Piedmont Realty Trust Inc (PDM) 2012 Q3 法說會逐字稿

Thank you for joining us this morning and welcome to Piedmont's third-quarter 2012 conference call. Last night in addition to posting our earnings release we also filed our quarterly Form 10-Q and our Form 8-K, which includes our unaudited supplemental information. Also, this information is available on our website at 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 our actual results to differ from those we currently anticipate and discuss today.

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

During the call today we may refer to non-GAAP financial measures, such as FFO, NOI and same-store NOI. The definitions and reconciliations of our non-GAAP measures are contained in the supplemental financial information available on the Company's website.

Today for the call we have several members of management here -- Don Miller, our CEO; Ray Owens, our EVP of Capital Markets; Laura Moon, our Chief Accounting Officer; Bo Reddic, our EVP of Real Estate Operations; Eddie Guilbert, our VP of Finance and Strategic Planning; and Brent Smith, our Senior Vice President and Capital Markets. All of them can provide additional perspective during the question-and-answer portion of the call.

I will review our financial results after Don discusses a few of this quarter's highlights and some events that have occurred subsequent to quarter end. Don.

Thanks, Bobby. Good morning everyone. We have a busy call scheduled and given that we are going live we will try to keep this moving along as best we can. Thanks for taking the time to join us this morning as we review the third-quarter results and share our perspectives on the current leasing and transactional environment.

During the quarter we executed over 1 million square feet of leasing. The two largest transactions were in the Chicago market. A new 300,000 square foot 12 year lease with Catamaran was signed for an entire property vacated a year ago at Windy Point II in Schaumburg, and a 396,000 square foot 15 year new lease with Aon Corporation at Aon Center in downtown Chicago was completed in September.

I say new lease as it relates to Aon, because as you may recall though Aon had obviously been a major tenant in that building for some time they were subleasing space from BP. Signing a creditworthy tenant such as Aon to a lengthy direct lease to this magnitude with no downtime was a significant win, because we now have accounted for 88% of BP's expiring space in December 2013 with a blue-chip tenant lineup, including the Federal Home Loan Bank of Chicago, Integris, ThoughtWorks and now Aon.

Other releases of note during the quarter were an approximately 87,000 square foot 11 year new lease with Guidance Software at our 1055 East Colorado asset in Pasadena, California, and a total of 113,000 square feet of leasing with General Electric, BGC Brokers, and Starr Indemnity at 500 West Monroe in downtown Chicago.

In addition, I am pleased to report that subsequent to quarter end we also executed an almost 400,000 square foot ten-year renewal with U.S. Bancorp in Minneapolis. Clearly, these transactions are confirmation of significant efforts by our leasing teams over the last several quarters and we applaud their hard work. Details of other significant leases executed during the quarter are outlined in our supplemental package available on the website.

Obviously, we are delighted about the leasing activity for the quarter and the uptick in our occupancy. Our stabilized portfolio is now back over 90% leased, and our average remaining lease term has grown to seven years, which is in-line with the office CBD peer group.

Also, bear in mind some of the economic benefits from the large leases signed over the past few quarters may not have commenced even if the leases have begun. Many leases are in abatement periods for 12 months or so. For this reason, and remembering the upcoming OCC expiration, I would not expect our same-store cash basis NOI to begin showing meaningful improvement until later in 2013.

To help you develop your own financial models we have added disclosures in our supplemental financial information this quarter for some of the larger leases that have not yet commenced, which is a total of 700,000 square feet, of which is currently vacant space, and for 41.6 million square feet of leases that are in some form of abatement. This added information includes when the abatement periods will expire.

Now that we have taken Aon and U.S. Bank off the table, our expirations in 2013 and 2014 are below 10% of the portfolio in both years. And over 30% of our leases have over 10 years of lease term.

The two major remaining near-term lease expirations are with government tenants in our Washington portfolio. The National Park Service at 1201 Eye Street is currently in holdover -- and our best guess is this tenant will sign an intermediate term extension -- and the Comptroller of the currency at One Independence Square, who as we have said many times, we anticipate will vacate the property during the first quarter of next year. Looking forward our annual lease expirations are only expected to average approximately 7.3% for the years 2014 to 2017.

Moving onto the capital markets side of the business, we did dispose of the last two industrial assets in our portfolio during the quarter -- 110 and 112 Hidden Lake Circle near Greenville, South Carolina. The transaction marked our exit from the South Carolina market, which brings us to seven remaining markets that we have targeted to exit over the next five years -- sorry, next few years.

On the capital deployment front we continue to believe that the best investment we can make is to invest in our own stock at levels that are below our internal estimates of NAV. As such, we were able to acquire an additional 2.2 million shares at an average price of $16.95 per share during the quarter, bringing our program to date totals to approximately 5 million shares for an average price of $16.77 per share. This program has met its objectives of both FFO and NAV accretion for the shareholders.

