Piedmont Realty Trust Inc (PDM) 2012 Q2 法說會逐字稿

Greetings and welcome to the Piedmont Office Realty Trust second 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. Thank you. Mr. Bowers, you may begin.

Thank you, Operator. Good morning. Welcome to Piedmont's second quarter 2012 conference call. Last night, in addition to posting our earnings release, we also filed our quarterly Form 10-Q and Form 8-K which includes our unaudited supplemental information, all of which are available on our website at Piedmontreit.com, under our 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. Now 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's future revenues and operating income and financial guidance as well as future leasing and investment activity. You should not place any undue reliance on any of these forward-looking statements as 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 risk 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 today we'll refer to non-GAAP financial measures such as funds from operations, core FFO, AFFO, and EBITDA. The definitions and reconciliations of non-GAAP measures are contained in the supplemental financial information available on the Company's website.

I'll review our financial results in a minute after Don Miller, our CEO, discusses some of the quarter's highlights. Don?

Good morning, everyone. Thank you for taking time to join us this morning as we review our second quarter 2012 financial and operational results and share our perspectives on the current leasing and transactional environment. It's just Bobby, Eddie Gilbert, our VP of Strategic Planning and me on the call this morning as we are still in New York for meetings following our quarterly board meeting held here yesterday. We will do our best to answer your questions and if we don't have the details readily available, we will certainly follow-up with public disclosure as appropriate.

Let's look at this quarter's leasing activity. During the quarter we executed approximately 600,000 square feet of total leasing, bringing our leasing for the year through June to 1.4 million square feet. While the total amount of completed leasing transactions for the quarter is a little lighter than we expected, we believe that a substantial volume of potential transactions is in the pipeline, which is anticipated to execute in the coming weeks.

Of the leasing executed during the quarter, the three largest leases were an 11-plus year lease of approximately 123,000 square feet for the headquarters of Piper Jaffray at US Bancorp Center in Minneapolis, and approximately 100,000 square foot 10-plus year lease for the US headquarters of Brother International at 200 Bridgewater Crossing in Bridgewater, New Jersey and approximately 80,000 square foot, 10-plus year renewal for the headquarters of HD Vest Financial Services at Las Colinas Corporate Center in Dallas. Details of other significant leases executed during the quarter are outlined in our supplemental package available on the website.

As I reminded everyone last quarter, we expect the first half of 2012 to be the trough of this cycle for Piedmont's occupancy and net operating income statistics. Our quarter-over-quarter occupancy metrics showed modest improvement and we expect that trend to continue over the latter half of the year as several large new leases are under negotiation.

We project that our same-store cash NOI will slow its decline over the remainder of the year as 600,000 square feet of new leases commence and as the free rent periods burn off on 1.3 million square feet of current leases. Combined, these contractual leases and free rent burn off should contribute approximately $0.20 per share in annual FFO going forward over the next couple of years. Lease expirations totaling only 3.9% of our annualized leasing revenue remain in 2012.

Looking ahead to the expiration schedule for the next five years, 2013 is the last major year of lease expirations with 12.3% of our annualized lease revenues set for expiration, of which a third is associated with our BP lease at Aon Center in December of next year. We are working through several of our large remaining near-term lease expirations, including two in our government portfolio in Washington, DC. The 330,000 square foot lease with OCC at One Independent Square, which is set to expire in early 2013, and the 220,000 square foot lease with National Park Service at 1201 I Street, which is now in holdover and the GSA has yet to issue their SFO.

Concluding my leasing comments, we are pleased with the leasing efforts year to date and our average remaining lease term has increased since the beginning of the year to 6.5 years. We are particularly excited about the replacement leases, which we have completed at our Bridgewater properties in the former Sanofi Aventis space and with the direct lease with Piper Jaffray in Minneapolis. Leasing at both these locations make up almost half of the total leasing activity during the second quarter. The former leases for these spaces however were among the few in our portfolio that were well above market, which we had previously identified. Therefore, our cash roll-down this quarter should not be reflective of the overall portfolio's mark to market.

