Piedmont Realty Trust Inc (PDM) 2013 Q1 法說會逐字稿

Greetings, and welcome to the Piedmont Office Realty Trust first quarter 2013 earnings conference call. At this time all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. (Operator instructions).

As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Robert Bowers, Chief Financial Officer. Thank you, Mr. Bowers. You may begin.

Thank you, operator. Good morning. Welcome to Piedmont's first quarter 2013 conference call.

Last night, in addition to posting our earnings release, we also filed our Quarterly Form 10-Q and a Form 8-K which includes our unaudited supplemental information. All of this is available on our website piedmontreit.com under the investor relations section.

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

Examples of forward-looking statements include those related to Piedmont Office Realty Trust 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 discussions related to risk associated with forward-looking statements contained in the Company's filings with the SEC.

In addition, during this call, we will refer to non-GAAP financial measures such as FFO, core FFO, AFFO 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.

We are joined on today's call by several members of management, all of whom can provide their perspective during the question-and-answer portion of the call.

I will now turn the call over to Don Miller, our Chief Executive Officer.

Good morning, everyone. Thanks for taking the time to join us this morning as we review our first quarter financial and operational results and share our perspectives on the current leasing and transactional environment.

First, taking a look at this quarter's leasing, the amount of complete leasing activity is quite often less in the first quarter than in the rest of the year, in our experience. However, this year it was particularly true, given that we do not have the number of lease expirations to contend with as we have had over the last three years. As such, during the first quarter of 2013 we executed just under 500,000 square feet of total leases, 75% of which was renewal related and another 25% was with new tenants.

If you highlight a few of the larger renewals we signed, we signed approximately 150,000 square-foot 12-year extension with FedEx at our Spectrum Loop asset in Colorado Springs, Colorado. We signed an approximate 70,000 square-foot 11-year renewal with the law firm of Miller Canfield at 150 West Jefferson in downtown Detroit. We signed a 50,000 square-foot, 7-plus-year renewal with Lockheed Martin at 400 Virginia in Washington DC. And we signed an approximately 45,000 square-foot renewal and expansion with Morgan Stanley at 1901 Main Street in Irvine, California.

The good news is that the least expirations over the next three calendar years are estimated only to be around 6% or less annually of our revenues, although we do have a number of big blocks of vacant space yet to sell. That said, except for a few select markets, we are still not seeing the economic recovery we would like to see to generate enough demand in the office sector.

Looking ahead, we are closely monitoring leasing trends and activity in Washington, D.C., where we have three government tenants whose leases have expired or are expiring this year. First of those is the National Park Service which has a little over 200,000 square feet, and they remain in holdover status. But we continue to discuss an intermediate-term renewal with them at 1201 Eye St.

Secondly, the Office of Comptroller of the Currency vacated spaces planned in March, which is the primary factor for the decline of our occupancy statistics for the quarter. While it is still too early to tell, we are actively marketing this space located at One Independence Square to multiple potential prospects.

And finally, as we noted in December, we received a termination notice from the Defense Intelligence Agency for 200,000 square feet at 3100 Clarendon. This property is located in the attractive Rosslyn-Ballston Corridor the top of Metro stop. Although the DIA is not scheduled to exit until year-end, we have already begun marketing its space.

Fortunately, other than these three leases, we have very little additional lease expiration exposure for the remainder of this year.

Moving to the capital markets activity during the quarter, we had a very active quarter. We were successful in making two significant asset purchases in our identified concentration markets during the first quarter, and we executed agreements for two sales. One was a non-core asset and the other was for a value added asset that will result in a very attractive to return for our stockholders.

Arlington Gateway, as many of you already know, is the premier Class A 12-story 334,000 square-foot asset located in the heart of the Rosslyn-Ballston Corridor, just two blocks away from the Ballston Metro station. It is currently 99% leased with no government exposure. It is beautifully constructed and surrounded by great amenities.

This is clearly a trophy asset that combined with 4250 North Fairfax and 3100 Clarendon gives us a significant presence in the R-B Corridor.

The other acquisition in the quarter, 5 & 15 Wayside Road, is a two-building Class A office complex located in Burlington, Massachusetts, which is currently a very strong submarket of Boston that we are particularly bullish on. The buildings are interconnected and combined for a total of approximately 270,000 square feet and they were constructed in 1999 and 2001 respectively. The complex is currently 95% leased to three tenants, with numerous amenities within walkable distance.

