Piedmont Realty Trust Inc (PDM) 2012 Q4 法說會逐字稿

Greetings, and welcome to the Piedmont Office Realty Trust fourth-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.

Good morning, and thank you all for taking time to join us as we review our fourth-quarter and year-ended 2012 financial and operational results, as we also share our perspectives on the currently leasing and transactional environment. Last night, in addition to posting our earnings release, we also filed a Form 8-K which included our unaudited supplemental financial information. This information is available for your review on our website at www.piedmontreit.com under the Investor Relations section.

On today's call, the Company's prepared remarks and answers to your questions will contain forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements address matters which are subject to risk and uncertainties that may cause the actual results to differ from those we discuss today. Examples of forward-looking statements include those related to Piedmont Office Realty Trust's future revenues, operating income, and 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.

In addition, during the call we will refer to some non-GAAP financial measures such as FFO, core FFO, and same-store NOI. The definitions and reconciliations of these non-GAAP measures are contained in the supplemental financial information available on the Company's website. I'll review our financial results after Bo Reddic, our EVP of Real Estate Operations, reviews our leasing results; and Ray Owens, our EVP of Capital Markets, updates us on Piedmont's investment activities.

In addition, we also joined today by Bob Wiberg, our EVP of Development and Head of the Mid-Atlantic Region; Brent Smith, Senior Vice President of Capital Markets; Laura Moon, Chief Accounting Officer, and Eddie Guilbert, Vice President of Finance and Strategic Planning. All will be available during the question-and-answer portion of the call. Don Miller, our CEO, plans to limit his participation today, as he is recovering from some recent planned surgery.

I will now turn the call over to Bo.

Good morning, everyone. I'm pleased to speak with you today about this quarter's leasing results. Our leasing activity for the fourth quarter totaled approximately 900,000 square feet, which brings our total leasing activity for 2012 to almost 3.4 million square feet. Combined with the record leasing year we had in 2011, approximately 4 million square feet, that translates into leasing more than one-third of our total portfolio square footage during last two years.

We are even more pleased to have maintained our historical average tenant retention ratio of approximately 70%, despite the tepid job growth environment and economic uncertainty the US has experienced during this time period, politically affecting large corporate tenants. You may recall that our primary customers are large creditworthy the tenants, as evidenced by approximately 80% of our portfolio being leased to tenants taking over 40,000 square feet; and over 66% of our annual lease revenue comes from investment-grade rated companies.

Our continued leasing success has increased our overall occupancy metrics by 100 basis points or more, when compared to the previous year. The total portfolio is at 87.5% leased at year-end, versus 86.5% at the beginning of last year. And our stabilized lease percentages was 90.5% at year-end, up from 89.1% a year earlier. In the fourth quarter, the larger completed leasing transactions included a 395,000 square foot 10-year renewal in Minneapolis for US Bancorp's headquarters; a five-year renewal of Lockheed Martin's 115,000 square foot requirement at 9221 Corporate Boulevard in the Washington DC market; an approximate 41,000 square foot new lease for 12 years with Standard Parking, in Aon Center in Chicago; and a lease for 45,000 square feet that has been signed for 5-plus years with Wells Fargo, at our Glenridge Highlands building in Atlanta.

During the year we've seen meaningful positive net absorption in our portfolio, and importantly, the lease-up of several large blocks of fully vacant space, such as 133,000 square feet with the US Foods at River Corporate Center in Phoenix; 145,000 square feet with Schlumberger at 1200 Enclave Parkway in Houston; and 301,000 square feet with Catamaran, at Windy Point II in Chicago.

We strongly believe that the contributing factor toward our leasing momentum is that our properties are consistently among the highest quality assets within their respective submarkets. Furthermore, we believe our unique leasing model helps us achieve this success across a geographically-dispersed portfolio; particularly the expertise and efficiency of our in-house leasing by our asset management team that is focused on renewals and new leases with large corporate users of our office space. And under the oversight of our asset management team we augment this effort with top-quality, submarket-focused, third-party brokers, sharpshooters in their respective markets, if you will, to ensure our properties see all potential tenants in the market.

