Piedmont Realty Trust Inc (PDM) 2012 Q1 法說會逐字稿

Greetings and welcome to the Piedmont Office Realty Trust first quarter 2012 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 first quarter 2012 conference call. Last night, in addition to posting our earnings release, we also filed our quarterly Form 10-Q and a Form 8-K which includes our unaudited supplemental information all of which are available on our website, 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 risk and uncertainties that may cause actual results to differ from those we discuss today. Examples of forward-looking statements include those related to Piedmont Office Realty Trust's future revenues, operating income, and a 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 of 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 including our most recent Form 10-Q. In addition, during this call we'll 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 the quarter's highlights. 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 Vice President of Finance and Strategic Planning, all of whom can provide additional perspective during the question and answer portion of the call. I will now turn the call over to Don.

Good morning, everyone. Thank you for taking time to join us this morning as we review our first quarter 2012 results and as we comment on the leasing and transactional environment in which we face.

As we reflect on our results for the quarter which were in line with our expectations, it is appropriate to put our current performance into context and give our constituents further insight into our expectations. Going into 2011, we have identified our biggest challenge as the large lease expiration schedule that we face in the coming years. In fact, at that point 37% of our portfolio revenues were tied to leases expiring in the next three years. As we are coming up on the halfway point in that process, it is important to highlight both our accomplishments as well as the remaining challenges. Let's start with occupancy.

During the first quarter our occupancy rates fell between 1.5% and 2% depending on the measurement. Our stabilized portfolio dropped from 89.1% at year end to 87.5% and overall occupancy fell from 84.4% from 86.5%. To those of you who follow us closely, this does not come as much of a surprise since we have been communicating for several quarters the move-outs of Kirkland & Ellis at Aon Center, Marsh at 500 West Monroe and Sanofi Aventis at Bridgewater during the first quarter. The net rentable square feet of these three expirations account for more than our drop in occupancy.

Our economic occupancy measures are even lower as a result of down time between leases and free rent periods for new leases that have recently commenced. For these reasons, we've added new schedules to our quarterly supplemental information which illustrate commencement dates for new leases on page 7 on the supplemental and building by building occupancy levels on page 42 to help with analysis of your financial projections for Piedmont.

The better news is that as a result of the record leasing year in 2011, the 4,000,000 square feet, our expectations of a strong second half of 2012, confidence in the renewal of our large lease rollover still yet to expire, and especially the lower lease expirations that we have in years 2014 to 2017, we expect the first half of 2012 to be the trough of this cycle for Piedmont's operating metrics. As a result of all of the leasing activity and associated down times and free rent periods, we have had a substantial same-store NOI decline of 8% to 9% in the first quarter of 2012 relative to the first three months of 2011. Sequentially, we are forecasting an improvement in same-store performance during the second half of the year and expect the full year to be down in the 6% to 8% range on a cash basis and down approximately 3% on a GAAP basis. These numbers should improve depending on our Washington DC government lease exposure in 2013 and start to grow substantially in 2014 and beyond.

Our biggest challenge for future leasing remains in the changing political budgetary environment and its impact on the Washington DC leasing markets. We believe that the outcomes of two or three large government tenant leases expirations through 2014 will determine how rapidly we grow FFO and NOI. Our lease expirations for the years that follow 2013 drop significantly while our anticipated leases commence and begin to generate additional cash flow.

On the acquisition front, as we had communicated to the street, we are value players and disciplined underwriters on the capital transaction side of the business. We pay close attention to the relationship between acquisition costs and replacement costs. Unfortunately, in our targeted acquisition markets and gateway locations, cap rates have continued to drop as competition for yield and quality assets increases. Even our opportunities to acquire value added properties which were so successful in 2011 have declined with competition now turning to this product type. We had budgeted to be a modest $100 million net buyer in 2012 but current market conditions lead me to believe we may be a net seller in 2012.

During the last quarter we did sell four buildings and 18.2 acres of adjacent land in the Portland, Oregon, market to Nike for $44 million and recorded a $17.8 million gain on sale during the quarter. This transaction marks our exit from the Portland market and continues our recycling strategy which is focused primarily upon investments in 10 target office markets in the United States. As we disclosed previously, we also have a $300 million stock repurchase program that was approved last November by our Board. We did not purchase any shares during the current quarter and have repurchased approximately 200,000 shares since the program's inception. We remain committed to this program and ready to transact as conditions warrant.