From the disposition side, we decided to sell 1111 Durham Avenue during the quarter and recognized a non-cash impairment charge. This was a non-core legacy asset constructed in 1975 and located in South Plainfield, New Jersey. Motorola's lease in the building expired in January, and given the prospects for the South Plainfield office market, we decided to sell the property on a vacant basis to a developer who plans to rezone the property for residential.

Conversely, we also entered into a contract to sell 1200 Enclave Parkway during the first quarter for approximately $48.8 million or $326 a square foot. As you may recall, we acquired this property as a value added opportunity in 2011 for $18.5 million when it was approximately 18% leased.

During 2012 we completed two leases with Schlumberger Technology Corporation, which resulted in the building of actively being fully leased to a creditworthy tenant through 2024.

Given the strength of the Houston market today, there was substantial interest in the asset, which resulted in an attractive internal rate of return for our stockholders when the transaction closed earlier this week. I think this is a good example of what we mean when we talk about opportunistic markets. We take some leasing risk, hopefully create value, intend a more modest holding period, and those are all in markets that tend to have lower barriers to entry.

From a broader perspective, as we look at both the leasing transactions and capital activity for the remainder of the year, I believe we are still in a pretty volatile market with sporadic wins and losses. The office sector continues to bump along the bottom of the economic cycle with minimal lasting office demand growth.

I'm encouraged there are select areas of growth, mostly tied to energy, technology, or healthcare industries. We have reasonably good pipeline of leasing prospects that we will expect to drive to our occupancy for the remainder of the year. But overall this anticipated growth for us is driven more by office moves and relocations rather than any real broad-based economic growth and expansion.

Finally, I am very pleased to note that after the court granted our motions for dismissal last year in the lengthy class action litigation, we received a final court approval on our settlement of the claims in late April. I expect that this will be my last update on the subject.

With that I will turn it back over to Bobby to review the financials and our expectations for the remainder of the year. Bobby?

Thanks, Don. I will discuss some of our financial results for the quarter, but I encourage you all to review the 10-Q, the earnings release and the supplemental financial information, which were filed last night, for more complete details.

For the quarter, we reported FFO of $0.36, core FFO of $0.37 per diluted share. AFFO was $0.22 per diluted share, covering our first quarter dividend.

The three-month results include an impairment charge of $6.4 million related to our decision to sell the 1111 Durham Avenue property that Don mentioned. We also incurred approximately $1.2 million in acquisition costs associated with the Arlington Gateway and Wayside Road acquisitions, which are adjusted to arrive at our core FFO for the quarter.

The change in our balance sheet assets from year-end is primarily due to these acquisitions, which were funded by draws on our $500 million line of credit, bringing the line balance to $412 million at quarter end.

Our debt to growth assets ratio was 30.8% as of quarter end, with a fixed charge coverage ratio of 4.8 times, and net debt to core EBITDA ratio of 5.2 times. We have no debt maturities in 2013, but we have approximately $575 million in secured debt maturities next year.

Looking more closely at individual financial metrics, rental income was up about 4% this quarter compared to the same quarter in the previous year, reflecting the commencement of several significant leases over the previous 12 months as well as the current quarter's acquisitions. We are coming off a multiyear period of very high lease expirations, renewals and new leasing activity. And we consequently have about a 10% gap between the economic occupancy and our reported overall occupancy of approximately 86%.

There are 400,000 square feet of leases yet to commence related to currently vacant space, and another 2 million square feet of leases that are in some form of abatement, which will contribute to our cash NOI growth over the next few years and offset some of the previously reported rent roll downs.

Our stabilized portfolio occupancy was 88.9% at March 31.

Our same-store net operating income on a cash basis was flat for the quarter. But this will vary from quarter to quarter, like our FFO, with commencement of new leases offset by the OCC lease expiration. We anticipate same-store NOI on a cash basis will be down approximately 3% for the year.

Our G&A cost varies from quarter to quarter for a number of reasons, but our annual budget for G&A remains at $24 million to $25 million.