We also continue to focus on executing upon the capital allocation plan outlined at the time of the 2010 IPO, consolidating into our select core and opportunistic markets and focusing on CBD opportunities. We have been actively pursuing a number of Class A acquisitions in our concentration markets, particularly in New York and Boston.

For the most part we continue to find it difficult to see value in the transactions occurring in those marketplaces. We are also continuing to seek value-added transactions in our opportunistic markets, namely, Minneapolis, Texas, Florida and Atlanta.

On the litigation front we have positive news to report. You may recall that in the two suits filed by the same plaintive that we have filed a motion for summary judgment in one case and a motion for dismissal in the second case. During quarter three the judge ruled in our favor on both of those motions. However, as you might expect, the plaintiff subsequently filed motions to appeal.

While we are very optimistic that we will ultimately prevail in these cases, we are able to capitalize on the positive momentum from those rulings and negotiate what we can consider to be very favorable settlements in order to put the matter behind us and avoid further legal costs and distractions that come along with matters like this.

So bearing in mind that it is an agreement in principle at this point, and still has to be approved by the judge, we agreed to pay $4.9 million to settle the first case and $2.6 million to settle the second case.

You'll notice in accordance with accounting rules we have recorded the expense associated with these two settlements in our September financials. The two settlements are within the applicable limits of our D&O insurance policy and we intend to seek full recovery of the amounts. We are working with our insurance carriers, and any recoveries we do achieve will be recognized in future periods when received.

In addition to our October leasing discussed in our press release there are two events subsequent to quarter end that I will like to address this morning. We are always looking at to add value to the organization in terms of the quality of our assets, the strength of the balance sheet and in the depth of our organizational team.

We were pleased to announce last week that Bob Wiberg has joined our team as Head of our mid-Atlantic region and Head of Development for the Company. Many of you already know Bob and the extent of his real estate knowledge and experience in the Washington DC market. His contacts and profile in the region will greatly assist us as we face some lease maturities in the coming year.

Over the past decade Piedmont has also developed build to suit projects across our portfolio, and we own a handful of attractive development parcels. We are not signaling any major change in our focus, but we believe bringing on someone with Bob's development capabilities will give us additional bandwidth to create values for these -- from these parcels.

Finally, I am thankful to report that in the wake of Hurricane Sandy our Piedmont staff in New York, New Jersey, Washington and Boston are all safe and out of harm's way. Unfortunately, we had two of our buildings that sustained some measurable damage from the storm.

60 Broad, located adjacent to the New York Stock Exchange in Lower Manhattan took on a lot of water in the basement from the storm surge and remains without power. We currently assessing damage, but it is too early to report when the building will be fully operational again.

400 Bridgewater had a portion of its roofing membrane torn off in high winds and some water damage results on the top floor of this building in Bridgewater, New Jersey. Repairs are underway and all damage is expected to be largely covered by our insurance programs.

As we observe the extent of the damage from the storm we are thankful for the limited problems that we observed. I want to thank our teams on the East Coast that were at our properties throughout storm and continue to give us great effort.

With that I will ask Bob to now review our major financial results and trends. Bobby.

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

During the quarter we reported net income of $0.06 per diluted share, FFO of $0.33 per diluted share, and core FFO of $0.37 per diluted share, which includes the addback of the accrued litigation settlement expense that Don just mentioned.

Operating revenues and operating cost, depreciation, amortization expense were all up during the quarter, reflecting the revenue contributions and costs associated with three assets acquired since the second quarter last year, and the commencement of several significant leases earlier in 2012.

G&A expenses for the quarter reflect a more normalized run rate of approximately $6 million per quarter without any significant one-time expense for recovery items. One item that is important to point out is the quarterly FFO amount of $0.12 per share for the third quarter.

As we have mentioned in these calls previously, we do not expect to earn -- we do expect to earn annually an average cash flow or AFFO that covers our current annual $0.80 per share dividend payout, subject, however, to the timing of certain large tenant capital commitments.

As an example, this quarter we were fortunate to commence large, long-term leases with KPMG and with United Healthcare at Aon Center in Chicago. But along with large block leases come major capital commitments, so this quarter we spent over $30 million at Aon Center alone.

As we move beyond the commencement of newly signed large leases, we expect that cash flow should improve materially as our lease expiration schedule moderates during 2014 through 2017. Our total non-incremental TI commitments were approximately $122 million at the end of third quarter.

The results in discontinued operations in 2012 and 2011 reflect the contributions from properties sold during 2011 and year-to-date in 2012. The largest transaction being the sale of 35 West Wacker in Chicago, which was sold in the fourth quarter of 2011 and contributed prior to its sell more than $0.03 per share quarterly in FFO.

