Piedmont Realty Trust Inc (PDM) 2011 Q4 法說會逐字稿

Greetings and welcome to the Piedmont Office Realty Trust fourth-quarter 2011 earnings conference call. At this time all participants are in a listen only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions). As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Robert Bowers, Chief Financial Officer for Piedmont Office Realty Trust. Thank you, Mr. Bowers, you may begin.

Thank you, operator. Good morning. Welcome to Piedmont's fourth-quarter 2011 conference call. Last night in addition to posting our earnings release we also filed a Form 8-K, which included our unaudited quarterly and annual supplemental information. This information is available for your review on our website at www.piedmontreit.com under the Investor Relations section.

On today's call the Company's prepared remarks and answers to your questions will contain forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements address matters which are subject to risks and uncertainties that may cause actual results to differ from those discussed today.

Examples of forward-looking statements include those related to Piedmont Office Realty Trust's future revenues, operating income and financial guidance, as well as future leasing and acquisition activity.

You should not place any undue reliance on any of these forward-looking statements and these statements speak only as the date they are made. We encourage all of our listeners to review the more detailed discussion related to risks associated with forward-looking statements contained in the Company's filings with the SEC.

In addition, during this call we will refer to non-GAAP financial measures such as funds from operations, core FFO, AFFO and EBITDA. The definitions and reconciliations of our non-GAAP measures are contained in the supplemental financial information available on the Company's website.

I will review our financial results after Don Miller, our CEO, discusses some of this quarter's activities, including progress towards our strategic operating objectives.

In addition, we are also joined today by Ray Owens, our EVP of Capital Markets; Laura Moon, our Chief Accounting Officer; Bo Reddic, our EVP of Real Estate Operations; and Eddie Guilbert, our VP of Finance and Strategic Planning, all of them can provide additional perspective during the question-and-answer portion of the call.

I will now turn the call over to Don Miller.

Good morning, and thanks for joining us as we review our fourth-quarter 2011 results. Before I get started I wanted to remind everyone that today is our second anniversary as a publicly traded company and we want to say thank you for your support over the last two years.

We are pleased to report the Company's financial and operational results this quarter, and we're prepared to update you on our transactional activity as well.

As we begin, we want to reinforce that the one of our primary operating focuses has been on the continued strategic repositioning of our portfolio into a handful of major markets, while dealing with the releasing of a substantial portion of our properties, as approximately 44% of the portfolio was facing lease expirations between 2010 and early 2013.

We believe that our disciplined, low leverage investment strategy, coupled with an aggressive yet prudent leasing approach to creditworthy tenants, has served our shareholders particularly well.

Regarding our recent leasing efforts, we have been very pleased with the leasing accomplishments in the portfolio. We have executed just under 4 million square feet of leases during 2011 with 900,000 square feet taking place during the fourth quarter, including 581,000 square feet of new tenant leases.

The 4 million square feet of leasing transactions represent almost 19% of our office portfolio and outpaces any single previous year in Piedmont's operating history. Although rents continue to bump along the bottom in most markets, we have continued to be disciplined in our negotiations and have achieved these leasing accomplishments without compromising our effective rent objectives for each property.

Importantly, we believe this allows us to continue to maintain enterprise value at the highest level possible given the leasing environment. Our same-store office portfolio was 88.3% leased at December 31, 2011 as compared to 89.1% leased at the beginning of the year. The total portfolio, including several value-added properties acquired during this year, was 86.5% leased at December 31, 2011. And our weighted average remaining lease term was 6.4 years.

I will highlight just a few of the more significant leases that were executed in the fourth quarter. Our single largest deal during the quarter was the previously announced 15-year renewal and expansion for up to 400,000 square feet with GE at our 500 West Monroe Building in downtown Chicago.

If you'll recall, this is the building we acquired through the conversion of our mezzanine debt position in first quarter of 2011, in which we inherited significant near-term leasing exposure. So we were very fortunate to not only retain, but also to expand a high-credit anchor tenant for a lengthy term with only a slight roll back in current rents.

CBD Chicago is one of the markets in where we have seen positive absorption over the past year to the point where there are relatively few large blocks of space remaining, a fact that should bode well for not only our remaining space at 500 West Monroe, but also at Aon Center.

The Southwestern US has also been an encouraging area for us. During the quarter we signed a new 12-year full building lease with US Foods at our River Corporate Center property in the Phoenix market, as well as a new 12-year 105,000 square foot lease with Schlumberger Technology Corporation at our newly acquired 1200 Enclave property in Houston.

Both of these leases bring high quality-tenants, and when combined will provide incremental rental revenue once they commence. The Schlumberger lease in particular highlights the value that we added by acquiring well-positioned properties with some vacancies in select markets, as we just acquired 1200 Enclave during the first quarter of 2011 and this single transaction will take down the majority of the vacancy in that building.

Year-to-date for the 3.2 million square feet of executed leases for spaces that had not been vacant rents are up 3.6% on a GAAP basis and down 1.7% on a cash basis.

It is worth noting our average capital commitment per year of lease term of $5.11 for renewal leases signed in 2011 was above our historical average. Two major long-term transactions during the year drove up our average capital cost for renewals, those two being NASA and GE. If we were to remove the costs associated with those two leases, our average capital commitment would have been $2.80 per square foot per year.

We have also made visible progress toward our portfolio repositioning strategy during 2011 with several disciplined investment transactions. We sold five assets, including two joint venture properties, while exiting two different markets, all at a gain of $122.8 million or about $0.71 a share.

The largest of the dispositions, the sale of 35 West Wacker Drive in downtown Chicago, closed during the fourth quarter, generating approximately a $96 million gain or $0.56 per share which is included in our 2011 results of operations.