Looking at the remainder of 2013, we do have some very nice-sized leases commencing over the next few quarters and the abatement period is beginning to burn off. However, I expect the second quarter to be the toughest quarter of the year from an FFO perspective as we feel the full quarter's impact of the OCC move-out, and recognize the seasonal G&A impacts associated with the issuance of annual employee stock awards and await commencement of significant leases later in the year. These leases are outlined on page 7 of our quarterly supplemental information.

At this time I would like to reaffirm our previously issued annual guidance of core FFO in the $1.35 to $1.45 range. But again, I remind you that there will be some variations between the quarters.

That concludes our prepared remarks today. I will now ask the operator to provide our listeners with instructions on how they can submit their questions. We will attempt to answer all of your questions now or will make appropriate later public disclosure if necessary.

Please try to limit yourself to one follow-on question so that we can address as many of you as possible. Operator, please go ahead.

(Operator instructions). Anthony Paolone, JPMorgan.

Good morning. Can you talk about the rent rolldowns in the quarter and what drove them, and what we should glean from that for the rest of the portfolio?

The rent rolldowns is kind of a curious issue this quarter because what happened was we had relatively modest leasing, admittedly, we were out-of-the-box. We were disappointed we didn't do a little more than 500,000 square feet. We do see the pipeline picking up a little bit, but obviously 500,000 isn't what we would have hoped to do.

But that also means that the rolldown was calculated on a relatively small number of leases. And we had two relatively large renewals done in the Miller Canfield lease in Detroit and the FedEx lease in Colorado Springs, both of which were done on sort of a blend-and-extend basis with very low capital. And so, you see our capital numbers are pretty low for the quarter, but also a little larger rolldown because we gave them rollback in rent as the concession to extend the lease rather than capital [in the form of TI].

And so, in fact, the FedEx lease was done. We did that directly as well, so we were able to save the leasing commission on our side. So, anyway, the point is the negative [18] number looks big, but it is on a relatively small number. And it is sort of offset by the capital -- the low capital number we spent on those leases.

So we felt pretty good about it, but obviously you can't control -- the numbers or what the numbers are.

And on the same matter, as you think about the next few quarters and what is coming up, do you think those roles are as dramatic? Particularly as you look at things like, say, Qwest where it looks like they might be giving some space back, and what should that number look like over the next few quarters?

Yes, we have updated our number -- our thought -- best thought process on that, Tony, and our overall portfolio we believe is about a 3% rolldown. Now a lot of the -- and so that continues to come down from where we were. Now, obviously, some of that is because we have done a fair number of leases that have been at higher rolldowns.

But at the same time, if we continue to do some early renewals, where we are really back rent rather than giving capital or something like that, the number could be larger than that. A lot of it just depends on what leases you do at what point in time and in which quarter.

So that's not like same-store NOI are something which is reasonably easy to predict. It is a very volatile number, so especially for a Company with large leases like ours. And so it is very hard to give you any good number prediction on that kind of front.

Okay. And if I could ask one other question, can you talk a little bit about the Arlington acquisition in the quarter? Just your decision to go into a market like D.C. that is kind of challenged at the moment, and what sort of the economics and plays on asset on that asset is, given it is fairly stabilized right now?

I will jump in -- I'll lead off and let Bob Wiberg jump in, who I think is on the conference call with us as well. Obviously we have been saying for a long time that we intend to build our presence up in our five -- our four concentration markets. Our goal longer-term is north of 60% of our ALR coming from those markets. We are just below 50%.

But frankly, we would be quite a bit -- we would probably be above 50% had we not lost the OCC lease, because obviously the percentages are based on ALR, not on square footage. So -- but that's very much in keeping with the strategy that we wanted to employ.

We also like the R-B Corridor very much, want to continue to get further concentration there. And particularly given that we now own two of the best buildings in Boston, not that you can drive rents with two buildings, but you have a really nice position in what may be the best if not, arguably, the best submarket in Northern Virginia.

So, Bob, I would throw you more of the details and the numbers if you would jump in.

Sure, and I think just to reiterate what Don said, the R-B Corridor has been the best performing Corridor in the D.C. metro area for the past 15 years. So it does remain a very attractive place for us to go to. And Arlington Gateway with 4250 are probably two of the five best buildings in that market. So we really see this as a long-term position, that it will continue to get better over the years.