You'll continue to see us adapt this model as our portfolio grows in scale and concentration in particular markets. For instance, our recent hiring of Bob Wiberg to run our mid-Atlantic Region is an example where, in this circumstance, our scale in the market warranted a stronger local touch point for operations, acquisitions, and leasing.

As we discussed in the past, it is important to note that our leasing achievements are tempered by some government consolidation that will impact our portfolio in 2013 and result in additional available space in the DC market at One Independence Square, beginning in March; and at 3100 Clarendon, in the heart of the R-B Corridor, at the end of this year.

Looking forward, however, we have 858,000 square feet of signed leases that have yet to commence; an additional 1.8 million square feet of commenced leases that are currently in abatement, which bodes well for our future cash flows once these leases begin and the abatement period burns off, resulting in a 10% contribution to our economic occupancy. In addition, think it's important to note that we have now stretched our average remaining lease term to 6.9 years, which gives us good visibility into our revenue stream over the next several years.

Looking at our lease expiration schedule, which is detailed in the quarterly supplemental information package, you can see that we have relatively modest leasing exposure for 2013, other than two expiring government leases, which I've discussed. There is one large government lease reflected in the 2013 expiration schedule that relates to the National Park Service, which has been in holdover since July of last year, for 220,000 square feet at 1201 Eye Street in Washington. Parks Service and GSA have just begun looking at their future space needs and discussing the possibility of a renewal.

We will be entering into a multi-year period with relatively low lease expirations in 2014. Any new leasing achievements over the next few years should feed our organic earnings growth; and when combined with any material acquisition accomplishments, should drive FFO growth for the Company. That said, the leasing market in general terms remain soft, with the exception of markets with meaningful ties to technology, energy, or healthcare.

With that, I will turn the call over to Ray Owens to review our 2012 capital markets transactions and view on future activity.

Thanks, Bo. Fourth quarter transactional activity was limited to a land parcel purchased adjacent to our Glenridge Highlands building here in Atlanta. This transaction was both an offensive and defensive move, enabling us to control the land parcel adjacent to our office building, which could provide the opportunity to enhance our current asset in the future through the addition of office space or an added amenity, such as a hotel. The site has direct highway access and is currently zoned for office.

We did end the year as a net seller of seven assets totaling approximately $100 million, which advanced our strategy that we stated during our listing an IPO in 2010 -- that is, focusing investments on fewer markets, the 10 to 12 major US office markets. The seven dispositions allowed us to exit two markets, as well as sell our last two industrial assets. We continue to pursue a number of potential acquisitions. And in general, our pipeline is more robust than what we saw in the latter part of 2012.

We remain focused on CBD and urban infill locations in cities we classify as concentration markets. I would add that during the second half of 2012, we continued to witness a disconnect between real estate operating fundamentals and pricing of properties in some of these higher barrier markets. Despite our acquisition goals in 2012, we continued to find investing in our own stock to be a better allocation of capital. We will continue to evaluate the risk-adjusted returns of all our investment options and maintain our discipline.

During the fourth quarter we continued to utilize our stock buyback program, effectively buying our own Class A real estate at a discount. We purchased approximately 0.5 million shares of our common stock at an average price of $17.48 per share, and increased the total shares purchased since December 2011 to 5.5 million shares, at a average price of $16.83 per share or $92 million. The two-year, Board-approved, stock buyback plan had $208 million of capacity remaining. And we plan to use the program when our shares trade at what we believe is a meaningful discount to NAV.

As I mentioned earlier, we began 2013 already seeing more investment opportunities. We believe our low leverage and national platform will help us successfully compete for high-quality, Class A office properties in our target markets.

Some of our strengths to help us achieve this are our balance sheet, with a debt-to-gross assets ratio of 27.2%, we have the capacity to add over $1 billion of debt and still remain under the 40% leverage threshold; our $500 million line of credit, which is private debt, 117.5 basis points over LIBOR and can be extended through 2017; the cash and capacity on our line, which, as of year-end, totaled $365 million; and our investment-grade credit rating, which, if the opportunity arises, will allow us the potential to access the unsecured bond market at attractive long-term pricing levels.