Turning to our capital markets activities and our capital deployment strategy, we've underwritten a number of transactions this quarter, but the competition for premier office space in gateway markets continues to be intense. We have recently added Brent Smith to our team as a Senior Vice President of Strategic Acquisitions to help us in our acquisition efforts. Brent brings great investment banking and large portfolio level transactions experience while he was at Morgan Stanley, as we anticipate increased flow of this type of acquisition activity going forward.

During the quarter, we did acquire a two-acre land parcel adjacent to the Medici building in Atlanta. The land acquisition, which is located in a unique, high-end, mixed use development, was done to control the adjacent site and to hold it for a build-to-suit opportunity.

The low cap rate environment has been beneficial to us on the disposition front as we continue to execute on our market repositioning strategy. We disposed of one property in Orange County during the quarter. The two-story, 145,000 square foot office flex building in Enterprise Way in Lake Forest, California was sold for $28.2 million and resulted in a $10 million gain in May.

We have a few other selected dispositions in the works, but nothing that I'm prepared to comment specifically on at this time.

The volatility of the equity markets, coupled with a continuing discounted pricing on REIT stocks, provided us with the opportunity to be a more active buyer this quarter with regard to our previously announced $300 million restock-repurchase program. In effect, we're buying Class A, well located office properties at what we believe to be a meaningful discount to today's private market pricing.

During the second quarter we purchased approximately 2.6 million shares at an average price of $16.66 per share. This brings the total shares repurchased under the program to the end of the second quarter to approximately 2.8 million shares and $46 million.

I will now turn the call over to Bobby to briefly review our financial results for the quarter and our outlook for the rest of the year.

Thanks, Don. While I will discuss today some of our financial results for the quarter, I encourage you to please review for further details the earnings release, the supplemental financial information, and the financial results on Form 10-Q, which were filed last night.

During the quarter we reported net income of $0.18 per diluted share and FFO of $0.35 per diluted share. Operating revenues, property operating costs and depreciation expense were all up as expected during the quarter, reflecting the revenue contributions and costs associated with the five office acquisitions made since the second quarter of last year. Most of these acquisitions were value add properties and we disclosed our lease-up progress on those properties in our supplemental financial report.

We exceeded our internal projections for the quarter, primarily due to lower G&A expenses. Major factors that contributed to the lower G&A include lower shareholder services costs, lower legal expenses and lower franchise taxes resulting from the successful tax appeal that we had in Michigan. As we've stated before, we believe that a normalized G&A run rate for the Company can be maintained at approximately $6 million per quarter.

Looking at our other operating revenues and expenses, we did not incur as much capital transaction costs as anticipated during the quarter due to the low amount of real estate investment activity. Also, we did not report any significant termination fee income and expense during the quarter as compared to $1.3 million recorded in the second quarter a year ago.

Interest expense declined compared to the second quarter a year ago due to the payoff of three secured notes during the past 12 months. The results in discontinued operations in 2012 as compared to 201, reflect the loss of earnings contributions from properties sold in 2011 and during the first two quarters of 2012. The largest transaction was the sale of 35 West Wacker in Chicago, which was sold in the fourth quarter of last year and contributed, prior to its sale, more than $0.13 per share annually in FFO. The $10 million gain reflected during the current quarter is associated with the sale of the Enterprise Way property that Don mentioned.

The balance sheet remains very strong for us with little change from year-end, other than some disposition activity in the pay down of the secured debt with the 35 West Wacker proceeds.

As we mentioned in the last conference call, we paid off a $45 million note on our 4250 North Fairfax Drive property during the second quarter and our debt to gross asset ratio is now 26.7% as of quarter end.

I will mention that we should be finalizing this month the replacement of our current $500 million credit facility with a comparable new unsecured line of credit, which we anticipate will be priced around 120 basis points over LIBOR. The North Fairfax payoff, together with the completion of this new line, means that we will have virtually no debt maturing until 2014.