Now in terms of the metrics on this property, the going-in cap rate as we had published in our information when we acquired it is about 5.6%. There are leases in here primarily with about a five-year term on average. And a number of those tenants have already approached us about renewing.

So we think that will be a good source of activity over the next couple of years, as well as some new tenants coming into this market, which is really driven by the flight to quality. So these two buildings really benefit from that, and we continue to see that as being the major driver.

And matter of fact in Washington, D.C. overall in the past quarter, there was about only about 50,000 square feet of net absorption. But that was from 500,000 feet of Class A absorption and negative 450,000 feet of Class B and C absorption. So I think this building is really in the right spot to do well.

Okay, thank you.

Michael Knott, Green Street Advisors.

Bobby or Don, on the topic of the gap in your least percentage and the economic occupancy, how long do you think it is going to take to get something much higher? It seems like you are going to have some steps forward, some steps backwards, so doesn't it seem like it is more 2015 before you really see a giant pop in your same-store NOI as opposed to the 2014?

Michael, I appreciate you understanding that with the size of our tenants, you do get a little bit of variability in between the quarters. And so we do try to provide our guidance on sort of an annual basis.

If you look at our occupancy projections for the year, we think we will actually be up. We started the year at around 87%, 87.5%. We think we will be between 88% and 89% in total occupancy.

Relative to FFO growth and cash NOI growth, this year we provided the same sort of range as we provided last year. And you are correct. The growth really will start kicking in as the abatements burn off in 2014 and into 2015.

Michael, more specifically, we see that economic gap lowering as we move through the 2013 for reasons you might anticipate. A lot of it is the fact that we have a lot of these leases either free rent burning off or they are commencing later in the year. So that gap appears to narrow fairly substantially towards the end of this year, then gaps back out again as we have to re-lease 3100 and the BP space in Chicago.

And it starts to decline and maintains a fairly steady decline through the next several years for all of the obvious reasons, most of which have to do with the amount of lease expiration we have over those few years. But I would say it will look better, not great later this year, get worse again early '14, and then start a steady improvement which we think probably really narrows up as we move into 2015. So I think your premise is probably accurate there.

Michael, to give you -- we are playing tag team on you here. Some perspective -- when we did our IPO at the beginning of 2010, that gap was about 2.5%. So you can see being at 10% now over time, we expect with the lease expirations slowing down 2014, 2015, 2016, that gap to come back within that range.

That's helpful color, appreciate it. And, Don, I might have missed it, but did you guys give much color on -- or did Bob - -on OCC leasing prospects and if there is anything new on that front?

We haven't, but I will throw it to Bob and let him answer if he is still on. I assume he is.

Sure. Yes, we have had pretty decent activity in that building. It is not a robust market, of course, now, but there are several GSA requirements that seem to fit it pretty well. We have two proposals out currently.

There's another group that we believe will shortlist us on their prospects. And in addition we have two private-sector tenants now that we are talking with. And these occupancies really would be anywhere between end of this year, potentially up through 2014.

Okay. That's helpful. And then the last one for me, just to touch on I think Tony asked about this a little bit, but the assets you have a quite this year feel like assets you would have bought back when you were a non-traded REIT.

So I am just -- can you help me understand the thought process as you were buying value add staff earlier in the cycle and now you are buying somewhat defensive type lease profile assets? Just trying to understand how are you thinking about where these fit in the cycle and your overall capital allocation strategy.

Yes, Michael, I don't think we shared that view at all, but obviously beauty is in the eye of the beholder. What we said we were going to do when we became publicly traded, and at the risk of sounding like a broken record, we said we were going to be moving into those concentration markets and buying the quality of assets we typically would own in those kinds of markets.

We also would like to concentrate in those submarkets which we think have strong longer-term growth prospects. There was -- obviously the R-B Corridor is as good as you get in the Washington, D.C., area. And yes, we paid very close replacement costs, but for that quality of asset in that submarket on a long-term hold, we are very comfortable doing that.

Boston we feel even better about, given that we were able to buy substantially below replacement cost in an asset that is at the top of the market quality-wise in Burlington, in a submarket that is literally [be getting it] on fire. There was a great article up in Boston today about how strong Waltham and Burlington are getting, because the technology markets are driving the tenant demand.