With that, Bobby will review some of the financial highlights for the quarter and provide guidance for 2013.

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

For the quarter, we reported net income of $0.09; FFO of 0.33; and core FFO of $0.36 per diluted share. Annually, we reported net income of $0.55; FFO of $1.35; and core FFO of $1.43 per diluted share. That's in the upper end of our previously-provided guidance. Core FFO for the current quarter includes the add-back of approximately $5 million of net expense associated with damages incurred in our New York and New Jersey portfolio, primarily at our 60 Broad building in the financial district in lower Manhattan, where water penetrated some portions of the basement as a result of the tidal surge of Hurricane Sandy that occurred late in October. Obviously, our damages pale in comparison to the struggles many had, and continue to endure, related to the storm. And our deepest heartfelt thoughts and prayers go out to the victims across the region.

60 Broad Street was opened to tenants within approximately 2 weeks of the event, and is completely operational with power from Con Ed. We are diligently working with our insurers to recover the majority of our losses, and have already received some insurance recoveries that are reflected in the fourth quarter's net casualty expense.

Accounting standards require the recognition of losses immediately upon occurrence. And the offsetting insurance recoveries are not recognized until receipt or confirmation of payment. We anticipate that the majority of these losses which relate to cleanup and repairs, equipment replacement, and rent abatements, will ultimately be recovered and recognized as insurance reimbursement income or contingency gains over the next few quarters when collected. This accounting treatment for insurance recoveries is similar to the litigation settlement expense that we reported in the third quarter.

Operating revenues, before management fee income and other income, were up about 1% for the year and flat for the quarter, compared to the prior annual and quarterly periods, reflecting increased occupancy by year-end 2012, but offset by downtimes between leases and some rental rate roll downs and abatements on operating expense reimbursements, which are not included in straight-line rent adjustments.

Looking at expenses, quarterly G&A cost decreased about $1 million compared to the same quarter a year ago, as we recorded lower compensation expense which is tied to our stock performance plan. On an annual basis, total G&A expenses reflect lower compensation expense and lower legal expenses associated with the timing of insurance recoveries. We anticipate that our normalized quarterly run rate for G&A is approximately $6 million to $6.5 million, with some seasonal variances associated with the various recoveries and timing of discretionary annual stock compensation awards.

The annual results for 2012 and 2011 also reflect the discontinued operations and net gains from the disposition of seven properties during the current year, as Ray mentioned, as well as the disposition of 35 West Wacker and two other wholly owned assets in 2011. On an AFFO basis, we generated $0.81 per diluted share, covering our current dividend.

As Bo discussed earlier, we are approaching the end of an extended period of high lease expirations. Our same-store NOI has declined throughout this multi-year period, with rental rate roll downs tied to the slower economy, and downtimes between expirations and the commencement of new leases. We believe we are near the end of this trend. In fact, our fourth quarter same-store NOI actually improved on both a cash and accrual basis by approximately 2%, with the commencement of several leases in the second half of 2012. However, based on known -- a move out in March of the OCC, our same-store NOI is expected to be down slightly, 2% or 3%, in 2013. Ignoring the impact of the OCC lease, overall same-store NOI is expected to be positive in 2013.

On a quarterly basis, this same-store NOI ratio will vary considerably in 2013, as will our occupancy percentage and our core FFO. This is due to expiration and commencement of various leases. Our overall occupancy rate at the end of 2012 was 87.5%. And this percentage is expected to be between 88% and 89% by the end of 2013, irrespective of anticipated property acquisitions or dispositions.

The combination of the OCC impacts and the decrease in net operations as a result of the sale of seven assets in 2012 leads us to introduce guidance for 2013 in the same range as 2012's guidance, with core FFO expected to be between $1.35 and $1.45 per diluted share. This annual guidance includes the continued repositioning of the portfolio, with dispositions approximating $300 million, and acquisitions estimated to be about $400 million during 2013.

Additionally, we anticipate the FFO results in 2013 to exceed the core FFO guidance, as the insurance recoveries I've previously discussed from the litigation settlement and for our Hurricane Sandy expenses are collected.