On the operational side of the business I want to recognize the excellence of our local property management teams. Today, almost 75% of our annual leasing revenues come from buildings with an Energy Star label. Also, Piedmont has the second highest number of buildings among all office REITs with a BOMA 360 designation which is becoming the industry standard for superior building quality, management practices and tenant services.

On the litigation front, I'd like to touch on one additional area before turn it over to Bobby. Last quarter we disclosed that we are nearing a trial date for litigation related to disclosures and a proxy we filed five years ago. In late February of this year the judge made rulings during pretrial motions which we believe will strengthen our ability to defend ourselves and the judge also allowed for us to file a motion for summary judgment on the one remaining claim associated with this litigation. The trial date has been postponed indefinitely pending a ruling on our motion for summary judgment and any appeal. I will now turn the call over to Bobby to review some of our major financial variances and trends.

Thanks, Don. While I will briefly discuss our financial results for the quarter, I encourage you to please review the earnings release, the supplemental financial information, and the financial results which were filed last night for further details.

During the quarter we reported net income of $0.22 per diluted share and FFO of $0.35 per diluted share which were in line with consensus estimates. Operating revenues, property operating costs, depreciation and amortization expenses were all up during the quarter reflecting the revenue contributions and costs associated with the seven acquisitions made in 2011, including value add properties at 1200 Enclave in Houston, 500 W. Monroe in Chicago, the Medici Building in Atlanta and 400 TownPark in Orlando. All value add property acquisitions are detailed on page 33 of our supplemental financial information. Also, we did not record any significant termination to income or expense during the quarter as compared to the first quarter a year ago. Our general and administrative expenses have fluctuated over the past year with changes to our transfer agent and associated with the timing of legal expense reimbursements.

Our estimated G&A expenses for the year should be between $25 million and $26 million. Interest income in the current quarter compared to the first quarter of 2011 declined $3.4 million due to a mezzanine loan receivable in the 500 W. Monroe building that was converted on March 30 of 2011, into our equity ownership of the building. We also reported a $1.9 million gain on this conversion which is reflected in last year's first quarter results. The results from discontinued operations in 2012 as compared to 2011 reflect the loss of earnings contributions from properties sold in 2011 and during the first quarter of 2012. The largest transaction being the sale of the 35 West Wacker building in Chicago which was sold for a $96.1 million gain in the fourth quarter of last year and contributed prior to its sale more than $0.03 per share in quarterly FFO.

Now looking at our balance sheet, most of the variances between our financial position today and a year ago are due to our acquisition and disposition activity. During the last two quarters, we have used proceeds from dispositions to fund our acquisitions and to reduce the amount of secured debt on our books by $305 million. After the end of the first quarter, we paid off an additional $45 million mortgage and we have no other maturities until 2014 except for our $500 million credit facility which we are currently in the process of renewing. Only $20 million was outstanding on the line at quarter end. On page 19 of our supplemental financial information we disclosed that we easily meet all of our debt covenant requirements. Also, during the first quarter we did adjust our quarterly dividend to $0.20 per share which will free up annually an additional $80 million of capital for corporate purchases.

Regarding guidance, I'm not going to make any changes to our annual guidance at this time. I will note that the variances in FFO and NOI between quarters this year will be greater than in the past with the sale of 35 West Wacker, and with the operating down time at certain properties between the expiration of large leases in the first quarter and the commencement of replacement leases in the third and fourth quarter, particularly at the Aon Center and the Bridgewater properties.

As Don indicated, we believe that the first half of 2012 is the trough for Piedmont and we expect to see our occupancy and financial results begin to improve in the second half of the year. Given that we have approximately 1.7 million square feet of leases currently in some form of abatement, that we have several large leases commencing later this year and a low level of lease expiration exposure begun in 2013, we are very optimistic about the future. Our portfolio properties has imbedded earnings growth potential as leases commence and as we lease up our blocks of vacant space which we believe are well positioned competitively in their respective markets.

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

(Operator Instructions) Thank you. Our first question comes from Tony Paolone with JPMorgan. Please proceed with your question.

Thanks. Good morning, everyone. Bobby, recognizing the variances in quarterly earnings this year, as you mentioned, can you help us maybe with any NOI adjustments we should make to the first quarter as we roll into Q2?

