Good day, ladies and gentlemen and welcome to the second quarter 2008 Kilroy Realty Corp. earnings call. (Operator Instructions). I would now like to turn the presentation over to your host for today's call, Mr. Richard Moran. You may proceed.

Hi. Thank you very much and good morning everyone. Thank you for joining us. With me today are John Kilroy, our CEO; Jeff Hawken, our COO; Tyler Rose, our Treasurer and Heidi Roth, our Controller. 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 telecast live on our website and will be available for replay for the next 10 days, both by phone and over the internet. Our press release and supplemental package have been filed on a Form 8-K with the SEC and both are also available on our website. We released our second quarter results yesterday afternoon; FFO was $0.78 a share. That includes a $0.09 a share increasing our bad debt expense related to the Favrille situation that's outlined in our press release. John will start the call with an overview of the quarter and our key markets, I'll add financial highlights and update our 2008 earnings guidance and then we will be happy to take your questions. John?

Thanks, Dick, and hello everyone. Thanks for joining us. The second quarter was very similar to the first quarter for us at KRC. We continue to see economic uncertainty affecting our tenant's decision-making and we made solid leasing progress in spite of that uncertainty. In terms of the economy, there is no question that continuing doubt about the future is affecting the pace at which transactions are getting executed. Job growth is slowed in our markets, but we haven't seen this translate into significant tenant contractions yet. California's unemployment rates for June showed the moderate increases from the prior quarter with current rates of 7% in Los Angeles, 5.2% in Orange County and 5.9% in San Diego county. We were pleased with our leasing results during the quarter and continue to exceed our forecast. So far this year, we've executed over 1.3 million square feet of new and renewing leases. During the quarter, we renewed two larger leases that were scheduled to expire in 2009. In June, Epson signed a 10-year renewal on its 136,000 square foot lease in our Kilroy Airport Center Long Beach project. The lease was set to expire in October of 2009. Rent was up 19% on a cash basis and 39% on a GAAP basis. And in May, Pacific Bell renewed its lease with us in Sorrento Mesa for a new five-year term. The lease covers a 133,000 square feet at our 6350 Sequence Drive project. Rent was up 10% on a cash basis and 24% on a GAAP basis. These transactions have given us a good head start on our 2009 expirations, which now totaled 1.5 million square feet. On the development front, we just signed a lease with DIRECTV for the remaining 25,000 square feet at our redevelopment project in El Segundo, bringing…

Thanks, John. FFO was $0.78 per share in the second quarter and $1.65 for the first six months of the year. Earnings were lower than originally forecasted to a $0.09 a share increase in bad debt expense related to the Favrille situation. Let me start with that. Our annualized GAAP revenue from Favrille was $6.4 million and Favrille had paid rent through June 30th. We also had $3.9 million of credit support in the form of a letter of credit and security deposit. The Favrille lease will remain in effect through August 31st and then be terminated. Of the $3.9 million in credit support, approximately $800,000 will be applied to rent for July and August. The remaining $3.1 million of credit support will be offset against the $6.2 million net straight-line rent receivable we had at June 30th related to Favrille. So the net effect of the Favrille announcement in second quarter was to increase our bad debt expense by $3.1 million, or $0.09 a share. That $3.1 million increase in bad debt expense is equal to the $6.2 million of Favrille straight-line rent receivable less the $3.1 million credit support proceeds offset against it. Partially offsetting the $0.09 a share of additional bad debt expense in the second quarter, we had $0.04 a share of one-time positive items from some insurance proceeds and property tax refunds. Moving to occupancy, we ended the quarter with stabilized occupancy of 92.8%, down from 94.8% at the end of the first quarter. By product type, office occupancy was 93.8% and industrial occupancy was 90.7%. Our lower occupancy was largely the result of the default in move out by the 153,000 square foot Anaheim industrial tenant that we mentioned on last quarter's call. Our occupancy rate hasn't been adjusted for the impact of the…

(Operator Instructions). Your first question comes from the line of Lou Taylor from Deutsche Bank. You may proceed.

Thanks. Good morning, guys. Dick, can you just go over a couple of the items, it was just a little too quick to pick up. So in terms of Favrille, it sounds like you had the letter of credit and that offsets the hit from the straight-line rent adjustment and that was 2Q hit.

Lou, we had $6.2 million of net unreserved straight-line rent as of June 30th from Favrille before the effect of this announcement. There were of the LC proceeds and the security deposit, it was $3.1 million available when the dust settled to offset against the $6.2 million of straight-line rent. So the math is straight-line rent at June 30th, 6.2 minus LC proceeds 3.1 equals, coincidentally, the same number, 3.1 as the net increase in bad debt expense we recorded in the second quarter.