Looking further out, as the expirations schedule subsides in 2014 through 2016, and the burn off of rental abatements of 1.8 million square feet of leases concludes, we anticipate marked growth in cash NOI and core FFO.

That concludes our prepared remarks today, and we'd like to open the lines for questions. We will attempt to answer all of your questions now, or we will make appropriate later public disclosure is necessary. We do ask that you to try to limit your questions to one follow-on question so that we can address as many of you as possible.

Operator, will you provide our listeners with instructions on how they can submit their questions?

(Operator Instructions). Dave Rodgers, Robert W. Baird.

With regard to acquisitions and dispositions in the guidance, I think I had read $400 million of acquisitions, $300 million of dispositions. Can you talk about what's in that disposition pool? What the average yield is on what you're looking to sell, and whether or not an Aon Center JV or sale is contemplated for this year?

This is Ray. What we are anticipating is probably Philadelphia would be the largest one in there instead of Aon. We would probably still look at possibly doing something on Aon the latter part of the year, but that's really not in that guidance. The others would be either assets that are in submarkets that we are trying to get out of, as we continue to mention in our disclosures. Those will probably be building somewhere in the 8 to 9 range.

And maybe, either Bobby or Ray -- would have you modeled for acquisitions, i.e., what is the positive or negative spread on the reinvestment?

Well, Dave, as you can imagine, that's going to depend on what the opportunities are. What we are seeing in the core markets, our concentration markets for CBD and urban infill -- those cap rates are probably going to be in the 5 range, or around 6 -- between 5 and 6.

Okay. And then maybe a question for Bo or Bob. It sounds like the National Park Service activity is still fairly early. But you did highlight it in the supplement as something you're working on. That building had a pretty good loss to lease for some time. Do you expect to be able to get all of that back if you go with the National Park Service? Or are you taking a little more cautious view on DC-area leasing; and, perhaps, going back with the government means you give up a little bit on the rental rate side. Can you talk about that a little?

Bob, do you want to address that for us?

Sure. We have remained in conversation with the National Park Service for a long time. And really, their situation is defined by other moves in the Federal government sector and opportunities that they may have. We continue to proceed with them. It does appear that there is more clarity on what is in and what is out, as far as their relocation options. And we think it is probably trending favorable toward us.

And with regard to the leasing there -- is that the best use of that space today? And can you close that gap on where their lease had been relative to market?

Dave, this is Don Miller. I think there is a subtlety to your question; and that is, obviously they are paying a little below market today. And if they do a short- to intermediate-term renewal, we would hope that there will be some capture of some of that difference in rent, maybe even going back -- probably even going back to the original expiration of their lease. And so there could be a minor windfall from that if we are able to do an intermediate-term renewal.

Obviously, longer-term, if they decide that they want to stay in the building, we'd love to have them. We also will want to try to continue to talk about other alternatives for them. But by and large, if they want to stay, we'd love to try to accommodate them.

Anthony Paolone, JPMorgan.

If I look at your lease expirations for 2013, it's about 1.9 million square feet. And by my math, it seemed like about 900,000 of that is identifiable with some of the bigger, chunkier things that you all talked about. So my question really relates to the rest of it, which it seems like it's maybe 1 million square feet of what we will call regular way leasing. How are you looking at that? And how conservative or not are you being with respect to rental rate changes, retention rates, and so forth?

Tony, this is Bobby. I'm going to try and address that. As we look at the entire year and all the expirations that are out there and renewals that will take place, we're looking at perhaps a slight roll down in some of the rates there. But do remember that we've got 2.6 million square feet of leases that are signed, or have been banked, that will slowly be coming online is the year 2013-2014, and even into 2015, progresses, that will give us some uplift as we have some roll downs.

Great. I guess what I'm trying to understand is your disclosure has been very good. And I feel like we've all had a pretty good pulse as to what's coming on that front. So you're putting some insurance reimbursements in the number, and the low end of your range at $1.35 just ostensibly maybe looks a little on the light side. So I'm just wondering where you see -- what has to happen to get to the low end of your guidance? Or how do we get to the $1.35?