At this time I'd like to also reaffirm our previously issued annual guidance, noting that we expect that the variances in FFO and NOI between quarters this year will be greater than in the past. We continue to believe that the first half of 2012 is the trough for Piedmont and we expect to see our occupancy and our financial results begin to improve in the second half of the year and into 2013 as rent abatements burn off and the magnitude of lease expirations begins to decline.

We believe our portfolio of properties has embedded earnings growth potential as these leases commence, as abatements subside and as we lease-up vacant space. The leasing environment remains challenging, however we believe we have high quality assets, which are well positioned competitively in their respective markets.

We expect the outcome of two or three large government tenant lease expirations through 2014 in particular will have an impact on the pace of our growth in FFO and NOI over the next two years.

That concludes our prepared remarks today. I will now ask the operator to provide our listeners with instructions on how they can submit questions. We will attempt to answer all of your questions now or we'll 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, when you're ready.

(Operator Instructions) Tony Paolone, JPMorgan Chase & Co.

My first one is for Bobby. Just in terms of run rate and rolling forward for the third and fourth quarters, you addressed G&A a bit. Sounds like that goes to a more normal $6 million run rate. Is there anything else we need to adjust for in either OpEx or reimbursements, so forth?

No, Tony, that's the reason I included that in the script to give you sort of a run rate for the rest of the year.

And then second question. Don, the $0.20 a share you referenced, appreciate that. That's helpful to quantify for us. But you went a little fast and so I'm just wondering can you just flesh that out a bit more in terms of was that FFO pickup or cash flow pickup? And what did that sort of incorporate?

Tony, thank you for bringing that up. Actually I misspoke slightly. I meant -- I said FFO, I meant to say AFFO. So that should be a cash flow pickup. And we think that roughly $0.07 to $0.08 of that is from commencement of leases that have not yet commenced. And say $0.11 to $0.13, giving a little bit of a range here, is from abatements burning off. But that's cash flow, not FFO.

So none of that is speculative, it's just what's going to happen.

That's already contractually signed, that does not count anything we would be announcing going forward.

Michael Knott, Green Street Advisors.

I'm just curious if you're seeing much slowdown in the way of tenant decision-making. Couldn't really tell from your comments, just curious to your thoughts on that.

Michael, as we talked about in previous quarter calls, because our average lease size is quite a bit larger than most, we have a longer lead-time in advance. What I would tell you and what we're trying to signal is we anticipate some pretty sizeable activity in the third quarter from things that have been working for quite some time, some of which rolled over into early third quarter and we tried to get that information out. But we also expect some more to be coming.

Having said that, we have seen much more recently, and this is just in the last few weeks, a handful of tenants acting much more indecisive than they were just 60 or 90 days ago. I can't tell you that that's a trend yet. Sometimes we see this in the summer and then it turns back again in the fall, but just in the summer weeks, so since say June 1st, we've seen a little more indecisiveness again.

And then can you maybe just talk about your outlook for some of the bigger leasing vacancies that you guys have to work with?

Yes, let me pull out -- I think as you probably know, on the supplemental on page six, we not only listed the bigger leases we've done, we also list the bigger leases that we try to update going forward. And we've provided that update and you can see that. But then we added some information on page seven, which gives you a little bit of a sense of both things that are yet to commence that are already contractually signed, as well as we've been trying to imply that we have some good activity going. Nothing that I want to comment on at this point for competitive reasons, but one or two nice size leases that could fill some nice blocks of space if we're successful in completing them.

Brendan Maiorana, Wells Fargo.

Bobby, I don't know if I missed this in your comments, but did you guys reaffirm that you expect to end the year on a leased rate of 87% to 88%, which I think you had disclosed on the last call?

I didn't say that during the comments, but 87% certainly we still believe that's something that we can attain or be close to it.

So if we look at your expirations for the remaining back half of the year, excluding the National Park Service, which I think is likely to be, as you guys have indicated, likely to be in holdover, I think it's roughly 500,000 square feet, maybe a little bit more than that. What do you think you're likely to renew out of that remaining square footage that's going to expire?