The small capital loss reflected in discontinued operations during the current quarter is associated with the sale of two industrial assets that Don mentioned.

I do want to draw your attention to our same-store cash NOI analysis included in our supplemental financial information. As we have discussed in the past and during the call today, we have been through a period of high lease expiration over the past three years, coupled with the profound economic downturn.

Consequently, we have experienced significant pressure on our property level cash NOI from vacancies and rent rolldown. As we have indicated last quarter, we believe the second quarter of 2012 was the trough for our occupancy levels, and that FFO and GAAP and cash NOI income will follow suit by bottoming out and beginning to improve in subsequent quarters through 2014 as leases commence and as rental abatements burn off.

The third-quarter same-store cash NOI, which is shown on page 14 of our quarterly supplemental information, reflects this improvement, as the same-store cash was almost flat compared to the third quarter a year ago. And we anticipate our 2012 same-store NOI will continue to improve and be down approximately 5% for the year, better than we forecasted last quarter.

Overall, our balance sheet remains very stable. As previously announced, during the quarter we did complete the replacement of our $500 million line of credit that matured in August with a comparable size four year facility with two six month extension options. As a BBB rated entity the spread on this new line is 117.5 basis points over LIBOR.

With completion of the new line, we currently have no debt maturities until 2014. Our weighted average interest rate is 4.26% today and our total debt to gross asset ratio is about 27.5%. Ignoring capital investments that is available from disposition proceeds, we could acquire up to $1.1 billion in additional assets and remain only 40% leverage on a gross assets basis.

At this time I would like to narrow our previously issued guidance to the upper half of our annual core FFO guidance. That is to the range of $1.40 to $1.45 per share. We will provide 2013 annual guidance on our fourth-quarter earnings call that we will conduct in February after we completed our annual budget process.

The preliminary models before consideration of any new acquisition activities suggest that 2013 will be flat to down slightly from 2012 levels, which reflects seven dispositions thus far in 2012.

That concludes our prepared remarks today. I will now ask the operator to provide our listeners with instructions on to how to submit questions. 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. Thank you again. Operator.

(Operator Instructions). Anthony Paolone, JPMorgan.

Thanks and good morning everyone. Bobby, if we just take the $74 million -- a little under $74 million of cash NOI in the quarter, by just to kind of simplify what the cash coming in through 2014 will be from either leased but not yet commenced or still in abatement sort of leases that are out there, if we just divide that by the 78% that is the economic occupancy of the portfolio and then multiply it by 87%, which is the leased amount, does that get us to the rough run rate of where we will be on a cash basis once everything is up and running?

I appreciate the question and I apologize that we had that pause when we started today, but answering your question I want to go back and reflect on two components that I think you're getting at.

We have 700,000 square feet of leases on vacant space that haven't commenced yet, and we also have 1.6 million square feet, which I think is to your point, that are in some form of abatement today.

If we try to calculate what is that on full abatement, we have 1.2 million square feet that are like fully abated at today's rate. So if you look at those two components, the 1.2 million and full abatement, 700,000 square feet, you almost have 2 million square feet that we know that is booked, that is going to be coming into income over the next year and a half to two years.

If you take some sort of reasonable gross rent rate, and you can take anywhere from $30 to $25, and use a conservative margin, you can see there is easily $0.16, $0.18 of AFO cash contribution coming in. Obviously that is ignoring the benefit that you're going to pick up from straight-line rent. So on a cash basis you have about $0.18 there of additional benefit. Does that answer your question?

Yes. So I guess -- yes, I was coming out with something in the $30 million to $35 million of annualized pickup in cash off of that just under $74 million. So it sounds like that is about right.

Yes, I have got right about $30 million, and that gives you that $0.18 AFFO contribution.

Okay, great, thanks. And then just in terms of a follow-up, maybe for Don, we have heard some other office companies talk about just over the last 30, 45 days some pause on the tenants' behalf in terms of making decisions. Can you just talk bigger picture to what conversations with tenants look like and what the last few months have entailed?

Yes, I would be glad to. We have commented multiple times, I think, since really middle of the year that we have seen a slowdown in new forward activity. And at risk of repeating myself, I think everybody knows that our leadtime, given the size of our average tenant base being 35,000 feet, our leadtimes tend to be fairly long. And so we have a fairly good look into our pipeline going forward.

It clearly has slowed down coming into the election. I think particularly the larger tenants seem to have taken a bit of a respite here in the third -- second and third quarters and are slowing down a little bit. So we don't see as many big deals out there as we were seeing.

We are seeing a fair amount of steady activity in the five 5,000 to 15,000 foot range. And so some places where we have smaller vacancies we are actually seeing a fair amount of activity, particularly in places like Texas and in downtown Chicago. I'm not sure what the correlation is between the two of those, but those are the places we have seen the best activity.