Well, as you look at the model and the delta, the changes that take place from 2012's actual results, looking at what we forecasted for 2013, there's probably $0.025 worth of disposition impact for the seven properties that have rolled out. And there was an earlier question asking about acquisitions. We have expressed to everyone that we may forego some FFO numbers in order to get long-term appreciation, buying properties in some of our concentration markets.

So I'm not expecting a huge delta even though we've got $400 million worth of acquisitions. Those acquisitions, as you are aware, will come in later in the year. And then you do have the expiration that you have already identified that is associated with the OCC. Their move-out that takes place at the 1st of March -- it's probably a $0.075 impact on us on an annualized basis.

So we will have to overcome that with leases. But we've got, at 200 Bridgewater, we have got Brother and Dendreon coming online. At Aon, you'll have the full-year impact of KPMG's lease, that was 222,000 square feet to begin in August of this past year, and we will have the full-year benefit of that. We'll have United Healthcare, also, that will contribute, as well as the Schlumberger lease, as well as many others.

Tony, the other aspect, I think, to your question was of the -- it sounds like you're doing the math and saying, OCC is 300, I can do that; [IDIA] is going to be rolled out at the end of the year -- that's really not until December 31, that doesn't really affect this year's number, but that's part of the $2 million you're talking about. National Parks Services is 200,000-some feet in there. We obviously are hopeful that that will certainly be at least through the end of 2013, if not well beyond.

And so now you're talking about the other 1 million square feet. And we have a pretty good sense, obviously, of what that 1 million square feet is doing. There is a fair amount of it that's rolling out this year of leases that we've known about for some time that are in our 2013 numbers already. So there shouldn't be any negative surprises from tenants departing this year that are not in our numbers. The real question is, how much new lease activity do we get to replace it? And that's probably the bigger question for us.

Okay. And do you feel like you are being conservative on that front? Or how are you thinking about broader backdrop for that?

I don't know that we'd say we are being overly conservative, but we are trying to take into account when we think there's a really good chance a tenant is going to leave, that we're not rolling them beyond their existing lease term right now. And like I said, the bigger question is how much new leasing do we get done relative to what we have pro formaed? We always try to be cautious on that front, particularly given the economic environment we're in.

Yes, I was going to comment. I read one of the research reports this morning and I thought one of the more astute questions was focusing on the new leasing that's taking place. We've historically signed 70% of our lease expirations. And you can use that for modeling purposes, I think, because that's happened since the last seven or eight years.

Attracting new leasing right now, I'd say the leasing environment is a little light, except in some areas that was mentioned earlier by Bo when he said the technology area, the health-care area, and then energy is where we're seeing a lot of interest, a lot of tours taking place at the properties.

Thank you. And feel better, Don.

Thanks, Tony.

Michael Knott, Green Street Advisors.

Don, you sound pretty good. I trust that you're recovering quickly. Bobby, was your NOI forecast for 2013 -- I think you said minus 2 to minus 3 -- was that cash or GAAP?

It is down 3% on a cash basis; 2% on a GAAP basis.

Okay. And then can you repeat the very last comment that you made in your prepared remarks? You talked about NOI growth and FFO growth, but I didn't quite follow you.

Do you mind if I turn and look at the script, try to figure out what you were --?

Sure. I think it was your very last comment.

Well, I was trying to make a reference. I was talking about core FFO and its relationship to FFO. This current year we had sort of a negative, if you will, impact on our FFO due to some one-time nonrecurring items. We take those nonrecurring items such as the litigation expense out. And we took out the impact of the Hurricane Sandy damages. And so we had a better-looking core FFO number.

This next year -- and all of our guidance is in terms of core FFO -- we will be having add-backs as we get insurance recoveries in 2013 that relate back to litigation and back to the damages from Hurricane Sandy. We're just trying to make sure -- as we look at the forecasts that come out from the analysts, sometimes you refer to FFO; sometimes you refer to core FFO. We're trying to draw a distinction between the two, that there may be a $0.03 or $0.04 difference between those.

Got it. And then I will just throw out two quick questions, and I will cede to the floor. First would be -- can you maybe just go over what would be an expected case for the OCC re-leasing? And then maybe a poor case? And then also we saw that you're maybe marketing 1200 Enclave in Houston, and just curious your thoughts on whether that's still an opportunistic market for you. Thanks.