Brendan, this is Don. I'm not sure -- which 500,000 square feet are you talking about? I'm sorry, I misunderstood the question.

The remaining expirations outside of the National Park Service in Q3 and Q4. Looks like you've got probably a little over 100,000 square feet in Q3 and then 400,000 square feet in Q4. So what I'm trying to do is just understand how much you're likely to renew and then what that means for new leasing activity that you're likely to do in the back half of the year.

I see, you're trying to do some occupancy modeling. Okay. I think most -- National Park Service obviously we do believe that at a minimum they're staying in for some period of time because they couldn't get out if they wanted to at this point, given they're already there. Most of the rest of that activity is still pretty speculative. There are a couple of situations where we think they're probably leaving but we have some pretty good prospects to backfill. And so if I were to tell you that gee, I thought 80% of them were leaving, but we've got good backfill prospects for 40% of them or something like that, I'd be making numbers up at this point. It's a little too early to tell, but we've got good activity on some of those that we do believe are going to be departing.

But that sounds like -- I'm just trying to reconcile the comments that maybe activity's slowing down a little bit. Or maybe there's some uncertainty with your tenant base versus getting to a leased rate of 87% by the end of the year. Because if you get there, you've probably got to do about 500,000 square feet of positive net absorption. And if you have even, let's say half of those tenants, that that remaining 500,000 square feet of expirations that move out, that's 750,000 square feet of new leasing that will be required in the back half of the year, which seems like it's a lot given your historical new leasing that you've done over the past few years and the market environment, which may be slowing.

Yes, let me see if I can try to provide a little bit of clarity, because I think there's one key issue that's a bit of a technical detail that will help you understand why we're expecting sort of 87% initiative year-end.

About 300,000 square feet of the vacancy -- or the leases remaining to expire at the end of this year expire actually on 12/31/12. And so you sort of know how that works. That ends up becoming first quarter '13 departure, if you will, from a reporting standpoint. And so as of 12/31, although we have 300,000 feet expiring on 12/31, we wouldn't report that until the first quarter. So as a result, that 300,000 doesn't factor into your calculations until the first quarter.

Okay, so if you're at 87%, it might be sort of an inflated number and then on January 1 it might move down a little bit for some of those move outs.

That's correct. What we said though I think in the last call and subsequently is that we expect occupancy to improve nicely through the remainder of this year, fall back again in the first quarter because of those leases we just mentioned, the 300,000 plus the OCC lease in the first quarter. And then there's very little rollover through most of the rest of '13 other than the BP lease at the end of '13. So again, if we just have normalized activity from a new leasing standpoint, we think we've picked back up pretty nicely during the course of '13 after the first quarter drop back.

John Guinee, Stifel Nicolaus.

You guys are obviously doing a great job, sort of unwinding the well strategy of above market long-term lease acquisitions. So congratulations. Let me just ask a type of big picture question here is it looks to us like the second quarter was pretty simple in this year. Use of cash was $43 million to buy your shares back. And your sources of cash was about $28 million from the sale in Orange County. So you had a $15 million [deed] use of cash exceeded your sources. But your debt went up by $62 million in the quarter. Can you, Bobby, sort of shed light as to the huge gap there? And this is after reducing the dividend down to $0.20.

John, about $20 million of that would have been CIs or capital expenditures. I think we're going to have to do a little bit of math on where the other $20 million would have gone.

Okay. What ends up happening is when you overpay when your sources exceed your -- or you have a $62 million increase in the denominator without much activity, that's hammers NAV.

Next question is BP is paying about $41 full service. When you look at Aon and all the other backfill tenants, what sort of renewal rents in the general range do we expect relative to the $41 full service for BP?

I think I've got the remainder of the answer to your earlier question, John. We have a little under $20 million of non-incremental capital. We also had a little under $20 million of incremental capital, where some of the new deals that we're leasing up, particularly probably related to 400 West Monroe and a couple of the other value added deals that we have going on.

Okay.