So I guess I would say, yes, I agree broadly with the marketplace that things have slowed down. Obviously, the election will have some impact on that and we will have to wait and see what that is.

Okay, thanks. Appreciate it.

Chris Caton, Morgan Stanley.

Don and Bobby, thanks for the detailed disclosures around leasing at the beginning of the supplemental. I appreciate the information. And congrats on getting through all -- or most of the major leases that you faced there.

So now as we look at lease expirations it is certainly lower, and I guess now it is comprised of smaller tenants. I wonder, could you talk to us a little bit about some of the expirations you have over the next year or two that aren't at the beginning of the supplemental.

So I'm looking back at page 26 where you disclose your lease expirations by market. I guess Chicago is a bigger market for you next year, is that -- it looks like maybe a little over 200,000 square feet. Can you talk about some of the smaller lease exposure that you have over the next year or two that might affect the financials?

Yes, so for example, in Chicago the 226,000, a lot of that is the remaining BP exposure that we have that is not leased. So the 12% that is not taken care of, which is roughly 100,000 feet or so, that would be sort of half of that. There is a tenant up in the Upper Bank that is expiring early next year that we've known about for a number of years that has got about a floor. So it is another 30,000 there. So I would say that accounts for 60% to 70% of the Chicago exposure.

Obviously, the DC exposure, over half of that is OCC. And then we have a handful of leases that expire particularly late in the year. In fact, most of the activity we have in 2013 is late in the year. And so part of the reason we have been commenting on the fact that OCC is a big impact to us, but other than OCC, at least early in 2013 through the first three quarters anyway, we have very little other exposure in the portfolio.

And then we have a fair number of 20s to 50s that are all expiring at year-end 2013. And several of those are at 4250 North Fairfax, the RBC corridor of Washington. So those are where the big exposures would be.

Thanks. And just a follow-up on BP, can you remind us when that lease expires and what the downtime is between a handful of the major tenants like Aon, like -- if any between Aon and Integris and a few of the other names that (multiple speakers).

The lease expires on December 15 of 2013. And other than Integris, so ThoughtWorks, Federal Home Loan Bank and Aon, all will take the space effectively December 16. And then Integris' space will lease middle of 2014. So, obviously, we have to rebuild the space, because they are not currently in there.

And these are standard abatements like you have been doing?

Correct.

Great, thanks.

John Guinee, Stifel Nicolaus.

Great. Okay, two questions. One, Bob, you're the best CFO in the industry, so why a $0.05 swing in guidance for the fourth quarter?

John, I don't know. We are falling within the range that we had projected so I don't look at it as being a swing at all.

Okay, second, Don, the issue is I think, as we all know, there is no doubt in anybody's mind that you can generate solid and really strong FFO growth through occupancy gains, and also using, as I think Bobby said, about $1 billion of dry powder of very cheap debt right now, because you have a great balance sheet. The offset that everyone struggles with is when do you hit bottom on rental rate rolldowns on a constant occupancy basis?

The TI leasing commission numbers for a year are, I think, $55 and maybe $75 a square foot for the last quarter. And those kind of numbers result in overpaying the dividend and are -- you know, when you still have rent rolldowns given those kind of dollars spent for TIs and leasing commissions it makes people concerned about where the bottom is.

Can you drill down a little bit on the U.S. Bank lease and the Aon lease to give people a real sense for what the net effect of it is after TIs and leasing commissions?

I am not sure I have -- and a fair question. Let me see if I can -- it sounds like there is three or four questions within there. Let me try to do my best and then follow-up if you don't think I have done what you're looking for.

The rolldowns by quarter get to be -- because we are so lumpy -- get to be very misleading. And we have talked about this before. I think for the 2011 we actually had a rollup for the year when we had a portfolio-wide -- you know, we had commented multiple times that we thought we had a 5% to 7% rolldown across the portfolio, but 2011 actually was a rollup.

2012 is going to be a relatively material rolldown, but that is primarily because of two or three relatively large leases, Aon being one of them, that we have commented on for a number of years now that when those hit they will be relatively large negative rolldowns in those particular quarters.

So we continue to believe that our rolldown across the portfolio is 5% or less. And I would say the only caveat to that, as you have commented I think accurately many times, is what is happening in Washington DC and what will happen with rental rates in that market.

So I am not sure that the back-to-back quarters of the negative 16% is what you should expect to see going forward, but let's -- I will try to continue and go on and answer the question further.

So now you go back and you look at a lot of larger leases that we have done lately and the per square foot concessions are relatively high. But a lot of these deals are at least 10 and many of them are 15 year deals. And so on a per square foot per year basis it is a little better. It is still not great, but we are in markets that are relatively expensive markets as we have talked about before in places like downtown Chicago.