Okay. So that implies that the kind of just normal monthly rent from this tenant of roughly $500,000 a month. That won't really start to flow into your, kind of, accounting run rate until September. Is that correct?

Right.

Okay. And then in terms of your 630 occupancy, you mentioned that, this still has Favrille and TeleTech in the numbers.

Yes.

That's correct. Okay. And then lastly, in terms of the guidance, you said there was the $0.09 charge from Favrille, but then you said that's offset by some non-cash item that will offset that. What are those items?

The $0.09, what we estimate, and again, it's a preliminary estimate because we obviously haven't reported our third quarter results yet or our fourth quarter results for the year, but our preliminary estimate is that for the rest of the year, the rent loss, that as you just mentioned will begin in September and continue for the balance of the year related to the Favrille lease termination will be approximately offset, we believe by the non-cash deferred revenues that will be accelerated as a result of the Favrille lease termination. There's a bunch of moving parts and we obviously haven't reported that yet, but the net effect is that we think that the approximate accounting impact on earnings for this year for Favrille will be roughly equal to the $0.09 a share we reported in the second quarter. There will be some ins and outs over the balance of the year, but we think they roughly offset. That's preliminary, of course.

Okay. And I'm sorry. One last question. Can you just go over the Intuit again in terms of a $0.10 positive and that's a 6.3 lease termination fee and then in terms of the rent offset is how much again?

Well, the lease termination fee that we will receive in the third quarter will be $6.3 million. And if I recall right, the loss rent for the balance of the year $800,000. And the rest would be deferred receipt, deferred asset write-offs that net-net when you net out the $6.3 million lease termination fee less the lost rent once the lease is terminated and if you net out the non-cash charges that we estimate, we estimate that the positive impact on earnings will be roughly $0.10 a share for the year.

Okay. Thank you.

You're welcome.

Your next question comes from the line of Michael Knott from Green Street Advisors. You may proceed.

Hi. This is actually Matthew Wokasch filling in for Michael Knott. Is there any update on the industrial to residential conversion?

Yes. This is John speaking. What's your name again?

Matthew Wokasch.

Matthew. Hi, Matthew. Yeah, We're caught into the, I guess, what has become a real legal dispute between the City of Irvine and some of the adjacent cities that have filed a lawsuit against Irvine dealing with requiring them to update their overall citywide EIR. And until that's updated, which they're underway with, we understand we are just in a holding pattern. There's nothing we can do.

Okay. Thanks for that update. Is there a similar update on the Del Mar land? And I know you're trying to expand your square footage for.

Yeah. We've been having meetings with the local citizens group and with the officials from the city, and at this point, everything appears to be pretty positive. Certainty, the devil is in the details, but we've had a very encouraging couple of first meetings and are working now to expand that into some revised site plans and whatnot. But at this point, we're very encouraged. A long way to go.

Thank you again.

Welcome.

(Operator Instructions). Your next question comes from the line of Dave Aubuchon from Baird. You may proceed.

Thank you. John, the interest lease that you got the lease term fee for in Calabasas, you mentioned they were growing and that space was too small for their needs. Are they staying in that market? Or do you have the opportunity to have them in other submarkets?

Yeah, we didn't have the opportunity. We didn't have any development properties, Dave, that would accommodate them. They actually essentially doubled in size into a project that Lennar developed for them just down the road. They've had talked with us about expanding, but we just didn't have the entitlements on the site. And I think, you know, we have a pretty strong relationship with those folks. For us, it was pretty simple decision. As I mentioned in my more formal comments, we basically got the present value of the remaining lease obligation through the point, which they had a termination plus a renewal down south in their data center at UTC. And we feel that the way that our building is positioned there that that was a very good thing to do, because it allows us essentially, rather than to have them go out and sublease and us get a portion of any sublease rental, we really get to capture everything now.

Great. And Countrywide, obviously, a significant user in that market and their plans are unknown as you outlined. Just relative to that situation and what you see in that market right now, how long do you anticipate re-leasing that space?

I'm very reluctant in this period that the overall U.S. economy is going through, which certainly rattles through all of our submarkets and so forth, to start giving projections. It's sometimes a little frustrated because we find ourselves with tenants literally sitting down exchanging proposals back and forth. And DIRECTV is the little deal that we just did with them, 25,000 feet, that's a case in point. They needed that space and all of a sudden they were going be sold, which they were to Malone, and then they said no, we weren't going to take the space. And then they said they needed the space. And then ultimately, we made the deal nine or twelve months after we originally had a letter of intent with them. And that's sort of the pattern that we are seeing. There are quite a bit of folks that are going through our buildings, all of our buildings, which is the encouraging sign. But when that translates to being able to make dinner, I just have lost the ability to predict that.

Okay. And back to Intuit, the Governor Park lease, you extended them out through 2010. Was there any increase in rent on that space or is the $1.7 million net the same as before?