Well, the one thing you need to remember, Tony, is that the Sanofi lease is the one that rolled off right at the end of this quarter, so you will have the full impact of that lease in the second quarter, but then as you move into the third and fourth quarter you start picking up those replacement leases that we've talked about on page 7. You get the commencement of the KPMG lease, you get United Healthcare lease beginning, you get Savient, and a couple of the other leases at Bridgewater.

No other though, large things we should think about in NOI as we roll into 2Q?

No, I do not think so.

Okay. And then, just another question is on National Park Services. Can you give us a sense as to how the hold-over process works, like how long do you think they can stick around just from a practical point of view?

Tony, this is Don. I'm not sure there is a great answer to that. The Federal Government, actually in their leases through the GSA, typically have a fair amount of, I'll call it leverage for lack of better term, in their ability to stay in the space if they need to. However, they have to stay in the entire space if they want to continue to hold over. So, given that we don't formally having an SFO in front of us and we don't know exactly -- other than what has been issued or what has been approved by Congress which is a 15-year, 160,000 foot lease, beyond that, we don't know what their goals are going to be.

It could range anywhere from them holding over for a short period of time, six months to a year and a half and doing something else, to asking to come back for a two or three year lease from us to give them more flexibility, all the way to signing a 15-year renewal with us, and then, of course, we have talked about other strategies in the past about how we would love to encourage them to maybe move over to our OCC space, but any or all of those are still options. Frankly, we -- they haven't formally issued SFO, they've only gotten it approved by Congress. So, until they do that and start to engage with us, it will be hard to know.

Got it. But it sounds like more than a month or two, or something like that?

Yes. I don't know how they would even physically get out. There is a conventional wisdom, I don't know if this is always true, but we have seen it a number of times in the past, that from the time they make a decision to move out of a building, quite often it's a year to a year and a half before they can actually physically get out, even if they are moving at fairly good pace.

Okay. Thank you.

Our next question comes from the line of Dave Rodgers with RBC Capital Markets. Please proceed with your question.

Hi, Don. On the acquisition disposition outlook for the year, it sounds like as you've said in your comments, expecting to maybe be a net seller of assets. Is there ability to maybe start to accelerate some of these non-core dispositions? I know in the past there hasn't been a lot of capital in those markets, but are we seeing a little bit better flow of capital into the secondary markets that would allow you to accelerate that and how does that make you feel about the guidance for this year if you were to be a bigger seller within the range?

Good question, Dave. I think a couple of comments more broadly about the capital markets, which I think will answer your question. If it doesn't, I will get more specific. Clearly, in the concentration markets we are seeing an improvement in pricing, and around the shop or even using the B-word which I know nobody wants to hear, for those of you not knowing what I'm talking about, I'm talking about a bubble.

What we're seeing -- but that is typically confined to the super core assets in those markets where there is just really strong rent rolls, good quality assets. Because what is happening you're seeing a lot of people trolling for very cheap financing. I consistently hear people bragging about getting five-year financing at 3.5% or at 4% or less on deals that you would think are long-term holds. So, my natural reaction is to believe that they are mismatching assets and liabilities again, which we've seen in previous cycles but what it ends up doing is encouraging them to bid these cap rates down to levels that don't make any sense from either an income yield standpoint or just a basis standpoint. You know how much we abhor paying too much for a piece of real estate.

As a result, what we're seeing is more and more of those people who can't find good deals in those markets are spinning out into super core deals in the secondary markets. And so some of the things that we're bringing to market right now are fairly longer term leased, reasonable quality assets that we think can take advantage of that. And most of those were already on our 2012 list, so they don't really change anything about our business plan for 2012.

In the event we got some more leasing done on a couple of other assets, it could encourage us to bring others to market but I don't think it will be a flood, it will be more of a trickle of the non-strategic assets to come to market beyond what we're currently planning. If that was to happen, it would likely be later in the year and, as a result, it probably wouldn't have a big impact on 2012 guidance even if we were to execute it.

You one thing I will say is, notwithstanding the strength in pricing in the super core assets, we are still seeing a deal here or a deal there that because it has got a little bit of dislocation in the rent roll has some interest to us. So, there is still a deal or two out there that could be interesting to us from an acquisition standpoint right now, but by and large you will still see us continue to err on the side of disciplined versus not.

And as a follow-up to that, maybe the flip side, have you looked at other forms of investments, maybe structured investments, across the country that might make sense for Piedmont?