Okay? So that would have been the majority of the $40 million delta that you're seeing there.

And then on Aon Center, let's see. Expenses have come down at Aon Center. They peaked probably the $17 range. They're now more in the $15, $15.50 range. Our leasing would be going $17 to $19, most of it on the net basis. So, $17 to $19, plus $15.50 to, say, $16. So you're $33 to $35 gross.

So it's essentially, if I'm doing the math really quickly, $26 net goes down to $19 net?

I don't think it's $26 net, John. I don't know where the $41 number comes from. That sounds a little high to me because I thought that lease was in the $23 to $24 net range.

Well, actually I'm theorizing. Okay, so I'm sorry. $23 to $24, goes down into the high teens.

So, that would be a $38 gross number today going to a $33 to $35 number.

Okay. So $38 down to $33, $35. Okay, got you.

Bobby, you had sort of alluded to some government rollouts. At 3100 Clarendon you've got about 215,000 square feet with the Defense Intelligence Agency. Costar has that all available starting 9/20/2013. Should we factor the Defense Intelligence Agency as rolling out at Clarendon in the third quarter of 2013?

No, I think we've already discussed previously that the Defense Intelligence Agency has a right to give us a termination notice and we've disclosed that to everyone. There's a year advance notice that's required with that termination notice and we have not received anything from the Defense Intelligence Agency at this point.

Okay, so it's on the market for lease despite not formally having receiving from the Defense Intelligence Agency?

Yes, we have long-term plans, John, on that building when DIA moves out -- when and if they ever move out to redevelopment to some degree. We're not prepared to talk in great detail about those plans, but obviously that location is fantastic and the building itself is a pretty good building. And so we're putting some long-term plans into place as we speak. But until you get some formal notice from them that they are leaving 12 months hence, it's hard to get in and do a lot of work because they -- it's a very secure facility so it's very hard to do a lot of touring and things like that until we know a little bit more about when they're going to be departing.

And then the Piper deal, $63 TI, I'm not sure what the leasing commission is, about $18.60 GAAP rent. I'm assuming the $18.60 is a net rent, is that correct?

That's correct.

But what's that on a roll up or roll down from the in-place rents for US Bancorp?

Yes, it's an odd one, John, because the -- US Bancorp has roughly 700,000 square feet in the building or had 700,000 feet. They had an opportunity to get back a couple of floors a few years ago and they did that. So they've got, let's say in the 600,000s today, around 600,000 today.

Some of that space was in the low 20s net and some of that space was in the low teens net. And so it depends on how you count it, but in effect what we're doing when we report that this quarter is we're reporting the Piper lease against that higher net rent, which is why you're seeing a big roll down this quarter as the largest lease we did had a very large roll down from low 20s net into that beginning starting rent with Piper, which was less than -- obviously a lot less than that.

And then the last question, Lockheed in 283,000 square feet. I think they maybe all of it expires in '14 in three different leases. Can you sort of give light to the current thinking with you and Lockheed?

Yes, it sounds like you're following that situation. It's an interesting situation. I won't speak to Lockheed specifically but I think you'll understand my point in just talking about the defense contractors in general. I think they're playing a very intelligent game, both politically and real estate wise. We as landlords to them -- and we're not the only ones; obviously there's a lot of people in the DC region facing the same issue -- are dealing with what is sort of getting caught in the middle between in a political fight and see frustration between Lockheed Martin and the federal government where Lockheed Martin's using that information to try to go out and say okay guys, we don't know how much space we're going to need in the future, but what we are going to need, we're going to probably need a little less than we've got today. We're going to make it more efficient and we are likely going to need a lot more flexibility because we don't know what the federal government's going to do with our funding.

And so they're using that to come back on a number of people who have leases coming up in the next few years and trying to negotiate very flexible terms on those deals.

We're in active negotiations with them on a number of deals and with some other defense contractors as well, but they're all sort of trying to maintain their flexibility and figure out what they're going to do. To comment beyond that might affect our competitive situation there.