The disposition price for Piedmont's 96.5% interest in the building was approximately $387 million, a price that equates to value of a little over $400 million, or $359 a foot, for 100% of the property.

Although the sale of this fully-leased property is expected to decrease our reported FFO short-term, it reflects the strategic disposition of our -- of a low FFO growth asset at attractive pricing. Additionally, Piedmont has been signed to manage the building for the next five years.

For the year we recycled nearly $390 million of capital into seven buildings located within one of our designated core or opportunistic markets. Our approach has been consistent and disciplined, often acquiring value-added properties at attractive bases with intrinsic earnings growth and compelling risk-adjusted return profiles generating value for our shareholders due to leasing up of those properties.

During the fourth quarter the Company purchased 400 TownPark, a 176,000 square foot five-story Class A office building in the Orlando submarket of Lake Mary, Florida, for about $23.9 million. We believe this high-quality property is located in one of the most desirable Orlando submarkets, and we are confident in our ability to increase rental revenue by leasing up this building, which was only 19% leased at acquisition. In fact, we have already executed and commenced the 19,000 square foot lease with Farmers Insurance for a 5.5 year term.

As we continue to execute on a strategy to reposition the portfolio we remain focused on building value for our shareholders, and we will not lose sight of basis of the property. As we have indicated previously, we intend to be patient to transition the portfolio, transact as market conditions allow, and not give up real value for a speedy shift to the portfolio.

I will add that while we purchased several suburban assets during this year, that choice, and it was a choice, was driven more by a particular set of circumstances and where we saw the best value in the market. We remain committed to being a CBD and urban infill owner and operator, with two-thirds of our current [AOR], and nearly 70% of 2011's NOI coming from our CBD and urban infill assets, which is disclosed on page 30 of our quarterly supplement. Over time we expect that contribution to remain in that range or even grow further.

Lastly, on a corporate governance note I wanted to mention the addition of a new member to our Board of Directors that we announced in December. Mr. Ray Milnes, who many of you already know from his association with the Board of Governors of NAREIT or his national role as a real estate industry sector leader for KPMG, joined the Piedmont Board in late December. And we're very pleased to have the benefit of his experience and expertise as we move forward.

With that I will now turn the call over it to Bobby to discuss the financial performance and financing activities.

Thank you, Don. While I will briefly discuss our financial performance over the quarter and our guidance for 2012, I encourage each of our listeners to review the earnings release, the supplemental information and the financial results filed last night for further details.

Rental revenues for the quarter were up 5% to $107.4 million as compared to the same quarter in 2010. This increase was driven largely by new properties acquired in 2011, and is partially offset by rolldowns in some lease renewals, and 80 basis point increase in year-over-year vacancy in our same-store portfolio. This change in vacancy is primarily due to the 300,000 square foot Zurich lease that expired at Windy Point II in suburban Chicago.

Total revenues for the quarter were up slightly compared to the fourth quarter of 2010. And this increase is despite the inclusion of 2010's results of $1.5 million of termination fee income, which did not recur during the fourth quarter of 2011.

On the expense side, property operating costs, depreciation and amortization all increased year-over-year due to the acquisition activity, while corporate, general and administrative expenses declined, primarily due to lower expenses associated with our change in transfer agents at the beginning of the year.

The comparative change in interest income on a quarter-over-quarter basis, as well on a year-over-year basis, reflects the acquisition of the 500 West Monroe Building during the first quarter of 2011 and the resulting termination of the mezzanine loan receivable held by us on the property.

On an annual basis AFFO was $1.17 per share in 2011 versus $1.34 per share for 2010. This reduction in AFFO was primarily due to capital requirements associated with a large amount of leasing activity that occurred in the portfolio during 2011. Non-incremental capital expenditures increased $15 million on a year-over-year basis.

As discussed in previous calls, this anticipated increase in capital expenditures and the resulting decline in AFFO were expected and expected to result in our cash flow being insufficient to fully cover our current annual dividend. Our Board will undertake its annual review of our dividend policy in its next release schedule quarterly meeting to be held later this month.

As we have previously disclosed, we anticipate that our current annual dividend of $1.26 per share will be reduced in the first quarter of 2012 to approximately $0.80 per share, which is closer to our taxable income level.

We also had some changes in our capital commitments during the quarter that I would like to draw to your attention. The shedding of the future tenant improvement commitments at 35 West Wacker was largely offset by the addition of $32 million in commitments associated with the 15-year GE lease signed during the fourth quarter. Our total outstanding capital commitments that we report to you each quarter-end remains relatively stable at approximately $143.8 million at December 31, 2011. I will point out that of this amount though approximately $53 million will be incremental capital when spent.

On the financing side, Don mentioned the sale of 35 West Wacker. That transaction resulted in the buyer assuming the $120 million secured note on the property. In addition to the transfer of the 35 West Wacker debt, we also repaid the $45 million mezzanine loan on the 500 West Monroe building during the fourth quarter. The West Monroe mezzanine instrument was settled at a discount, resulting in a $1 million gain on the early extinguishment of debt, which is reflected in our fourth quarter operations.

Subsequent to year-end we also paid off in early January 1 the $140 million first mortgage on the 500 West Monroe building. Since midyear 2000 we have reduced the total amount of secured debt on our books by over $300 million.

Further, as previously announced we obtained a new $300 million unsecured term loan during the fourth quarter of 2011. And we effectively fixed the interest rate on the loan at 2.69% for the entire five-year term of the loan. The proceeds of this term loan, as well as the proceeds from the 35 West Wacker sale, were used to pay off the debt I just mentioned, as well as pay off the balance outstanding on our $500 million revolver.