So net effective rents are all over the board as you can imagine. We have them -- sort of a minimum threshold we try to achieve or we won't do a deal. And we could have done a lot more leasing the last few years had we been more aggressive on the net effective rents we would do, but we are big believers in maintaining long-term value in the assets. And so as a result we have tried to do deals that we felt like would continue to at least maintain, if not grow, the value of the portfolio.

So I don't quibble with any of your comments about the concern you have. I think if there is two concerns in the report this quarter it is the negative 16 number. And we just don't get caught up in quarterly rolldown numbers, because we're such a lumpy organization.

But then, secondly, as the overall capital costs, I think we have been saying for several years our overall capital costs are going to go up at the tail end of our releasing cycle, because that capital tends to get deployed 6 to 12 to 18 months after the leases get signed. And we think we will have a fair amount of capital going out the door over the next year or two.

And then as that lease expiration schedule starts to roll down to much lower numbers in 2015, 2016, 2017, you're going to see just the opposite effect, and all of a sudden you will be, I think, standing on our shoulders and applauding for what little capital we have going on in our portfolio. And so I think you just have to normalize over long periods to get to the right number.

Excellent answer. And congratulations on hiring Mr. Wiberg.

Well, thank you. We appreciate it. By the way, I didn't answer your U.S. Bank question. I don't want to forecast what rollup or rolldown will look like in the fourth quarter, but the U.S. Bank lease, which of course will be a huge part of the fourth-quarter number, will actually be a positive. And so that will probably, again, -- from a lumpy standpoint it will look better than it should be in the fourth quarter.

Don, I want to piggyback on some of this lumpiness that is associated with leases and hearken back to John's question of why the swings that you have seen in our earnings, we had two major leases that started in the current quarter, particularly at Aon. We had the United Healthcare lease that started as well as the KPMG lease, two very large leases that came off of downtimes that we had.

Yes, and that was $30 million of capital that came out this quarter of our numbers. So that was even lumpier than normal for us, John.

Great, thank you.

Michael Knott, Green Street Advisors.

Don, I was wondering if you could help me understand what the longer-term read through might be from the Bob Wiberg hire in terms of your centralized leasing and asset management approach to business?

You know, Michael, I thought you might ask that question. The read through is that, if you were to ask us is our business model changing, I would probably say yes and no.

Let me start with the no side, because I think it is very important to reiterate this. We don't feel like there is anything wrong with our business model. It is different than most of our peer group because of the some of the things we have already mentioned today. The average tenant insides being 35,000 square feet. So much of our activity in our portfolio is done on a relationship basis with the corporates and the governments that we have relationships with.

I think you have met Kerry Hughes, for example, that does all of our new business development. She does a fantastic job of making those relationships work for us.

But what -- so what has happened is over the last eleven quarters we have done 10 million square feet of leasing. So I think we feel like we know how to do some leasing. But almost 30% of that leasing has been done on a direct basis where we haven't used, so to speak, outside landlord agency commissionable reps, if you will. We are doing those things on a direct basis ourselves.

And so like I said, our model is just a little bit different because of the nature of what we have. Having said that, we do believe substantially in the benefit of local presence and regional structure. Heck, that is what I came out of. I ran a major region for lend lease for a number of years in Chicago when our headquarters were in Atlanta. I understand the benefit of that local presence in the capability of having those people in those offices.

And so as we have been looking over time, rather than a revolutionary move to bring in a number of folks and potentially risk the culture and the team atmosphere that we have going here, we felt like it was really critical to address those needs individually.

So Washington was a major focus for us. I think you know I have known Bob for a number of years. We worked together at Prentiss Properties. I think the world of him and are thrilled to have gotten him to be able to come over and join our organization.

If we can find a couple of more guys like Bob, and that could be internal candidates or external candidates, we might add those roles in a place like a Chicago or a Los Angeles or even a Texas over time, and supplement their capabilities with other folks in those markets.

But that isn't going to change, so we still have a fairly centralized process in terms of how we do some of our leasing. But it will give us a lot more, we think, capabilities in the value-added arena at a local level.

So we think that is the story. Obviously, Bob brings us sort of a second benefit, if you will, and that is just his strong development capability. And as we mentioned in the call, we had some land parcels that we could do some things with over time, and having a guy of Bob's capabilities that could give us a steady hand and guide us through some of those processes will be helpful as well. So we probably got a twofer with Bob.

Okay, thanks for the answer. On the second question I might bend the rules a little bit if I can. I have a couple of questions in one. It pertains to DC.