And then last question and a lot of people are doing this, so maybe you might want to consider it, Bobby, on your FAD page, you've got about straight line revenue of 5.6 million square feet and then amortization of above below market leases. Of the 5.6 million, how much of it is sort of traditional straight line and how much of it is relatively quick burn off of free rent?

John, I think we're going to have to get back to you on that. But we're scattering through some pages, but it looks like we're going to have to give you a call back after that.

I'm sorry, it's about 5.5 million or 5.6 million of straight line, some of which is traditional and some of which is more of a fast burn off. Great. All right, thank you.

Yes, so we'll make a note and we'll get back to you on that.

(Operator Instructions) Paul Adornato, BMO Capital Markets.

Don, you added to your acquisitions team and also mentioned that you felt you might be more successful at the larger transaction size. Could you maybe expand on those comments? Is the pricing better? Are those deals -- do they have more hair on it or why do you think that'll be a better place for you to find some investments?

Well, we did add a new member of our team, we brought an investment banking guy from Morgan Stanley named Brent Smith on. Very thrilled to have him. Just adds another broader skill set to our team. And one of Brent's missions among other things is going to be continuing to focus our attention on some of these larger deals.

Frankly there haven't been very many of those out there. I think it's fairly well known that the only big deal that has really been out there in recent times was Charter Hall and we went after that fairly aggressively. But there are some things coming down the pike that I wouldn't want to comment on for a variety of reasons that we were looking at. Whether we'll be successful or not I don't know.

I didn't mean to imply that we thought we had a greater level of success or chance for success than we have in the past. It's just that we have that much more resources chasing after it and we're going to make sure we're in front of everyone of those to give ourselves the best opportunity. But obviously if pricing still remains sort of where it is and doesn't appear to be as attractive as we'd like it to be, then we're going to maintain our discipline and our patience.

Chris Caton, Morgan Stanley.

Don, I was hoping you could maybe expand on, I think it was Paul's question on just basically uses of capital. If you look over the next either through year-end or even longer than that, how do you see making investments over the near-term? And I guess there might be kind of four areas. One would be just acquisitions in your cluster, your targeted cluster market, acquisitions in some of the secondary markets where you've been active, say value added deals. Another would be are you still looking at your shares and have you made an investment subsequent to quarter end? And third is -- or excuse me, fourth would be some of the economic uncertainty and macro uncertainty causing you to want to pause on making investments over the near-term?

Okay, wow it's going to be hard to address those in any sort of proper order, but let me give you sort of a high-level look at how we're thinking about things at the moment. Obviously we've I think been pretty open about where we think the best investment is available to us today and that is in our own stock.

If you think about sort of we bought $40 million-some worth of shares last quarter at an average price of $16.66. That was 2.6 million shares I guess to be precise. We feel like we're buying that in the upper 6s on a current cash going in basis and if you take the portfolio from its current economic occupancy below 80% to a more stabilized occupancy just in the low 90s, doesn't even have to be above that, we're buying an investment we think stabilizes in the low to mid 8s.

We feel like that's -- for the quality of portfolio, low leverage and tenant credit quality we've got we feel like that's as good an investment as we could possibly make in this marketplace. And so that's part of the reason why we're focusing our attention frankly on our stock repurchase and we continue to be active buyers of the stock or we'll probably continue to be active buyers of the stock in the third quarter.

As it relates to taking that into the private market, obviously that raises the bar for our private market investments when we can get that kind of return expectations out of our own stock. And also makes it difficult to want to spend our currency at full private market pricing when we have another option available to us. And so we've tried to be thoughtful about that and we'll continue to be looking at deals, but obviously the deals will be measured against what our other alternatives are.

We are seeing a handful of things that are kind of interesting to us. I don't know that prices are dropping in the market, but I think there's more product coming to market. And so there may be opportunities where there aren't as much attention paid to a particular asset as there may have been earlier in the year. We are hearing rumors that some of the debt providers are running out of capital as the year progresses and that might make some of the leverage buyers who have been pretty aggressive pull back a little bit. And so we think the end of the year might have the opportunity to be a little bit more successful than we've had earlier in the year, but we're still not budgeting huge numbers or huge impacts to our balance sheet as a result of acquisition activity.