As of year-end, which includes the $140 million West Monroe mortgage paid off in January, we have had a net debt to core EBITDA ratio of 4 times, a fixed charge coverage ratio of 4.7 times, a debt to gross assets ratio of 27.5%, and approximately $614 million in combined cash and borrowing capacity heading into 2012. Please refer to your supplemental information for a detail of all of our debt and the associated maturities.

Additionally, as an update to our stock repurchase plan announced during the fourth quarter of 2011, in December before the REIT markets rallied, we repurchased about 200,000 shares of our common stock at an average price of $6.24 per share.

Finally, I also want to point out that we added a note in our earnings release guarding outstanding litigation. During the fourth quarter a trial date was set in late March of this year for a suit filed in 2007 related to the internalization of various management functions provided by a former adviser. We cannot predict the possible outcome of the trial, however, we do intend to continue to vigorously defend against this action.

Turning to our guidance for 2012, as we have mentioned in our last quarterly call, the sale of 35 West Wacker causes a $0.13 per share decline in AFFO for 2012 versus the prior year. When we combine this strategic event with modest rent rolldowns and (inaudible) before major leases commence, we expect the decline in 2012 FFO to a midpoint range of $1.40 per share or about $0.04 per share less than 2011 results without 35 West Wacker. This translates into a core FFO in the range of $234 million to $250 million or $1.35 to $1.45 per diluted share.

This annual guidance includes assumptions of approximately $200 million in dispositions and acquisitions totaling $300 million during 2012. Depending on what the market conditions dictate in 2012, particularly with our US government lease exposures over the next 18 months, we are anticipating growth in our earnings over the next few years as the number of annual lease expirations decrease.

That concludes our prepared comments. Therefore, I will now ask the operator to provide our listeners with instructions on how they can ask questions of management. We will endeavor to answer all of your questions now or make appropriate later public disclosure if necessary. We do ask, however, that you limit your questions to one follow-on question so that we can address as many of you as possible. Thank you. Operator.

(Operator Instructions). Michael Knott, Green Street Advisors.

Don or Bobby, could you just give a little more color on your expectations for same-store NOI for 2012?

This is Bobby. We think on a same-store basis, with the downtime that we've got associated there at Aon with Kirkland & Ellis moving out before KPMG moves in, and USC lives in, and at Bridgewater the downtime after Sanofi Aventis moves out and Synchronous (inaudible) moves in, probably about 2% down on a same-store basis this year.

That is helpful. Then for my second question, Don, we have heard some of your peers talk about seeing more opportunities or expecting to see more opportunities on the acquisition side in 2012. What is your expectation for the outlook in terms of acquisitions this year? And what -- can you just remind us what, if any, is included in your guidance?

I would say we are continuing to see prices particularly in the better markets moving up or at least staying very strong. And, obviously, that hasn't been a great environment for us to be -- as a value player to be finding a lot of great value. We are getting more creative on some of the things that we have done in the past -- like what we did with 500 West Monroe, for example, in the past, where we're looking at some debt positions and things like that to try to see if we can't find ways to get access to the kind of product that we would like to have and still feel like we're getting good basis.

So I would say I think the opportunity set is going to be greater. I don't know that the opportunity set where we find good value is any better right now. And so I think we're going to have to continue to be as creative as we can to fine new investment activity.

Bobby mentioned, I think in the call that we had budgeted $300 million of acquisitions. Ray reminded us we ought to probably say $300 million of investments, because that could be some acquisitions. It could be some debt positions with underlying collateral that would be consistent with what we would like to do.

So your $1.40 includes $300 million of investment activity?

And $200 million of disposition activity. And admittedly the acquisition activity is weighted towards later in the year. The disposition activity is weighted equally across the year.

So net debt there is not a big amount of earnings expected from investment activity for 2012?

Very little.

Especially as you recycle from the secondary markets into the core markets where you got lower yielding at least on a short-term basis from an income standpoint.

Bobby wants to clarify earlier the negative 2 number he gave you that was an accrual number, not a cash number.

What is the cash number?

What would the cash number be? Do we have that?

I think around 5% or so.

Closer to 5%.

Okay, thanks.

Dave Rodgers, RBC Capital Markets.

I guess when you look at leasing spreads coming up this year, I didn't hear it in your comments, but can you talk about the big leases that you're looking at that are still coming up? And in aggregate for this year what do you expect to see on the leasing spread side?

Let's -- maybe the best thing to do is if you have got the supplemental in front of you just look at the leasing -- the big leases and we will just go through the update. Kirkland & Ellis, obviously, we have mentioned previously before that the leases we are doing in that space are rollups, fairly substantial rollups, because Kirkland was at a very low number in that building.

So although those leases don't start until August and September, once they commence they will -- on an accrual basis they will be pretty nice rollups. Marsh was paying a fairly strong rent. Obviously, we only got a portion of that space released at this point in time. So unless we get some leasing done there even -- well, I would say, even if we get some leasing done there prickly, which obviously is not going to be real simple to do, that would be probably a small rolldown.

The Sanofi deal we have talked about for a long time. We are getting good rents in that project. But Sanofi was on the back end of a build to suit lease and so that is one of the big rolldowns that we have had in our portfolio over the last couple of years.

Park Service, which comes up in the third quarter of this year, and because it is a GSA lease it is hard to know what is going to happen there, but they obviously haven't made any move to do anything yet, which bodes well from at least a short-term renewal standpoint.

But they're at below market rents in that building by a fairly meaningful amount. GE, of course has renewed. And (inaudible) with the currency today, because they did a short-term deal, would now be at above -- with slightly above market rent, because we took them from below market to above market when they did the short-term renewal.