Yes, we may have talked about this on the last call as well, Dave, but we are seeing better relative value in Mez loans today, particularly on deals that either had some problems in the past and need to be recapitalized, or somebody who is buying something, leasing it up and you have got sort of a low going-in basis and some protection, because they have got to spend a lot of capital to go forward. Those are actually pricing -- in some cases, I feel like we're getting a better return than the equity is getting on the same deal. So, kind of fascinating given that you are lower in the capital structure and getting better returns.

So, that is encouraging us to look at a few of those kind of deals, but those are always hard because you have got to line up a lot of different things. You got to line up the right sponsorship, the right real estate, obviously we would not do one on something that wasn't a piece of real estate that we would otherwise want to own, it has got to be in markets that we want to do, et cetera, et cetera. So, those are even a little harder to do than just pure equity deals.

Our next question comes from the line of Michael Knott with Green Street Advisors. Please proceed with your question.

Don, can you talk about leasing prospects going forward with some of these big holes that you have to fill, particularly, I guess you touched on DC a little bit, but maybe Chicago, New Jersey?

Yes, I would be glad to, Michael. I think we've talked a little bit before. It's really an oil and technology market at the moment, so it is Texas and the technology markets that are doing well and everybody else is not. I'd like to tell you I have more of my portfolio in the Texas and technology markets than I do, But, unfortunately, we are by and large concentrated in those markets that are not technology and oil.

Where we are, for example, Dallas, we are seeing a lot of good activity even though we don't have a lot of big blocks there, we do have some opportunities to create value for those assets that we're seeing good activity on. We are seeing good activity on the blocks of space, for example, 400 TownPark, the Orlando asset we bought, we have got some good activity there. We have got fair activity at Piedmont Pointe up in Washington. We have got very good activity at Bridgewater, obviously.

And then just recently we have started to see some interesting prospects at Windy Point. Rents will be terrible, obviously the economics will be rough. But we are actually seeing a couple of good credits out there looking for decent sized space. So, we have some more optimism on that than we have had in the past.

We've been a little disappointed recently with, given that we have got probably the two best blocks of big space in downtown Chicago, there haven't been any big block players out there lately. That has been very disappointing to us because when you are the only guy in town, that is the perfect time for somebody to come along, and it has just gotten really quiet again there for the last little while. And then, of course, just in general Washington is pretty quiet, particularly on the bigger block front so right now we're doing everything we can to hold on to what we got.

Okay. And then, Bobby, did you say the full year cash same-store NOI guidance is now minus 8% or minus 9%? I thought it was minus 5% on the last call.

For the full year it should improve from where the quarter was minus 9%, it will go up to probably --

I think we said 6% to 8% in the call, my guess is a little better end of that, but to be cautious we said 6% to 8%.

Okay. But that is worse than what you guys said last time, right?

A little worse than we said last time for the full year, yes.

Why is that because it sounds like the GAAP number, the FFO number did not change too much?

I would guess it is probably because we didn't get as much leasing done in the first quarter as we would have liked, is probably the largest answer.

One other thing --.

We thought, I'm sorry Bobby, to cut you off. We had some pretty good activity in the first quarter that reversed on us. A couple deals that were getting pretty far down the road that we thought were going to take up some big blocks and then we had a merger, one was a merger that got knocked out and another one was a tri-party agreement with an existing tenant, where we had get the existing tenant out of the way and they couldn't move quickly enough. So, we had a couple of deals that were really disappointing for us that we thought were going to be contributors earlier this year than it turned out to be.

The other thing I was going to point out, Michael, is on the cash NOI, the amount of abatements that we have gotten. As large as I have seen it with all the leasing that we have done, the good news there is that those leases are signed and as those leases commence, there will be a period of time that you're getting the GAAP basis NOI. But the cash NOI is going to start probably a year after the commencement.

On the longer-term deals.

Right.

Last question. Don, in light of what may be slow leasing overall it sounds like, can you grade yourself on leasing progress on the value add acquisitions that you guys have made, just sort of thinking about what kind of investment strategy makes sense for you guys, as most people wouldn't associate Piedmont with being a value add buyer given, just given the history and the background of the firm as a whole. I know it's a little different for you guys individually, but can you just talk about that? How you grade yourself and the outlook for whether you guys would continue to look at those types of deals going forward?