Michael, it is Don. We don't have -- in our base case, we don't have OCC leasing up until, I think, just a sliver of space late in 2013 is the first time we have anything going in there. There actually has been some activity at the building, positively and surprisingly. And Bob could address that if you want more detail. But overall, I'd say nothing imminent and nothing to get too excited about yet. But the point is, there's more activity there than we might have anticipated.

So that is the first -- so there's not much of an impact, if at all, on 2013 to any leasing activity at OCC. Our poor -- I think you said the poor or the downside would be obviously if we hold out and try to get the whole building leased. It just takes longer to get the next agency to come along. Then I think our expectations would be, we'd be lucky to do something in 2014.

On Houston, yes, I guess Real Estate Alert or somebody reported that we were selling the building that we leased to Schlumberger in Houston. Obviously, we should have a really nice round trip there. It will continue to be an opportunistic market for us. But obviously by definition, an opportunistic market is one in which we think we can take advantage upside and value.

We've done that with this particular asset in Houston, maybe a little harder going forward, unless we decide to do something -- a partial development deal on our land that is there, adjacent to our other building in the Enclave. But I think buying in Houston will be a much tougher opportunity to make money going forward than it was when we did this deal.

Michael, this is Ray. I'd mirror what Don was saying. We're happy with the type of interest that we are already receiving on 1200 Enclave. But think it's fairly consistent that value-add deals like that are becoming harder and harder to do, and find. We will continue to look for those. There's a lot of capital has been formed not only to buy core, but to buy value-add type deals that might make it a little more difficult for us to find that same type of transaction.

Right. Thank you.

(Operator Instructions). John Guinee, Stifel.

First, Bob, welcome aboard. Nice to have you there. And then second, Don, you're a very smart guy, as we all know. Can you just go to page 49? And what we've got is, we've got economic lease percentage of about 76.7%. What is that number going to be like at year-end 2013? Well, everyone is trying to figure out the ramp up here. And I think if you just go to the very last number in your supplemental, and tell us what your projection is for economic lease-up.

Yes, let me see if I can tell you exactly what we are -- it looks like we are moving that from about 77% to 81%, 82%, near the end of this year. And as you can probably imagine, that will average just at 80%-ish for the year. So as you can imagine, that's probably a function of the fact that obviously you've got free rent burning off in some of these leases. You've got new leases commencing. And you've got a few rolling out; in particular, OCC. It doesn't reflect any new economics associated with that deal at the end of this year. So there's obviously some offset to that. But that's probably our best estimate at this point, John.

How about year-end 2014?

I don't think we've carried it out that far. We probably should. And if we do, we'll be glad to disclose that to you all.

Okay. And then on the page --

But John, I think -- hey, John, real quick -- I'm sorry to interrupt you. I think the answer is it should move up materially from there as well, particularly if we have some leasing that we get done this year.

Okay, great. And then page 29, you guys do a great job of showing your cash rent and accrual rent roll up and roll down. But you only include about two-thirds of the leases. How does that look if you include all the leases, Bobby?

Well, John, you're comparing a number of 0, if it's vacant space. It's been vacant for the current year. That's the reason we exclude it. So that --

So you can look back on two or three years ago, when it was last occupied, right?

Right, we could. I don't have that data for you. But when I'm trying to do for the shareholders and for the analysts is give them an analysis of what's going to happen to our annualized lease revenue, as a result. And you're looking back only a year, probably not three or four years.

Okay. And then lastly, Bobby, you guys do a great job on page 33 of bifurcating between non-incremental and incremental capital. What is the theme on tenant improvements and leasing commissions that is actually incremental capital?

John, I would say that there is a little bit larger -- I always get the terms confused -- what I call good capital -- little larger good capital right now than there will be going forward. Because not only do we buy some of these value-added deals, we've also had a handful of spaces that have gone down for a long enough period of time that -- for example, the Catamaran is a good example that where that was down just over a year before we released it. And so that became good capital. As a result, we're having a little bit larger percentage of our capital in that bucket now than I think we'll have going forward.