I'm guessing that the good news about National Park Service is that they are maybe going to sign an extension, but maybe the bad news is you're not going to be able to move them to the OCC space. So I am just curious your best thoughts on refilling OCC today. Also just curious, generally your thoughts on DC do they change given if one candidate wins or not next week?

As it relates to National Park in OCC, on an MPS basis, yes, we have said that we are optimistic that we will get an intermediate term extension done with National Park. I think that the best reconnaissance we continue to have with them is they do want to move to the Department of Interior buildings over the period of time.

Obviously, that takes time in a federal government environment, and so we think that -- and of course a tenant like that probably doesn't want to move twice. The cost to move are so expensive in the federal government model. And so that is why we think that there is likely to be an intermediate term extension with us.

That probably does also rule out them moving over to OCC, as we have talked about before, because they don't want to move twice. And so there is just sort of pros and cons to that from our perspective.

We actually have had some activity at OCC. I say surprisingly because I have been relatively bearish, as you know, on DC and what the expectations from the federal government leasing perspective might be. But we have had a little bit of activity. Nothing that I would in term that would be near-term, but we have had some and that is encouraging.

And I think that is probably because we have one of the highest quality, if not the highest quality block of government space in the district, in a very nice quality building. And we will be aggressive in chasing the right deal if it comes along. So nothing probably imminent to report, but we are at least going to remain optimistic and keep plugging away on that.

From an election standpoint, without getting into the personal views of it, I think that, at least as it relates to Washington is concerned, I think it is somewhat becomes which market are you talking that phenomenon.

If you said that a Romney victory would probably be good for national defense and it will probably be better for Northern Virginia, although there is always a lot of Lockheed presence up in the Maryland corridor as well, but an Obama victory would probably be better for Maryland and maybe more damaging to Virginia if defense continues to get cut. So I think a lot of it depends on what sector you're looking and what submarket.

What about the district in either of those scenarios?

I guess, just generally I am a little bearish on all of Washington just DC, just because I can't believe that we aren't going to continue to see further reduction of federal government use of space. Some of that will go into contractors and spin off into other office space.

But private entities tend to be a little bit more efficient than the government, and as a result I think there is just overall downward pressure on use of office space in Washington for the forseeable future. I don't think that is good news for any of us from our -- except as taxpayers.

Right, okay, thanks. I will get back in the queue.

(Operator Instructions). Brendan Maiorana, Wells Fargo.

Hey, Don, so I guess I was trying to understand your comments to a prior question about the CapEx levels and about rent. If I look at your rent levels relative to the amount of CapEx that you are spending, in 2009 it was around 12% or 13% CapEx as a percentage of rent. 2010, it was 17%. Last year it was 16%. In the past couple of quarters it has averaged over 20% and for the year is about 21%.

Is the high level driven because you have got most of the large deals that were done in the quarter were in Chicago, where the high CapEx market and the low rent market, is that what you are suggesting in that going forward, if we get a more, let's say, overall mix of leases throughout your portfolio that that should migrate back down to midteens or somewhere around there?

That is a fair question. I am not sure I would -- I'm going to guess -- when I say guess, I mean make an educated guess here, because I'm not sure we have the exact facts in front of us. But generally the more percentage of our leasing we do in downtown Chicago, the higher our capital costs are. Clearly that is an obvious issue -- downtown Chicago has some of the higher capital costs in the country.

Having said that, if you look at total gross rents in downtown Chicago they're really not far off of rents you see in a lot of other markets. And so I am not sure the relationship is as far off as it used to be, particularly given that capital costs have gone up in a number of the sort of the core or concentration markets in the last few years.

And in Chicago they haven't gone up anymore, but haven't come down yet. So I think that relationship is changing a little bit. Chicago is not quite as much of an outlier as it used to be. But having said that, you are absolutely right, the more we do in downtown Chicago in a quarter, the higher our percentage of capital costs are going to be.

Having said that, when you go back to 2008 and 2009, before we had a lot of our rollover scheduled, you have got to remember that those numbers may have been artificially low relative to our overall capital needs on a full cycle basis. And today we are at the peak of the market and doing a lot in downtown Chicago, so that is probably artificially high compared to what our long-term cycle would look like. And so I think your conclusion is probably accurate that somewhere in the middle is probably more appropriate to the long-term expectation.

Sure, okay, that is helpful. Do you think that -- has there been any change in dynamic of your large tenants with tenants that -- has there been any change in terms of tenants that have the upper hand versus -- now versus a few years ago? Has it moved more in the landlord favor or is it still that large tenants have significant negotiating leverage given availability and lack of other tenants that could fill the void?

It is very much a submarket by submarket phenomenon in the kind of space for you have, and so I will give you an example. We did the catamaran deal here recently -- a wonderful tenant, 300,000 footer. And so even in a market that is one of the weakest in the country, being suburban Chicago, there really wasn't a lot of places for them to go at 300,000 feet. Now if they had been a 100,000 foot tenant they might have been able to drive even harder terms than they would be able to do at 300,000 feet.