Yes, I would say we will know a lot more in the next couple of quarters as we have a lot of activity on some of those buildings. Right now I would -- if we were to grade ourselves, I'll give ourselves a solid B. Things are going well. We got in a nice basis on a lot of those assets, and so, overall I think we are going to achieve our returns and more on that portfolio of assets. But until we fill up a couple of those, I'm not going to be too self-congratulatory.

Are you still sort of looking at continuing to invest in some of those low barrier suburban markets? Or do your comments about tech and oil make you want to get more aggressive on those markets or what are you seeing?

The best relative value we are seeing, Michael, is in still some of these sunbelt markets where most of the institutions are a little loathe to go because they are still seeing fairly weak job growth and fairly high vacancy rates. So, there is nowhere near the energy around trying to accumulate product in I will call it Atlanta, and Florida, and Phoenix and some of those kinds of places, Minneapolis even.

And so you may still see us do a few of those deals, but they have gotten harder as I was commenting on in my earlier comments. They've gotten harder to do because I think along the lines of what we have done and people have seen the success that we and others have had doing those deals earlier in the cycle, I think more people are chasing into that space now, given that they hope they are closer to improvement in the economic cycle than we were a year ago. The returns on cost just aren't as attractive as they were a year ago when we were doing those deals.

Our next question comes from the line of Chris Caton with Morgan Stanley Smith Barney. Please proceed with your question.

Good morning. I want to follow up on Michael's questions on Chicago. You talked about fewer big blocks in the market. Can you talk about how maybe you will change your leasing strategy? Are you going to wait for big blocks to come to market or are you going to do single floor deals? What's the plan from here?

Obviously, you want to try to find that right balance if you were try to break up those blocks and make them a lot smaller, but let me -- for example, in Chicago there is really three or four blocks of space over 250,000 feet in all of downtown Chicago that could be assembled right now. The other two, other than ours, are not the same quality of product that ours is, let's put it that way. As a result, if you get a good quality tenant coming into downtown the needs space fairly quickly, you would hate to go and have taken your block from 350,000 down to 225,000 and then have to compete with a bunch of people on 175,000 foot deal when a 350,000 foot deal may have only one or two competitors.

So, as a result, you have to be really thoughtful about it and so if you have a 50,000 or 100,000 foot tenant that is out there, it better be good credit, decent economics to give away that advantage you might have in the marketplace. So, each a deal is sort of individually thought through.

We're working on a deal or two right now at Aon that could take that block down to a slightly smaller size But, again, they are very strategic deals for us, thoughtful, and we think we are getting the right economics and the right tenancy to do that.

How are lease economics trending in Chicago, mostly sideways?

I would say sideways to slightly up and in downtown. And then sideways to probably slightly down in the suburbs, just because you always have got another building who will do whatever it takes to get the deal.

And that would be on kind of an effective rent basis?

That is correct. Yes, we sort of think of everything as effective rents, because space rates are only as important as the overall economics.

Face rates are face rates. I want to follow up on, I think Tony was asking about DC and the plan for Parks. You mentioned it would be interesting, nice to be able to move them over to the OCC space. What's the rate differential between I Street and the Southwest and your, I forget the exact address of the OCC space?

It probably depends a little bit, but I would say $5 to $10 a foot, somewhere in that fairly broad range.

Okay. Great. Thanks very much.

(Operator Instructions) Our next question comes from the line of Brendan Maiorana with Wells Fargo. Please proceed with your question.

Hi. Thanks. Good morning. I wanted to follow up on Chris' question or just follow up on DC. 3100 Clarendon, what is the status with DIA which I think has their expiration next year, and I think as we had talked about on prior calls, or maybe in meetings, that there were other GSA tenants that may find that space attractive. Is that the case, and what's the outlook for that pending expiration?

Well actually, when we said this we misspoke, but the expiration is not formally until 2018; however, in the latter half of the lease which is the 2013 to 2018 period, they can terminate with 12 months notice. We believe that they will likely take that termination at some point during that period, we just don't have any idea when yet, because it is part of a DOD BRAC reorganization. We believe that unit is going to be working its way out towards Reston over the course of time. We continue to get feedback that is not going to be taken any time soon, just because they have got -- it is going to take time to get all of their folks worked out into that. But right now if you were to budget, say, a '14 type of expiration that might be a good guess.