But obviously, our overall capital needs are also going to decline as we move forward, pretty substantially, just because of the sheer volume of leasing activity. It should slow down, now that we've moved through the heavier part of our lease rollover. And just to help --

Does the incremental capital, Don, pertain to what I call recent acquisitions, and capital that you probably would capitalize into the acquisition versus --?

Yes, John, a meaningful amount of that is related to -- GE in Chicago or the Schlumberger lease in Houston, or some of the other larger deals that we've done recently on some of the new leasing. So yes, quite a bit of it is, actually.

All of that capital, John, is included in our analysis on page 34.

Perfect. Thank you very much.

Young Ku, Wells Fargo.

Thank you. I just want to go back to the occupancy comment that Don made earlier. So you are assuming that economic occupancy is going to go up about 4%. But a big piece of that is OCC, which on a per-square-foot basis, is pretty high. So how should we compare that to the NOI increase that you are expecting for 2013?

I think I -- I may not understand, but we're going to -- we think we'll gain 4%, notwithstanding the fact that we are losing 1.5% to 2% on the OCC deal, right? Does that make sense? So that is net --

Right, so how does that translate to the net NOI increase -- net of OCC -- is that more like 2%?

I am going to let Eddie try to address that.

Jang, OCC contributes roughly 4% of our same-store NOI. So you can think, if you add back OCC, it would be a 4% swing. So from, call it, negative 3% to positive 1%. So that was one of the comments that Bobby had made in his prepared remarks.

Does that answer your question?

Okay, Operator, do you want to see if there are any more questions out there?

(Operator Instructions). John Guinee, Stifel Nicolaus.

Just to make sure we're all clear, what you are basically saying is, you think that economic occupancy is going from 76.7% into the 81% to 82% range, despite losing 4% because of the OCC expiration?

Yes, by the end of the year.

Got you. Okay. Wonderful. Thank you.

Brendan Maiorana, Wells Fargo.

I'm sorry, I think the Young may have got disconnected, so I just wanted to follow up on that, and maybe on John's comments too. So Andy, if I understand you correctly, you've got 2% of your space that moves out OCC. You are expecting a 4% pickup in economic occupancy. So, effectively, ex-OCC, it is a 6% pickup in economic occupancy. However, given that rents at the OCC space are double the average for the Company, a 2% overall portfolio leased rate is 4% of NOI. So if it's a 4% net pickup on square footage, given that rents at OCC are double the average, it's about a 2% net pickup on NOI run rate, end of the year 2012 versus end of the year 2013?

Yes, but we are mixing apples and oranges a little bit, because we're talking about lease percentages versus ALRs. We probably have to do a little bit more digging to get exactly right on that, Brendan. But I think your point is well made, that OCC would be about double the average NOI per square foot. And so as a result, the impact would be different on lease percentages versus economic percentages.

And let me weigh in there. One of the complexities you have in our model is that we have large tenants. As we've said, the average lease is between 35,000 and 40,000 square feet. And so you get that chunky volatility that happens. So, during the course of the year you get, early on, the negative impact from the OCC. And it's not until the other leases pick up our abatements burn off that you get the benefit. So the numbers we've given you are as of the end of the year.

Yes, right. I understand they're sort of -- the movements during the year are going to move around, but just year-end versus year-end.

So then next question, Bobby, is if we look at where economic occupancy is today versus overall occupancy, it's low. It's a widespread. But there's probably -- but what do you think a fair spread is, normalized as you look out over a cycle of where you typically would have economic occupancy versus the reported stated occupancy in your portfolio? Because I imagine that that number isn't a 0, or not a 0 very often.

Brendan, you could do a number of different math problems on that one. And it really comes down to, ultimately, your average free rent in the market, to a great degree. And so as a result, a lot of it depends on where you are in the cycle.

If you were to suggest that every market is a 10-year market with a one-year free rent, then you would suggest that everyone in the market should have about a 10% differential between economic occupancy and physical occupancy. Presume -- now, that is the case in many markets. But it's not the case in all of our markets, obviously. But it is in many.

But I think if you blended those all together and said, hey, a lot of our average markets are -- 10% of the rent goes to free rent. But then you say a handful of those markets are giving little or no free rents, or blend those two together, that's probably what you'd expect today at this point in the cycle.