So I guess aggregate for the year continued improvement from what we have seen in the last couple of quarters but still down?

I would -- if I had to guess, I would say it is somewhere between -- we were basically flat last year and we were down substantially the year before, I would say it is somewhere between the two.

I guess the packages that are coming out today, you kind of addressed it in Michael's question, but just to get a little more sense out there, you talked first about the guidance not being necessarily that accretive in terms of investments. I assume there is some dilution, actually, built into the guidance from these numbers. Can you quantify maybe how much that might be, if there is any?

And then I guess more on the package side, what are you inclined to do if the returns aren't there in value out of our, core are you happy to stay where you are today and just wait for better opportunities down the road?

We are all fully are growing, your first question, Dave. But I'm not sure I understood the aspect of the dilution question. Would you restate that one?

I guess, what cap rates do you expect to sell? What cap rates do you expect to buy at in the model related to the guidance this year?

Oh, I see. We don't do broad cap rate conclusions because everything is so specific to the individual asset that we expect to sell. And given that we are going to be selling what we hope are lower-quality assets in lower-quality markets by definition there should be some dilution spread.

Having said that, if we do some debt positions or something like that on an income basis we might actually do as well or better on those positions because of the nature of what they are.

So it is really hard to forecast, but I think on my answer to Michael and Michael's conclusion from that earlier was there is probably not a lot of either accretive or dilutive activity from our transactional work this year. It is just going to be continued progress, what we hope is progress towards a strategic longer-term strategic goal.

Fair enough.

And then the second question, I am sorry, I have now forgotten what it was.

I guess you have addressed it in a way. It is just that how long are you willing to be patient? What are the next steps in either the credit market that you're looking for where you expect to see opportunities coming your way, if in fact you're not seeing a lot of those today?

We are not seeing a ton of activity right now that is really interesting to us. But I will tell you we are going to continue to plug away and try to find value. And I think you know we will follow or err on the side of being disciplined and conservative rather than go out and make some mistakes and utilize what is -- utilize a balance sheet that otherwise would be -- is in great position.

So we are protecting it. We are going to protect that balance sheet at all costs. But we will make some bets where we think we are seeing good value. I know that is not a great answer to satisfy your question, but it is just how we look at it. We're going to stay pretty darned disciplined.

Okay, thank you.

(Operator Instructions). Anthony Paolone, JPMorgan.

For 500 West Monroe can you walk through what you think your basis will ultimately be once you get that leased up and kind of where net rents are shaking out?

Obviously, like a lot of downtown towers net rents are a function of where you are in the building, if you will. So I will try to give you a sense of where we are. If our basis initially started out at $230-ish a foot, keep in mind that includes the parking deck which we have somewhere -- assumed at somewhere between -- we have 1,300 plus parking spaces. We think it assume somewhere between $35 and $50 a square foot to the building value, given the NOI that is coming out of the parking deck.

So let's try to make the basis a simpler calculation. It is something slightly under $200 a foot going in. If we had to lease the vast majority of the building, which is say 70% to 80% of the building over the next few years, and you apply sort of normalized CapEx, you probably are adding $70 -- depending on whether we are doing 10- or 15-year deals $70 to $75 a foot in basis to the asset overall in total.

So maybe you are at $275 a foot and your rents are in the lower part of the building starting $19, $20 to the top of the building is $25, $26.

So something in that low $20s, I guess?

I would say low- to mid-20s average, I think it's probably a pretty good estimate, yes. Then, obviously, the parking deck itself has its own return on costs separately from that.

So rough numbers though it seems like upon this getting all leased up it would be somewhere in the high-single-digit -- I don't know, I guess just coming out just rough math -- like in the 8% range it seems like.

I think we would -- we think a little more than that but, yes, I think you're not too far off. So you can see there is a nice spread to what we think long-term value would be, particularly if we are doing these -- the GE type leases on a 15-year basis, you can see what that can drive in terms of cap rate.

Then my other question is just on the two big DC expirations, can you talk about how you're going about approaching OCC, how you market the space, prospects for that, give us an update there?

Sure. Obviously, the bigger leases, particularly the GSA leases have been few and far between lately. There are -- there is some activity out there in the large lease space arena. But basically what we have got is a really good quality building in the Southwest market that is going to have to compete both with other government buildings, but also we are going to try to pull private sector tenants got into that area.

We have actually -- a couple of the prospects we looked at so far have been private sector prospects, which had been encouraging to us. And I think it is just because it is a slightly more value-oriented alternative to being in the CBD for a larger tenant -- somebody who might need a couple of hundred plus thousand square feet.

So obviously we have got a full marketing team on the project. They're going at it full bore. We have a pretty good sense from OCC of the timing of their departure. So it is not a typical GSA deal where we don't know when they're going to leave and so it is going to be hard to figure out how to communicate to the marketplace when the space may become available. And so we feel like we've got a pretty good handle on that.

So now it is just a matter of trolling for everybody who is out there. But we probably wouldn't open the building for anything less than say 50,000 feet or more just for all the obvious reasons.

Any sense on just what you think the TI package might be to get a private sector tenant in there?

I don't, because there are some decent existing conditions in the building today. So it really depends on the kind of tenant that shows up. So if I was to quote you a number it would be a middle-of-the-road who knows kind of number. And it could go a lot higher or a lot lower depending on the type of tenant and the rent they are willing to pay.

Okay, thank you.

Brendan Maiorana, Wells Fargo.

I just wanted to follow up on Tony's question about 500 West Monroe. So going through the math, and I guess, Tony's math was sort of call it, an A cap, maybe it is a little bit better than that. That is a cash number? That a GAAP number?