And then we continue to have a pretty steady flow of non-strategic assets to bring to market. I think we've indicated that we have a couple more moving forward in the latter half of this year that we anticipate. We have budgeted, I think, a couple of hundred million dollars -- $300 million for next year and those -- we never know exactly which assets are going to come to fruition the way we would like, but over time we've been pretty close on the disposition budget each year in moving towards getting our non-strategic assets out the door.

So I hope that answered most of the four questions by staying at a high level, but if there's more specific, I'd be glad to go into it.

No, that's great, Don, thanks. And just on the share repurchases, I think when you introduced the program I think you said you found it very compelling below $17. I see the stock has now gotten to $17.01 today. Given that maybe the shift in market pricing that you remarked on, what do you think about the share valuation and your willingness to buy the stock at a new little bit higher level now?

I'm not sure that we have changed our thought process on sort of where we're a buy and where we're not. I'm not sure we ever said that we were a buyer below $17. You may have figured that out from our actions itself. But obviously we think the stock is very compelling at this -- in this pricing and below primarily because we can do our own internal calculations of NAV just as you can in terms of applying cap rates to our buildings and then giving us value for vacant space and we come up with a valuation from an NAV standpoint that's materially higher than our current stock price and we just see that as a compelling purchase.

And then last one for me on the capital budget. It would be helpful if -- we've talked about the leasing capital and your commitment in past calls. I'd be interested to know kind of how you see that trending over the next few years as you finalize your lease up here. As you mentioned you have much less roll beginning in '14. But I'd also be interested to know on the building improvement side, so separate from kind of related leasing costs. So do you have any big kind of capital plans for any of your major assets over the next say year or two?

Well, I think we can break that question down to two levels. On the capital expenditure side as it relates to leasing capital, obviously with this sort of pig going through the python for us, I think we were looking at it this morning. We had 37% of our portfolio expire in years '11, '12 and '13. A lot of '13 obviously has now been taken care of, but so we're more than halfway through that. But as you can imagine, the capital side of those tends to lag behind the execution of the leasing, other than for the first half of the commission.

And so, the capital for the next two or three years will lag behind the actual execution of the leasing and so those numbers will be elevated clearly over the next two or three years as we pay the piper, if you will, on all this leasing we've done.

Having said that, as you know, we then go into a period of time, '14, '15, '16 where our lease expiration schedule is much, much lower, in fact, de minimis in '15 and '16 at this point. And as a result, we should have a long period of sort of a nice window where we have very low capital expenditures and very low turnover of our portfolio. So that should benefit us.

At this point, we have -- because our portfolio is so relatively new, very few of our buildings are much over 12 or 13 years old, that there really aren't a lot of major capital projects we have. The only things that we can see going forward as I mentioned earlier was 3100 Clarendon. We probably have a repositioning of that asset going forward at some point in time over the next three to five years. And then we'll probably have some capital spend on 60 Broad just because of the age of the asset and some of the systems that we'll have to spend money on going forward.

I don't have any specific budgetary numbers to give you on those, but those are the only two I can think of that have major capital projects ahead of them over the next few years.

Yes, just to follow-up, Chris, we disclosed $136 million in TI commitments outstanding. Half of that's related to just three leases, the KPMG lease that starts here in August and then you've got NASA and GE making up. Following Don's analogy on pig through the python, once you get those through there, it drops dramatically.

Michael Knott, Green Street Advisors.

Any thoughts on what overall portfolio mark to market is during your remarks that the overall is not as severe as what you saw this quarter? Just any sort of broad brush thoughts on -- are you minus 5, minus 10?