So it really comes down to the submarket, the size of the unit you're talking about and the number of competitors in each of those submarkets that you're dealing with.

I will give you a great example. In downtown Chicago right now, because we have got two blocks of space, particularly two really good quality blocks of space at the top of our buildings, anybody over 50,000 feet were getting to look at either one or both of those buildings, depending on their locational preferences.

And there is some decent activity in downtown Chicago right now, but that is because there just aren't very many good sizable blocks of space, particularly above the 30th or 40th floor in buildings in downtown Chicago.

So, all of a sudden, you can be a little bit more -- you can hold the line a little bit more than you would otherwise have been able to do a few years ago in downtown Chicago when there are more blocks available.

So, like I said, it is just so specific to the individual situation it is hard to generalize.

Sure. And then I know you provided a little bit of disclosure on the U.S. Bank deal, positive on rents. If we look at that as say maybe a more typical renewal within your portfolio is there -- was the CapEx level on that deal relatively moderate as well or is that a high CapEx kind of deal?

That won't be Chicago kind of CapEx numbers. And given the way we were able to structure it we were able to do it without free rent as well. And so as a result, it is a nice set of economics for us. I think it was a good win for U.S. Bank as well, because they were able to keep their headquarters in a fantastic building. But that is one we are really pleased with the execution on, but I think U.S. Bank would say the same thing from their perspective.

Okay, great. Thank you.

Michael Carroll, RBC Capital Markets.

Hey, Don, how are you guys thinking about the acquisition market today? Are you starting to see more opportunities than you did earlier in the year?

I will start high level and see if Ray or Brent or anybody else wants to jump in. But I would say the activity level has been fairly stable, but we are seeing a lot of deals be brought to market and not trade. And I think that is just a function of the fact that the debt markets are better but they're not there for a lot -- particularly in your opportunistic markets for a lot of things that don't have great credit and term equality to them. So it is a bit of an unsettled market, I think, from that perspective.

And more recently, particularly in Washington and New York, we are seeing a lot of the bigger deals that you thought would be relatively easy to execute getting a little bit tougher. They might be getting done, but they are getting done, taking a little longer to get done. There is a little more [ajatob] before it gets worked through the process.

And so I think that is just a function of the fact that people are starting to realize that New York and Washington are both a little softer than they would have thought they were a year or so ago.

So I would say the overall market is active, lots of product out there, but not a lot of great value still, at least from the market that we would like to be in. Ray or Brent, either one of you add anything to that?

I would echo what Don said. Michael, this is Ray. A lot of the deals that had been put out on the market in what we call an opportunistic market, either did not trade because there is still a gap between buyer and seller expectations or there has been an increase in financing activity in some of the better secondary markets.

So when folks aren't maybe getting the guidance or the activity that they would like on a disposition, they have been going out and pulling those deals from the market and financing them. We are seeing that also in the concentration market, some of the larger deals as Don had mentioned before.

So I think the impact of still aggressive lending environment out there and lower interest rate environment has caused some sellers to say we could go ahead and refinance versus going and executing a disposition.

Okay, and then, Bobby, can you walk through how you're thinking about your liquidity position currently? I believe you have about $150 million drawn on your line. I know you're still actively -- or you still have that repurchase program outstanding. At what level would you want to take that line down and how would you do that?

As we said in the comments, we have a team line that is in place for $500 million. So much of our capital is going to be controlled by events that you just talked about with Don and Ray, with our acquisition opportunities that we have here. Without any major acquisitions taking place, I'm projecting for the next year staying underneath $200 million drawn on that line.

Thanks, guys.

Michael, I think you probably know the answer to this, but in 2014 where we have about $500 million of mortgage debt coming due, our current anticipation, assuming the markets are open and available, that we would be refinancing that with unsecured, likely public debt. And so that is our most likely scenario in which we would execute on refinancing of the debt that is coming due in 2014.

Great, thank you.

Michael Knott, Green Street Advisors.

Bobby, I guess this one would be for you. I think the prior guidance on 2012 same-store NOI on a cash basis was minus 6 to minus 8, if I recall, and obviously that has improved. And just given that -- I'm curious what you attribute that to just given that on a cash basis most of your leases that you have signed would have free rent periods that may take those leases out pass this year. So I am just curious how you think about what -- that improvement?

We originally had looked at same-store cash NOI you referred to as minus 6, probably this year it is going to wind up all the way down to minus 5%. And you had something you were going to comment on. So I apologize -- what was it?