And GE -- do they have sizable bumps throughout? Because I'm just trying to compare where you guys may be on 500 West Monroe relative to 35 West Wacker, which was sold at a low cash cap rate, but the GAAP cap rate, just given the long duration of the leases there, I think was around 7.5 on a GAAP basis. Just (multiple speakers).

I think I understand your question. This situation should be quite a bit different. Let me see if I can explain why. The number I was just giving you a sense of would have been a cash cap rate not a GAAP cap rate. It would've been a going in yield, if you will.

In this case the thing that was different about 35 West Wacker is what happened when we restructured that lease back in 2006 was one of the tenants had a large rent continuing through -- I think it was 2012, if I remember correctly. And then when we extended that lease it rolled back down fairly substantially.

So even though the going in cap rate was 6.4, the rent stayed pretty flat for quite a while on that deal. And as a result I didn't -- I don't have a way to validate the 7.5 you just quoted, but that is probably not far off of what a GAAP cap rate would have been on that deal, because there was a rolldown in the rents of one of the big tenant initially.

That won't be the case on 500 West Monroe, or at least shouldn't be, because all the leases will be new. All will have 10- to 15-year steps in them, and so the GAAP cap rate will be much higher than what we are quoting on a cash basis.

All right, that is helpful. And you guys think that the relative return that you get for taking the amount of risk on those value-added deals is appropriate -- the spread of 150, 200 basis points or so?

We certainly have -- we certainly have, and we think so far it seems to be bearing out pretty nicely. Obvious the activity we had at the Houston Building this quarter, we outperformed our pro forma pretty dramatically on the lease -- in the lease-up of the building. And so we feel really good about how that is coming together.

We are making small incremental progress on some of the other deals. And then, obviously, getting the GE lease renewed. So we feel like we had a really nice quarter from a value-added portfolio standpoint. And, so, yes, we think we have really executing really well on that front these days.

And then, Don, you mentioned the balance sheet and trying to make sure that you are a good steward on the balance sheet. And we have talked in the past about how you've got a lot of balance sheet capacity, so you can do net acquisitions that will be fairly sizable. But is being relatively conservative with the outlook for this year, so net acquisitions would be $100 million, is part of that driven by the amount of lease-up capital that can be required given the value-added strategy that you guys have?

So even if we look at net acquisition activity that might be positive by a couple of hundred million dollars over the next few years when you layer on all the CapEx to get those assets up to stabilized it becomes a number much bigger than that, and therefore, maybe just looking at net acquisitions we ought to dial those expectations back over the next few years?

That is an interesting point. I guess, my first reaction to it is that if there is -- I don't think you are implying that there was some limitation on our new investment activity because of the amount of capital we have got to spend, but if there was, that is clearly not the case. Obviously, the balance sheet allows us to have a lot of flexibility in that realm.

But, obviously, everyone has CapEx coming. We are no different than anyone else but we do have some lumpier, if you will, lease expirations and leases to be done, and so our capital will be fairly substantial over the next couple of years, and we have been pretty consistent with talking about that.

So I don't think there is a correlation between the two, if that is what you're trying to figure out at all. But at the same time, maybe I'm misunderstanding your question.

I am just trying to think, if let's say you guys do acquisitions, like if we're thinking about the model and you guys put in -- I will just throw number out there -- let's say you do $100 million of acquisition. And we think you have got $500 million, $600 million of net acquisition capacity on your balance sheet. But that $100 million, maybe that number is really $150 million when we layer in the amount of CapEx that it is going to take to stabilized that asset.

So just thinking about longer-term as we build out our model over several years do we have to budget that in, whereas if you guys just announced $100 million of acquisitions maybe we say you have got $500 million more dollars of capacity and maybe we're understating that future -- or overstating that future capacity?

I don't think I disagree with you. I am trying to -- I may -- if I am misunderstanding the question, we can always talk later about it. But I do think the real point is that you are right, if we're buying $100 million of acquisitions, and let's say half of those are value-added in nature. And I don't know if that will be the case or not, but let's say they are. And we have got to spend another 50% of the purchase price to get them leased up or whatever -- I am just making it number up now -- then yes, I think your point is well taken.

That is going into the capital bucket. It is not coming out of AFFO, if you will, because it is new basis-oriented capital. And so I think that if you're trying to model those things into your AFFO models, a lot of that capital won't go into AFFO, it will go into basis, if you will.

And so I think you're right in the way you're thinking about it. I just may not fully understand exactly what you're trying to get at.

All right, we can follow up off-line. Thanks for the color.

Chris Caton, Morgan Stanley.

I guess I will ask a follow-up. One, is when you discuss the purchase price do you include some kind of near-term anticipated capital, either for short-term leasing or base building improvements?

Then, specific to guidance, can you talk a little bit about what the capital budget is? And if you could maybe split into three buckets. I know you have incremental and non-incremental, but within the incremental how much of that is allocated to your recent value-added acquisitions and how much of that is related to the existing portfolio?

I'm going to talk real slow, and answer your first one, while Bobby and Eddie is figuring out the answer to your second one. I think -- remind me what the first question was.

It was a follow-up. It was a follow-up, but it was on -- when you disclose a purchase price, especially on the value-added side, do you include any kind of allocated near-term capital in that purchase price?

We don't. That would typically be the contracted purchase price in almost all cases that we were talking about.

And then -- and Bobby, I know you are working on it. Let me see if they got the answer yet. Go ahead.

You were asking me the breakdown relative to the capital expenditures maybe between non-incremental and incremental.

Exactly.

I think he is asking you to break it out between value-added and space that was done for a year. I'm not sure we have that readily available. We could probably get it.