Mike, we consistently say we thought we were sort of getting to the lower half of the minus 5 to minus 10 range as a result of sort of some burn off over the last year and a half or so. Obviously this quarter because we had a higher than average negative rollover in the quarter, I think we're continuing to move towards that 5% number. We're doing some more work on it right now and as we get more detail on it we'll try to come out and probably try to disseminate some of the information. But I would just tell you that if we've been saying 5% to 7%, I think we're moving towards the 5%, not towards the 7% because of things like what happened this quarter.

With respect to the lawsuit that's pending, anything that you would -- of all of us. I know you have some comments in the 10-Q, but --

Yes, there's frankly been very little activity on that over the last few months. I think we did report in the last quarter that the -- we re-filed the motion for summary judgment on the case. That's under review by the judge and we're awaiting his review. We still are very -- we remain very optimistic, notwithstanding five years of effort on this, that the judge is going to rule in our favor. We think the facts in our case, but we're waiting to hear from the judge on that. So there's no real update from the last time we talked about it. But obviously we feel very good compared to where we were six months ago.

And then with respect to the land purchase near the Medici, I don't think most people would think of Piedmont as a developer, so I hear what you're saying about that being a defensive move to some degree, thought that you really would at some point down the road do a build-to-suit if there was tenant demand? Or is this more of a we'll hold it, sell it later at some point? How should we think about just buying land?

Michael, obviously we have some development capabilities internally. We don't spend a lot of time talking about development because it's not our core competency, but five, six, seven buildings in this portfolio we developed or co-developed with an outside partner on. And so it's not that we're not capable of doing that. And we do see an opportunity in places like Atlanta and some of the other opportunistic markets where we can pick up a strategic piece of land that's adjacent to an asset that has both defensive, as we mentioned in the [Gabotella] situation, or offensive qualities to it where we think we can get in the game with a unique parcel of land at a very low basis. We don't see any reason not to sort of stock up those offensive opportunities going forward when and if the markets improve.

And so to me at today's low cost of capital and low land carry costs that we haven't seen in a long time, just feel like it's a smart time to pick up land inexpensively that will create more opportunities for us. We're not going to do a load of it. We're not going to be doing $50 million of land by any stretch. But we might spend $10 million or $20 million picking up a handful of parcels that we think make a lot of sense strategically for us.

And then if I can just ask one more question. Are you still thinking that you're going to be a net seller in this type of environment when your stock is priced at a discount and you have obviously a lot of the strategic repositioning that you want to accomplish? Or does the hiring of Brent such that maybe you won't be a net seller for this year or maybe going into next year? How are you sort of thinking about that?

The risk of hiring somebody like Brent sometimes gets people reading too much into the move. It was more just an opportunity to pick up a really talented guy, Brent, and round out our skill set and think long-term. And so don't read too much into Brent's coming onboard. But no, I would still guess if I had to make a guess, we'll be a net seller of real estate this year overall probably a net user of our balance sheet as a result of buying back stock.

John Guinee, Stifel Nicolaus.

Bobby, just a quick follow-up. You guys quote percent leased. Do you have a general economic occupancy number for 2Q that we could ramp up from? Is economic occupancy 81%, 82%, 83%, 84%, 85% this quarter?

Yes, John, it's actually on pages 42 and 43 of the supplemental. We provide information by property. And if you'll look at the bottom of page 43 we list economic occupancy at 77.5%.

That was Bobby throwing his voice into Eddie's body.

Okay, perfect. Thank you.

Yes, that's part of the new supplemental information we're trying to provide, John, to help guys like you figure this out because obviously we feel like there's a big delta between our economic lease and our actual commence lease and we want to make sure we can try to help you guys understand that.

Mr. Bowers and Mr. Miller, there are no further questions at this time. I'd like to turn the floor back over to you for any closing comments you may have.

Well, as always we really appreciate the interest and appreciate the questions. We're glad to have anybody follow-up with us and ask what other questions you have. And we'll be reaching out to some of you today who expressed interest in the call. So thank you for participating and we look forward to catching up with you at our next formal meeting. Take care.

Ladies and gentlemen, this does conclude today's conference. You may disconnect your lines at this time and we thank you all for your participation. Good day.