Having said that, there is a GSA user or two that would be good fits for that building size-wise and otherwise that are out in the marketplace today. And so, we are working to try to figure out whether that might be a way to swap in because, in fact, they could swap in to a slightly below market rental deal in our building under GSA clause, if you will, and not actually have to go through the whole procurement process for a new building. And so, we're trying to see that is a way to take that expiration out all the way out to 2018 without any disruption.

The other alternative obviously if it doesn't turn out to be a GSA tenant is, it's a B plus building but in an A plus location right on the Metra, right across from the Saul retail and office project there in Clarendon, and given it's literally a Metra stop comes up into the basement of the building, it is a really attractive alternative in what is probably the best sub market in Washington DC. So we have got some pretty good confidence in the asset and its leasability if they are to leave, but we just don't know when they are going to yet, so it is another typical sort of a GSA-type situation.

In the expiration schedule for 2013, I guess being in soft term, you guys aren't including that DIA lease in your 2013 lease roll for DC are you?

No, it is in our lease expiration schedule as a 2018 still, because we just have no idea when they are going to leave, if they're going to leave at all.

Sure. Okay. That's helpful. And then, Bobby, you mentioned that there was 1.7 million square feet of leases that hadn't yet commenced. I guess if I look at the differential between the lease commencement and leased rate as you guys now have on the schedule on I think page 43, for the overall, take that, 3.3% differential times your 20 million square feet it works out to be somewhere around 680,000 square feet, which would be right in line with the known move-ins that we expect. But you mentioned the 1.7 million square feet. What is the differential between those two?

1.7 million doesn't have anything to do with leases that haven't commenced. It has to do with leases that have commenced but are still in some sort of concession or abatement period. So, you have got the GAAP NOI contribution, but you are not getting the cash NOI contribution yet.

So, the 680,000 square feet or so is in addition to the 1.7?

That's correct. We've got leases such as the Chrysler building that has been leased. You have got H.M. Jackson there at Piedmont Pointe. You got Schlumberger there at Houston. They are all still in abatement periods. But the [leases] have begun.

Okay. So that is just the abatement period. So your straight -- but your straight line rent numbers seem to come down a lot during the quarter. Do you expect that that adjustment, given that these leases have commenced on a GAAP basis but not on a cash basis, that that is going to come down even more sharply as we get further into 2012 and into '13?

Your GAAP basis certainly will slide down with now having all of those leases in the first quarter that have expired, you'll get a full quarter's worth in the second quarter. It will start to improve your GAAP NOIs once the new leases commence in the third and fourth quarter.

I think there are two other things you need to think about their, Brendan. One is, obviously we're going to have a lot of other new leasing happen here over the next six to 12 months, we hope. And if we do and they have free rent periods as well, which most of them likely will, then we will still be -- whatever improvement we see as Bobby just laid out for you, we're going to have 141 adjustments in the other direction for all the new leases that are coming in. So, I think that will offset some of that.

And then secondly, if I'm not mistaken, if you remember Philadelphia in the first quarter we had that anomaly in our 141 adjustment for the first quarter, because Philadelphia pays all their rent in the first quarter of the year. A big chunk of it anyway. As a result, our first quarter 141 adjustment is always more positive than the other three quarters of the year. In fact, the other three quarters of the year offset it one-third, one-third, one-third.

Okay. So you had a $4 million benefit, call it a reduction to straight-line flash FAS141 in Q1 which will not be the case in the forward quarters?

By definition, 1.3 of that will go the other direction in each of the next three quarters.

Sorry, I just want to make sure I understand. So, it's a $4 million positive in Q1, and then the delta would be, you don't get the $4 million positive and you get a $1.3 million negative in Q1 so the Delta would be 5.3 from Q2 to Q1?

I think that is correct, yes.

Okay. Great. Thank you.

Our next comes from the line of John Guinee with Stifel Nicolaus. Please proceed with your question.

Hi, guys. Nice quarter. Quick housekeeping question, Bobby. When you are coming up with your current guidance, what are you assuming in terms of acquisitions, and what are you assuming in terms of year-end occupancy?

Couple of things there, John. John, we had originally budgeted in acquisitions that were going to come in late in the year, and we only have about $0.01 of FFO contribution included in our guidance associated with acquisitions. There was a second question, what was that?

Year-end occupancy.

Year-end occupancy should improve up around 87%, 88%.

Okay, but you can always really generate a lot of FFO by just acquiring and borrowing off your line at about 73 BPS. So, you can move it around a lot if you just decide to acquire in the second half, correct?