But the non-incremental capital is probably about $88 million to $90 million next year. There may be as much $70 million of incremental capital. So when Brendon was talking a little while ago almost all (inaudible). When you add those two together it is 150, which was the number that he said. But I don't have the breakdown right down, and I apologize (multiple speakers).

We may be able to get that by the end of the call if you keep listening.

I will keep listening anyway. And then my follow-up, Don, I was trying to write down a comment you made earlier on in the call. You talked about leasing environment and being patient for the right deals for your buildings. Can you talk a little bit more about the types of deals you are seeing that either you're passing on or pushing hard to renegotiate? And if you have any specific comments to Chicago that would be helpful.

I am sorry, I may have misunderstood. The question I was addressing earlier was around acquisition activity, not leasing activity.

It was in your prepared remarks.

Oh, in the paired remarks. Actually, we have seen -- and, again, if I misunderstood (inaudible) that, I apologize. We have actually seen a nice pickup in leasing activity again here after the first of the year. I'm not sure we will see the same level of total leasing activity in 2012 that we saw in 2011, just because we obviously had so much renewal activity and otherwise going on last year. But I think we're going to see a pretty productive year this year as well.

And, like I said, although in the last quarterly call I was telling you I thought the leasing environment was slowing down, we're now seeing it pick back up again. The places that we've seen the most activity and seen the strongest activity is in the Texas markets and in downtown Chicago.

And then there has been some odd places where we have seen just some improved activity. We have seen some great activity at the Bridgwater assets, as we have talked about in New Jersey. We have seen some more renewed smaller tenant activity in, for example, suburban Chicago. I don't know that that is a huge trend, but we have just seen some good activity just in the last couple of months in some of the suburban assets there. And we have seen a little bit of a pickup in the LA Basin recently.

And the only place we are seeing a slowdown, if you will, is probably Washington DC at this point. Atlanta remains slow. Phoenix is probably a little slow. But by and large nowhere else is lying down slowing down other than maybe Washington DC.

Thank you.

(Operator Instructions). Paul Adornato, BMO Capital Markets.

Don, I was wondering if you can talk a little bit about the appetite in the market for large space versus small space? And what is your outlook for having large blocks versus smaller blocks available, are you agnostic? And how does the math work on a per square-foot basis?

Well, we have always -- well, I say we always -- we'd sort of prided ourselves or built a business model around serving large corporates and governments, as you guys know. And as a result, we think that is always wise to try to maintain a big block strategy. That does make our income stream a little bit lumpier, although at our size level some of that diversification sort of diversifies that away.

But we do have, and work pretty hard to maintain full blocks of space on floors, for example. We might -- whereas some of our competitors might break up a 25,000 floor by slapping 4 or 5 prebuilt units on it, and throw some bunch of 4,000 and 5,000 footers on there -- and I don't necessarily say that is the wrong strategy. We have always worked to try to maintain that full-floor availability so that we can deliver blocks of space.

And as a result when times are good I think we pick up very quickly. And when times are tough, which I think is the environment we have been in, that has been a little harder on us.

But as a result, right now I think we have got -- let me see if I can count -- 5, 7, 9, 11, 13, 15 -- about 17 or 18 blocks of space that would be 50,000 square feet or more contiguous available in our portfolio. And I'm not suggesting -- and don't take this the wrong way -- I'm not suggesting this is the immediate benefit of that, but that translates into a gross potential rent of about $60 million in just those 18 spaces.

So you can see the impact of a pickup in activity in the marketplace from a big block standpoint when the market starts to get to that point with the quality of spaces that we have available.

So we have been protecting those spaces as much as we can, because the minute you start carving those up or dividing them up, you really take away your potential to get a premium rent out of someone who needs a bigger block of space.

So that has always been our theory, and that is why you see such a big contiguous block, for example, the top of Aon Center, why you see a big contiguous block at the top of 500 West Monroe. And we think we are now in position to take advantage of that, given that there are no other really good Class A blocks of space available in downtown Chicago. And there are a few tenants floating around out there, so we hope we can convert one or more of those.

Can you point to any examples where you made the determination that the large block -- there is no just not going to be too much activity and you did decide to break it up?

There are a few buildings in our portfolio, because of the way they're configured or where they are in a market that we see as more smaller tenant buildings. For example, that is The Medici here in Atlanta that some of you guys toured recently, where you're just not going to get very often the 50,000 foot block to come along. But you've got a lot of really good local regional firms at 10,000 to 15,000 that fit really well into that building who are looking for a higher image.

So that is a good example. We don't have a lot of those. But few others would probably be largely concentrated in Washington DC at like our 1201, 1225 I Buildings. 400 Virginia would be a good one, and the stuff like 4250 North Fairfax and the RBC corridor.

So I would say that is really where we are concentrated in the spaces that work for small units, because otherwise we pretty well protect the larger blocks in our portfolio.

John Guinee, Stifel Nicolaus.

Aaron is with me and pointed out this -- you've got, let's see, about 775,000 square feet leased to BP. The majority is subleased to Aon. I think Aon just signed a letter of intent in that building. Of the 776 that BP leases, how much of that is subleased to Aon, and then how much do you expect them to keep?

I can't comment on the Aon situation, because we have not announced anything on that. It has been in Chicago newspapers the LOI we signed, so I will just leave it at that. But let's say we renew Aon and the reported information in the paper was accurate, that would be about half of the space that BP originally leased.

And then all but three floors of the entire rest of that block of space is already leased on a long-term basis to other tenants, including Integris. You may remember, we sign a corporate headquarters lease with Integris earlier this year.

About two or three years ago we signed a multiple floor lease with the Federal Home Loan Bank of Chicago. We also signed a two floor lease with ThoughtWorks, a computer consulting company in the building. And then I think there is one other if I'm not mistaken. But, anyway, the best -- all but three floors, if we did sign the Aon lease, would be completely taken care of at this point already.