Bobby, I will jump in. Michael, I think we would be -- we always try to be a little cautious when we give you a forecast. I think what we just -- what we are trying to do is signal that we think it is going to be a little bit better, maybe minus 6 going to minus 5. If we err, we are going to try to err on the side of being cautious.

A lot of that improvement that you see in the last quarter has been OpEx related. The utilities have been continuing to come in attractively. Property tax appeals have been successful, and so a lot of that is driven frankly out of the OpEx side.

Okay, that is helpful. And then going back to an earlier question about market specific expirations, on page 26 as you pointed out the 2013 number for DC is mostly OCC. But it is also a big number in 2014, and can you just help us understand what that is? Is that the DIA building in Roslyn, Boston? What is in that number and should we worry about that?

No, I don't believe that is [Roslyn Boston] -- I don't believe that is DIA. That is -- that would be two leases -- the two last few leases up in Shady Grove. We also -- the FDA lease up there is a 2014 expiration as well, so we have three buildings a little over 100,000 feet each in Shady Grove that are all in 2014. And then we have a big exposure to Qwest at 4250 North Fairfax in 2014 as well. So those would be -- that would be 450,000 to 500,000 of the 555,000.

Anything you can say about any of those today?

No comment on any of those, although we are actively working on all of them, as you might imagine.

Okay. And then I think my last question would just be -- you mentioned the number of markets to exit over the next few years from an investment standpoint. Can you just talk about -- just remind us which ones are maybe the highest priorities where we might see sooner. Will we see any in 2013? Just talk about the challenge that you face there.

I think you have seen a really steady process of us knocking those out one by one. We obvious they got Seattle, Portland, Greenville in the last quarter -- the last year or so.

We anticipate that -- I would guess Denver is probably the next most likely one that we think we got some liquidity there. And then Philadelphia is one that we have been consistently thinking about as we move forward.

It depends on what level of activity we might have with a tenant here. The tenant has got 11 plus years left on their lease at this point. But it might be getting to a point where we would consider doing something with that. And then if we get some leasing done in Cleveland that would probably be one that would be a 2013 execution as well.

So I guess we would hope to be down by three more, maybe a little more than that next year. And so we continue to cut it in half. And originally we said by 2015 we feel like we would be done with all of them. I still think we'll probably be done a little bit sooner than that, but not -- we're not rushing it unless we feel like we're getting the fair value.

But in general you expect your profile will be more of a net seller in the next six, nine months, 12 months?

I am not sure we would say that. I think we continue to be very desirous of finding the right core concentration market opportunity, if you will, $100 million to $300 million in size, that will ultimately get us to our strategic execution.

I think if we weren't out there with the share repurchase program, rightfully so, shareholders might say what are you doing buying at full retail? But I think as long as we are a net seller at retail and -- sorry, been a seller at retail -- and been a net seller at retail, frankly, with our stock price where it is, I think we would feel like we have been good stewards of capital from that standpoint.

But we would want to continue to move towards the long-term strategic goal of getting up in that 60%, 70% range in our core and concentration market. So we hope we will find something that will offset the sales that we will have in 2013 from a core concentration market standpoint.

Okay, thanks. Nice job on the buybacks. Thank you.

Thank you. I would now like to turn the call back to Mr. Miller for any closing remarks. Please go ahead, sir.

Well, thank you very much. Just one last comment I would make before everybody disconnects. One of the things that we probably don't do a very good job of selling of ourselves is the operating capability that we have been delivering. And I mentioned earlier in answer to one of the questions, we have done 10 million square feet of leasing in the last 11 quarters. That is a heck of a lot of leasing in any environment, much less the environment we have been in.

But we have also been sellers of a lot of product at 100% occupancy. And so we were doing some calculations the other day. We are 87% leased on our overall portfolio and a little over 90% on our stabilized portfolio, the difference being that we bought a number of properties that were under-leased, if you will, in the last few years with the idea that we would lease them up and hopefully create some value.

Interestingly, if you just took our existing stabilized portfolio today and added back the roughly 2 million square feet of property that we sold with 100% occupancy in the last 12 months we would be 91.2% occupied.

So the only reason we are sitting at 87% today is we have been, we think, really good capital recyclers, selling over 2 million square feet of 100% occupied product with lots of gains associated with them.

We have been a big buyer of very low basis product that is under-leased that is holding back our occupancy levels to the 87% range. But if you combine -- like I said, if you combine the two -- if we hadn't sold 100% occupied and hadn't bought the under-leased, we would be 91.2% occupied today.

So we feel like that is a testament to the capabilities this firm has, but I'm not sure we do a very good job of selling that as well as we should at times. So I just wanted to bring that up before everybody got off.

And thank you very much for attending the call today.

Ladies and gentlemen, this concludes the Piedmont Office Realty Trust conference call. Thank you for your participation. You may now disconnect.