There was a slight increase of about 3% or 4%.

Okay. And then lastly, Dick on the TeleTech situation, you took out the earnings, I think last quarter from your guidance. Was that $0.09 as I recall?

Yeah, $0.09 for the remainder of the year, its $0.12 on the annualized basis.

Okay. Thank you.

Thank you.

Your next question comes from the line of Michael Bilerman from Citi. You may proceed.

Good morning, it's Irwin Guzman. I just had a question about the guidance. You tightened but kept the midpoint the same. It sounds like there were $0.05 of downside in the second quarter, offset by about $0.10 of FFO upside in the back half of the year. I am just wondering if you are sort of baking any occupancy loss, or if there is anything else coming down the pipe that would keep you from raising the midpoint by the net $0.05.

Well, yeah, I think there is lots of things going on, but I think we are adjusting slightly for the economy on the downside.

Do you have an estimate for what the net cash impact for the rest of the year is of the tenant vacancies?

For new tenant vacancies?

No, I mean just the issues that you've announced with TeleTech or with Favrille. You gave the GAAP estimates, but I'm wondering if you have an estimate of what the cash impact is for the rest of the year.

Well, in Favrille, the cash impact is actually positive because of the letter of credit and security deposit more than offset the lost rent for the remainder of the year. Everything else was on cash. On TeleTech, that's true cash, the $0.09 for the rest of the year. And on Intuit, the lost rent of that is as we said about $800,000 dollars. That would be the cash portion of that, offset again by the increase in the termination payment of $6.3 million.

Alright. Are you marketing the TeleTech space or can you market it? What are sort of your options? Are you considering pushing them out of the space?

This is Jeff. Our understanding is that the tenant is actually in the process of trying to find a subtenant. So they're in the market trying to market the space.

Okay. Thank you.

(Operator Instructions). Your next question comes from the line of George Auerbach from Merrill Lynch. You may proceed.

Hi. Good afternoon, everyone. John, have you seen any pressure on net effective rents in your core San Diego markets over the last 6, 12 months?

It's interesting. We did that transaction out, that took the entirety of the six-storey building we had under construction, or we have under construction. The deal we did with Bridgepoint and which also included the better of our 130,000 or 140,000 feet that they currently occupy and at the end were expanding into the adjacent building. And we set the all-time high for the I-15 Class A rent. And it is bouncing around. Basically, what we are seeing at Del Mar, rents are holding up very well. On I-15, it really depends where you are on the I-15. That market really should be broken up, in my view, into three or four different submarkets because it sort of all get lumped into one big bag. And some of those markets, the Class A up in Rancho Bernardo, I believe they're getting some concessions. Again, there is not such a huge deal volume that you can really make too much out of it in terms of what the market is. We have not seen a deterioration in Sorrento Mesa and down in UTC on our 140,000 foot, we've been a bridesmaid three times. And my understanding is we were not the highest rent. It was just locational decisions based upon preference of either the corporate parent or the executive in charge. In El Segundo, we haven't seen a deterioration, in fact, we've seen an improvement; same thing in Long Beach, in West LA. I think a lot of folks got out there are expecting that they were going to get the same kind of rents the very best buildings in the market were able to achieve. And I think that some of those folks realized -- I think they realized with the time they weren't going to probably get for a secondary or tertiary location within the Westside market, the same kind of rates as somebody that has a great building in the best location. So that has backed off a little bit. But by and large, we haven't had huge rental discussions. The thing that a lot of folks are now starting to talk about in terms of landlords is how much should you negotiate your bumps to be, given the fact that we might have more inflation in the economy.

Did the bumps move from, call it 3% to 3.5%?

Now, in a lot of our deals, like San Diego deals have been sort of in the 3% to 3.75% range and in the Westside, and generally a number of markets has been somewhere in the 3% to 5% range with sort of West LA being at 4% to 4.5%. And I think that's going to continue. I don't think people are going to be able to get big bump. I don't think you're going to be able to see the bumps go up for a while, unless we really see current inflation move.

Okay. That's helpful. And also, wondering if you can give us your view on market rents over the next 12 months.

Well, I think I've touched on this in the earlier conference call this year, is that we really haven't been forecasting much in the way of rent increases in the markets. We believe our portfolio is somewhere in the 10 to 15% range on average below current market. And we think that in certain markets like Del Mar, within the next couple of years, we will see some very substantial spikes, just because of demand versus availability. But for the next 12 to 18 months, I don't think that you're going to see rents in any of the markets move up substantially.

Okay. That's great. Thank you.

You're welcome.

This concludes the question-and-answer portion of the call. I would now like the hand it over to Mr. Richard Moran for closing remarks.

Thank you all very much for joining us today. We appreciate your interest in Kilroy Realty.

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