Then the second question is -- you guys have done a great job on acquisitions and dispositions, to some extent repositioning the portfolio in 2011. You acquired about $390 million of assets, and in 2011 you sold about $500 million of assets.

But in reality if you carve out 35 West Wacker and 500 West Monroe, which essentially you just traded positions in Chicago by about a mile as the crow flies, I think, the rest of it is maybe $150 million, $100 million to 150 million. And then I think you've got $200 million of dispositions and acquisitions next year. Given this kind of volume, how long does it take you to get where you want to be?

I think we have said for a while now that we think we largely completed our strategic plan by the end of 2015, and at that pace we would do that. Could we be more aggressive and get some more done and get it done sooner? Yes, but I think that obviously that would require the capital markets to fit our strategy pretty well.

But, no, I think -- if you look at our longer-term models of what we sell and when we sell them, and then how much volume we have to do to get there, it is a fairly modest -- we have always said 2015, it only takes a fairly modest amount of activity to get there by 2015. So we hope we will exceed your expectations, but we don't want to promise more than we think we can be fairly certain to deliver.

Got you. Okay, thank you.

[Michael Hartman], Invest.

I am calling primarily as a retail investor. You have talked about additional revenue that can come in from leasing up and you have talked about profits on buildings that you have sold. And comparing those numbers to the potential liability that the plaintiff is claiming of $159 million, it is certainly a significant number.

I know you are saying that the odds -- that you feel that they're going to prevail is low, but then you're also saying on the other hand that when you're dealing with the court system it is a wildcard. So, obviously the probability -- possibility issue is significant when you are talking about $159 million.

So could you shed a little bit of light on that? I looked at your 10-Q from 11/3. I'm not sure if that is one that really details the litigation, because I really didn't pick up a whole lot of information there. But if you could give some insight on that -- $15 million of insurance certainly isn't going to do a lot to cover a potential $159 million liability, so are you reserving any funds or perhaps are you going to come to negotiated settlement?

Obviously, it would probably be inappropriate for us to address litigation strategy on a broad public call. I think the reason we want to just point out that that risk exists and we are getting closer to the date of trial.

And we've had some -- now had some judges' pretrial rulings that didn't go exactly the way we wanted them, and so we felt like there was a greater chance of risks than there was previously, and so we upped the profile on our risk assessment at this point because we just felt like that was prudent to do so. And we wanted to do it as soon as we thought was the right time to do it.

But to get into any set of litigation strategy or be able to quantify anything any further would be very -- first of all, it would be extremely difficult to do, and second it could compromise our position in the case.

I understand. But can you discuss if it was adversely found against the Company, how you would deal with that? How would that affect the dividend payments?

I don't know that if there was an adverse -- material adverse effect that it would affect dividend payments going forward. Obviously, we have made a comment on what we think we are going to be doing with the dividend already going forward.

But, obviously, it would impact the value of the business and our capacity and our line of credit. But we have $600 million of liquidity as a company. And the plaintiff's top ask is nowhere near that. That is before you even start taking into account whether they would even get their ask and whether that would be assigned liability to the company or not and that kind of thing. So I just don't know whether it is prudent to comment much further on it than that.

Your last comment there was very comforting, so I appreciate that. Thank you.

Michael Knott, Green Street Advisors.

Just coming back to the minus 5 on cash same-store NOI for 2012, can you just talk about the sources of that? And maybe -- not that you have given guidance on 2013, but as you look into 2013, is a big chunk of the minus 5 for 2012 caused by some of these downtimes that you're talking about and so maybe the outlook for 2013 actually is much better -- maybe not much better, but has to start improving as you get some of those leases taken care of, et cetera?

So can you just talk about maybe your expectations for the arc of maybe average occupancy for the year for 2012 compared to maybe what might be appropriate to think about for 2013?

This is Bobby. I'm going to take a shot at this, but you asked about five questions in one question there, so bear with me as I try to go through it.

We talked about on a GAAP basis that we thought it would be about 2% rolldown. Obviously, as leases begin that is the front-end part usually is where any concessions and abatements are. So that is why you see a further decrease on a cash basis for 2012 on the NOI basis.

As you start talking about 2013, it is still just a large number of unknowns. If you follow the model, we have got it to where we think it will be very positive in terms of lease-up potential. We are sitting at 86% today. A little over -- about 86.5% maybe going to 88% by the end of the year.

The unknowns going into 2013 though really largely lie with what we talked about already, what is going to happen on the governmental side, National Park and with OCC. About 13% of our revenues come from the governmental side.

I would just add one thing. I think Bobby said this, but as we look at it, a lot of our lease expirations were 2011, early 2012. The latter half of 2012 we don't have a ton of lease expiration; there's a couple right at the end of the year. And then we have the two or three big government deals coming up, but we just don't know what is going to happen with those -- other than OCC at this point, we don't know what is going to happen with those yet.

And so the two government leases in early 2013 -- well, the one government lease, OCC, that we know is leaving is going to affect us in early 2013. We don't yet know what is going to happen with National park, obviously, and how long they may extend. And then there is always other impacts from the government downsizing that could hit us in 2013 as well.

So if you look at all that, it gets really hard to predict what 2013 looks like over 2012. But if you start looking at fourth quarter and into first quarter of 2013, I think the NOI numbers start getting a lot better because we are burning off some of the free rent of all those big leasing chunks we had going on here. And you're starting to also pick up occupancy, assuming our occupancy -- or our leasing activity stays as strong as it has been so far. So we think we will pick up occupancy that will offset other rolldowns.