We could, John, and sometimes I think we may be our own worst enemies in terms of we're not beating the drum on that. I think if we saw better value in the marketplace, we would probably be beating that drum in a big way. Keep in mind our 73 basis point line benefit goes away at the end of August, and it will go to a market line of credit but it will still be in today's terms, upper 1% to 2% cost of borrowing rather than 73 basis points, but your point is still the same.

On the National Park Service in DC, the word on the street, I think, which you implied is that the RFP is out there for 158,000 or 160,000 square feet. And essentially it is the continuing resolution, and the Republicans are essentially asking for all GSA leases to be reduced by 30%. Is that a good assessment?

Yes and a slight no. I think, John, that their determination to go from 220 to 160 predated any sort of mandate of sort of 30% down number you are hearing. We're hearing different kinds of things coming out of GSA but I think in general you are right. The Congress, especially the Republican Party, is putting pressure on them to try to down size their uses, so they looking at all kinds of ways of being creative and get their space needs down. In the National Park Service situation, though, I think that actually pre dated that mandate and they were planning on getting down sized anyway.

Okay. On the Defense Intelligence Agency, the DIA, is that essentially the transition out to Patriots Park and Reston, the BXP project?

That is what we have heard, John. That is what we've been told is, that they're likely to go to that park with most of their use out of this but some may go to other places but the majority would go there.

Okay. And then Bobby, the $19 million notes receivable, does that have to do with Portland or a different deal?

That has to do with Portland. It will be paid off in August or September, Laura? October.

A couple more questions. The issue in Chicago I think is much as lack of big block space is might be that everybody really wants to be on Wacker and doesn't really want to be up in the Lakeshore sub market or west of the river. Is that an accurate assessment?

John, I don't think so. There isn't any activity in the marketplace right now, big activity, that isn't looking at us because we're not, so to speak, on Wacker. There just isn't any real big blocks out there. There's a lot of 50s and 100s that are looking around that are just trading spaces but our 500 West Monroe asset is considered a top 10 building in the marketplace, so just the fact that it is a block or two west of Wacker and right over by the train stations doesn't impact it at all.

In Aon Center, I know we beat this drum for a long time now, but the East Loop market, the perception in the city continues to be that East Loop is the less desirable sub market. What we are seeing among the brokers and tenants now is that more and more people are looking at the East Loop because for all the same reasons they are looking at tech space and cool space is they want to be able to attract younger talent to their companies. And East Loop is a much more attractive location for younger talent. It's a less attractive location for older talent who's coming in from the suburbs and riding the train in. But over time we seem to be getting more and more market share over there, at least our building is, from that experience so that is how we're able to sign all the sort of litany of tenants we have done over the last few years.

The last question as I'm sure you've looked at the Hearst tower BofA sale at uptown Charlotte. What did you think of that transaction?

You mean the one that was just announced yesterday?

Yes.

From one of our competitors? We did not spend a lot of time on it, John. I hate to not be able to answer your question directly because Charlotte is not in our target market list. It's a very nice quality building. I have questions about that entire BofA portfolio because it just appears to me that BofA is signing 10-year leases to maximize value on the portfolio, and I question whether they are going to be in a lot of those spaces for the long-term. And so we have not been as aggressive on any of those deals as we otherwise would have been, because our sense is that they are not committed to a lot of those key locations, and that is why they are selling the buildings.

Great. Thank you very much. Wonderful.

Our last question is a followup question from the line of Chris Caton with Morgan Stanley Smith Barney. Please proceed with your question.

Hi, Bobby. Just a quick question on guidance. What kind of G&A do you have baked into the numbers?

In the conference call I said we have about $25 million to $26 million for G&A for the year.

Thanks. I had missed that. I appreciate it.

Mr. Miller, we have no further questions at this time. I would now like to turn the floor back over to you for closing comments.

Well, as always we really appreciate everyone's interest and participation, a lot of good questions today. If anybody has any interest in following up, obviously our team will be available today and will be reaching out to some of you. And I think Bobby has one administrative issue that he wants to cover as well.

Yes. Thanks, Don. We received a number of calls regarding NAREIT, trying to schedule time. We're going to start trying to book that next week, particularly paying attention to our institutional holders and to our analysts, but we will be trying to get in touch with you next week. Thank you.

Ladies and gentlemen this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.