was down and the cash number was only 3%. Was there anything holding that back in terms of comparability or something in the quarter?

Well, it's really the three industrial properties that are vacant, that are driving that lower same-store without the lease termination fees.

What would just the office portfolio have been?

The number you quoted, though, were for both office and industrial and so those numbers are being impacted by the industrial properties. I don't have the same-store results just on our office spaces in front of me.

Okay.

You talked a little bit about the lease term fee in terms of where it was received on what amount of space and whether you've released it and just a little bit more color?

Yes. There was basically two lease terminations both in San Diego. Both of those spaces have already been released at higher GAAP rents. The larger one, I think, was up 6% and the smaller one was up about 34% on a GAAP basis. The total amount of those two lease terminations I think was $1.8 million.

Okay. And can you just refresh the guidance for the full-year in terms of your expectations for lease term fees?

I think we have maybe another penny in our numbers for the remainder of the year for other income.

So in terms of tightening the guidance, there was no major changes in any of the line items, or did something shift around?

I don't think there were really any major changes this quarter at all. No.

Okay. Thank you.

You have another follow-up from the line of Michael Knott of Green Street Advisors.

Jeff, just a follow-up on the comments on the released space in San Diego. It sounded like there was only one space that was not released but that sounded like that accounted for the bulk of the, I guess, about 70,000 feet remaining. Is that the right math? Did I hear that right?

Actually, it was 162,000 square feet. The 93,000 was released at Lusk, the 38,000, Sorrento Mesa. There were two-8,000 square-foot transactions in Del Mar and the remaining was 15,000 which was the New Century termination that we talked about last quarter. So the only space that has not been released is the 15,000 for New Century.

Okay. Thanks.

But when we say released, that doesn't mean it's occupied. It takes a while for those spaces to get occupied so that will come in over the next several months.

Okay. Got you. And then could you just give us an update on the subprime issue?

Well, I think as we said at the end of the first quarter, from a substantiative point of view, we had a little bit of exposure to New Century in buildings we had bought and they went bankrupt and they're gone. And then we had -- other than that, the only meaningful subprime exposure we have at all is Accredited Home Lenders in the I-15 corridor.

I'm sure you've probably seen and it's publicly available that there's been an acquisition announced there and the stock traded up on that and it's bounced around a bit since then. And that space is in the I-15 corridor, which is a distinctly not a financial services corridor. There's no other subprime exposure there, and it's building right along the freeway, and I think it's building where tech and defense and back office space predominance and so I think we're very confident in the health of that market overall.

And then just to bring up the occupancy issue again. Can you remind me or just reiterate for me, I know on the last call you'd said you expected to lose about a point of occupancy before rebounding and it looked like you had lost 130 basis points sequentially.

What was the cause of that sort of unexpected 30 basis points? Is that the San Diego vacancies that we've talked about?

I don't know if it's unexpected. I think it's just rounding numbers.

Okay.

And then just a couple of accounting questions. Tyler or Dick, on the balance sheet, where is the $29 million that you paid for the extra call protection on the convertible debt?

That's in additional payment capital.

Okay.

And then also, can you just help us understand the difference between the CIP on the balance sheet and the development expenditures? I think Tyler had told me there was a new accounting rule that makes those numbers diverge?

This is Dick speaking.

I don't -- I'm not sure it's a rule. I'll let Heidi cover the interpretation, but the essence is that we've been told that the rules are that if a tenant provides us with anything in the way of consideration for the occupancy of their space, we have to account for that as rent.

Obviously, that includes cash over time, but in addition, we have been told, and this goes back a couple of years now, when the SEC had that leasing pronouncement, we've been told that the interpretation to use for that is to include when the tenant puts money into the building, and I'll let Heidi explain the specifics as to how that works.

So, essentially, as Dick said, we've had extensive technical conversation with our auditors in their national office and have concluded that the required GAAP accounting treatment is essentially that we need to evaluate when a tenant puts tenant improvements into the building, we need to evaluate specific criteria to evaluate whether or not those qualify as our capital assets, i.e., are they permanently affixed to the building, do we have control over the types of improvements that are put into the building and so forth.

And if we can conclude that those are our assets, we record them on the balance sheet as our asset and then the offsetting credit goes to deferred revenue which is then amortized into our income statement over the life of the lease. So the reconciliation between what we're showing in estimated investments for some of our development properties and the CIP on the balance sheet, is that we are not including those amounts in the estimated investment column because that does not represent money that the Company is outlying, but it's money that the tenant is outlying, but it is still showing up as an asset in CIP on our balance sheet.

Thanks, Heidi.

I would add that this was all a function of the -- this came up when the SEC accounting release about leasing came up a couple years ago. It strikes at a personal level, I would say, it strikes me as entirely counterintuitive to do it this way, but that is the way we've been told we should do it. What we do is that, as you'll note, we back that out from FAD as a non-cash item.

Okay. Thanks. I'm shocked that the accountants made something more convoluted than necessary.

This concludes our question-and-answer session. I would now like to turn it back to Mr. Richard Moran for closing remarks.

Well, thank you all very much for your time today. We appreciate (inaudible). As I said, John was very apologetic and embarrassed at the turn of events that caused him to not be able to be here and he sends his regrets. Thank you.

Thank you for your participation in today's conference. This concludes the presentation, and you may now disconnect. Have a wonderful day.