Thanks, that is helpful. Then just in terms of the upcoming dividend cut, any updated sense from retail investors in terms of whether you're worried about a wholesale flooding of stock in the market or not?

From where we were two years ago when we had our IPO, over 50% of our retail shareholders have moved out of the stock -- institutional holdings exceed that. On February 15 we should get updated data. Certainly what we have attempted to do was to get this information out there.

Do we anticipate a large flowback? No. Could it happen? Maybe. But I certainly -- we have been talking about this for two years and it hasn't happened yet.

I fully expected you to ask the question -- why didn't you buy more stock back in the fourth quarter. I am sort of disappointed with you. But, obviously, we've been pretty cautious in our thought process on how we use our share redemption program. That has always been a piece of what we thought about is just to make sure we feel like we've got plenty of liquidity for that if that eventuality came around. But we are -- frankly, we are kicking ourselves for not having done more share buyback in the fourth quarter.

I knew you would talk about it, so I didn't have to ask.

Tom Hill, JRL.

Going to specifically the Bridgewater and the solar array, can you add some color on the gradability or scalability of that project, or was that a one-off or is that something that you're looking at going across the portfolio?

Thanks for bringing that up, and I appreciate your participating in the call. It is interesting, there was a unique opportunity we thought last year to start to -- well, multiple benefits of obviously putting a solar array on one of our properties. One was just to demonstrate our further commitment to green behavior and activities.

Obviously, in New Jersey, maybe you are aware of this and maybe you aren't, there has been programs that have been very beneficial to users to install solar arrays. So we not only got a federal tax credit, or in effect, a federal rebate for purchase of the solar, but they also have a program where carbon credits are required to be purchased by the utilities out there, and pricing in that market has been fairly strong.

So we were able to -- especially once solar panel pricing fell later in the year last year -- we were able to generate a reasonable return on investment by putting those in, and then send a message to the marketplace that we are active in this arena.

Having said that, some of the federal tax rebates have gone away. Pricing on the SRECs or the carbon credits in New Jersey and other places have fallen quite a bit lately due to all the new solar projects that have been built. So our sense is, although wasn't intended to be a one-off project, it may be one-off for a while until we find new, better economics on future projects.

So just to follow up, though, that would potentially add to the rentable square footage of the building, actually if it was 100% rented and you have got the roof rented that falls to the bottom line.

Actually, we own -- good question -- we actually own the solar panels ourselves, and it doesn't add anything to the rentable. The way it works -- I am sorry to give you a primer on this -- but the way it works is in effect we generate the power. We send it to the utility company. They pay us for it in effect. And then we are able to bill the power through to the tenants on a more favorable cost structure than they would otherwise get from just buying power from the utility company.

So we get, if you will, the spread on that investment, plus the ability to sell the carbon credits back to the utility company. So that is how we generate our return. So it doesn't actually increase the net rentable area, it just in effect lowers operating expenses and allows us to generate profit from the carbon credits.

Very good. Thank you.

Chris Caton, Morgan Stanley.

Don, I just had a quick follow-up on disposition, $200 million in guidance. Can you talk a little bit about market pricing and potentially barbelling with core versus opportunistic markets? And as you look over your portfolio, what are the best sale candidates from here? Is it the middle? Are you able to sell some of those that you really want to exit, can you just shed a little color? And if you can provide yields that would also be interesting.

I would tell you that the vast majority of what we have budgeted, the $200 million we have budgeted for this year would be exiting nonstrategic assets. So it would be either markets we are trying to get out of, other product types we are trying to get out of, not to be too coy there, or some of the joint ventures -- those small joint ventures we still have left over.

So disproportionately it would be in that arena. There are one or two what we would call some of our lower-quality projects in concentration markets that are also sprinkled in there, because we feel like now is the time to reap what we have sown on those.

And so I'm not sure I could give you a good sense of blended cap rate on all that because, again, I hate talking about cap rates because they're just so point in time, but I know you're trying to build out models. But to me it would be -- gosh, I would hate to even throw a number out because I am not sure -- I haven't calculated.

That is all right. Then the follow-up is have you had any conversations, I guess, in discussions with brokers about financing markets for some of these assets? Are you -- now that the new year -- are you seeing lenders interested in providing capital as you dispose of these assets?

I would say marginally the financing market is improving again. It may just be because everyone has got new allocations -- the insurance companies, the bank have new allocations.

We're also seeing the CMBS market creep back a little -- not much, but a little. And so we're not getting to the point where the 4- or 5-year leased asset has got strong financing and you can drive good pricing on it. But if you have got 7, 8, 9 years of average lease term in a property or something like that you can probably get some pretty good financing and move something like that, if it is the right decision for the business.

Thank you.

This is Bobby. I wanted to try to follow-up with your question when you asked about the $70 million that we have got included in incremental capital and was that primarily value-add related properties.

On page 33 of our supplemental schedule you have got a list of the value-add properties. And when you look through that I can tell you -- I don't have the detail, I was just doing this on the side. Where you have got GE listed, that certainly is a large portion of the expenditures for incremental. You have got located the Enclave property that we purchased this year. You have got the Schlumberger lease there. That is a significant portion of our incremental expenses.

So without being more precise, I'm just trying to get back to you timely and do this publicly, is the vast majority of that is related to value-add properties.

Thank you.

At this time there are no further questions. I would like to turn the floor back over to Mr. Miller for concluding remarks. Thank you.

Thank you again for everyone who has held on. This, I think, is our longest call since we have been public. And we appreciate all the questions and a lot of good questions this quarter and a lot of good feedback. So thank you very much.

And if anybody wants to follow up on anything else, obviously within the bounds of public information, we will be glad to do that. Thank you very much.

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time. We thank you for your participation today.