But obviously, as the markets improve, if they ever do, then we should see a lot smaller -- I use that term, lost to lease, if you will, in parentheses -- but to see a lot lower one over the course of time. But at this point in the cycle, 10% times the number of markets you are giving a month a year in free, is probably a pretty good guess.

And if I could add to that, I would also say it's a function of the lease expiration schedule. So as we head into 2014 through 2016, we've got low lease rollovers. You'll see that gap narrow a good bit.

A great point, Eddie. Great point.

Sorry, Don, I was just trying to follow that math. If you've got 10% space rolling a year, you on average give a year of free rent -- so you're saying -- okay, 10%. But your spread right now is 7% or 6%. So are you saying that you think, right now, it's actually more narrow than average?

Well, first of all, I think it's about 10% right now; actually, from 87 to 77. But --

Sorry, yes, 87 to 77. I'm sorry, I was looking at --.

I'm not suggesting that that's exactly why. But I think that's a pretty good proxy for why there is a 10% difference today, is that a lot of our markets were given about 10% free rent. But I think Eddie's point is really well taken; you don't want to miss that one, which is -- where we've had to give a lot of free rent because our rollover schedule has been higher, that probably drives a larger loss to lease, if you like that term, or difference in that economic occupancy.

As we move into a period where we have a lot less rollover and a lot fewer new leases coming into the portfolio, that difference should subside dramatically.

Okay. Just from an outsider perspective, and you guys are a large tenant landlord, so it's a little bit different than some of your peers that are out there. Anything -- and you've only been public for a couple of years. And you guys provide the staff, which is very helpful. Anything that we could get with respect to historical context, I think would be helpful. Because it does strike me that this economic to stated occupancy percentage is wide. But I'm not sure if it is wide by double, or if it's wide by 20%. I'd be interested in where it normally is for this portfolio over the long term. So anything that you could provide would be pretty helpful.

We will go back and look at that, Brendan, and get you some information; and probably put it as a supplemental exhibit, in the supplement that we have, okay?

I would tell you, Brendan, I think your intuition is right. This is probably the highest economic loss we would have seen anywhere in our history, at least so far. Not that I think there's a lot of comparable periods for us, obviously, given that we have a fairly short public history. But if you think about the fact we are coming off the highest rollover percentage, at a time when the market is giving its greatest level of concessions, it's hard to believe that we wouldn't be seeing the highest level of economic loss at this point than we should see at any point in the cycle.

Yes, okay, great. All right. Thanks, guys.

Thank you.

Michael Knott, Green Street Advisors.

I was going to ask about the same exact question as Brendan. And I echo the comment that getting maybe a historical time series in an 8-K, or as an addition to your supplemental, might be helpful with percent leased and maybe physical occupancy and economic occupancy, just so we can see that. That would be great. Thank you.

Okay. Well, let's get to work on that. Thanks.

And with no further questions in the queue, I would now like to turn the call back over to you, Mr. Bowers, for closing remarks.

Okay. Well, we appreciate everyone being on the phone today. And I will tell you, we have been through a period of uncertainty. If you look back at the consequences of Hurricane Sandy and its aftermath -- even if you look at the tragedy of Sandy Hook; and if you look at the Presidential elections and the government, and I will use the word incompetencies in dealing with unemployment, dealing with our deficits -- it's been a tough period of time that I think has had an impact on the leasing and leasing prospects.

I really feel quite fortunate that we have gone through what has been a pretty tough period of expirations here in the last three years. If you think about it, our leasing team -- and I congratulate them for leasing 50% of our total square footage. And also looking over at our capital markets team, preserving for us a very strong balance sheet, where we can capitalize today on opportunities that come up for us.

And then, even still, as we've talked a lot today, I feel like we are really quite blessed and fortunate to have this backlog, if you will, of 2.6 million square feet that will be contributing to our cash NOIs over the forthcoming year and a half.

So we are optimistic, long-term, as you look at our numbers. And we appreciate your support. Thank you.

And again, that does conclude the call. We would like to thank everyone for their participation today.