And I would tell you, if we had space in Burlington right now, we could lease it in a heartbeat because it is very hot up there at the moment. And so we are very happy about that transaction as well. So I guess we just don't share the view that a couple of the sell side analysts have on that issue. This is far from what we were ever doing back before we became publicly traded.

Michael, this is Ray. If I could add something to that, remember that our value add strategy is really about 10% to 15% of our overall strategy. We have always said we take advantage of the opportunities that presented themselves either on building critical mass in those concentration markets or finding opportunistic deals in those opportunistic markets.

We had a lot of success in 2011 finding more opportunistic deals and we've harvested one of those. But it is very consistent with the strategy that we've outlined, which is rather two-pronged. One, to build concentration market presence, but we also want to identify value-add deals. And that is really about 10% to 15% of our investment strategy.

Okay, that's helpful, thanks.

Dave Rodgers, Robert W. Baird.

Good morning, this is Matt Spencer here with Dave. I was wondering if you could provide some commentary on what type of activity you are seeing in your core markets, maybe with regard to competition for assets, and maybe where the best opportunities are?

I will start and let either Bo or Ray jump in. I assume you are talking about the investment sales side of things, not the leasing side.

Right.

Okay, yes, it's extraordinarily aggressive capital markets environment right now. And I think our Houston sale and some of the transactions that we have been chasing that we haven't been successful on, on the buy side, would indicate that we are -- that almost every deal that is coming to market that has some quality in any term structure of the leases is getting double-digit offers, and substantial fights over who is going to try to win the deal. And as a result we are -- it is very hard to play in that market.

We were fortunate enough to preempt the Washington process. We still believe -- that price -- we could turn around and sell that for a gain today, believe it or not, just because we felt like we got a fairly good buy there, and same thing in Boston although that did go to a formal bidding process.

It's just that, but to us, it is just amazing what has happened with the return of the CMBS market and the quest for yield that pricing on real estate has gotten extraordinarily aggressive. And there really isn't a market that I would tell you -- whereas a year ago we would have said the core concentration markets were really aggressive and these secondary markets were not, I would tell you that we now believe that particularly for quality assets with some term structure of the leases, we are seeing all markets be extremely aggressive.

And so we are doing what we can to ramp up our sale disposition pipeline a little bit just for some of our nonstrategic assets because we think we can take advantage of that trend.

Maybe along those (multiple speakers)

Sorry?

So, maybe along those lines, are there any assets in your portfolio now, similar to the suburban Houston sale, where you might want to try to monetize and maybe quantify how much that might be?

Yes, we have got, I think, three or four that we would expect we would be bringing to the market in the next few months, where they're either things we've cleaned up some leasing on or we think it is just getting to be a better time to bring to market. So I think we have budgeted $300 million or something like that for the year; yes, around $300 million worth of sales activity.

Some of that depends on one or two bigger deals that we are trying to debate whether we want to bring to market or not. But having said that, I would say we will probably be executing pretty steadily on a handful of deals as the year goes on.

(multiple speakers) I'm sorry, I would echo what Don said regarding the competition that is out there. A lot of it is being driven by CMBS.

We have heard that even the projections that were originally put out there for CMBS will be more than achieved, maybe to the level of a third more than what they had predicted. And all that means is there's a lot more capital that is driving deals and looking for yield.

The other thing, as Don had mentioned, we will be looking at some of the other assets that we targeted for sale either this year or possibly next year, and seeing if there might be an opportunity to move those out sooner rather than later, given how active the capital markets are.

Great. Thanks for the commentary.

(Operator instructions). Brendan Maiorana, Wells Fargo.

Good morning. Bobby, you guys had the known OCC move-out which hit the occupancy. And I think we had talked a couple of quarters ago about -- I think it was 250,000 square feet of move-outs on January 1.

So if I look at the drop in occupancy in the quarter, was that in line with your expectations? It seemed a little bit higher than what I was guessing, but maybe I was being a little bit too optimistic.

No I understand that it is pretty hard to get it accurately what our occupancy is going to be due to the very ability of the large leases that we have. We had forecasted occupancy for the year to end up between 88% and 89% and we are still on course for that.

So I may be splitting hairs here a little bit, but I think you said same-store down 3% with the expectation was that -- I thought the prior expectation was down 2% to 3%. So I am not sure if that's -- I'm just being a little critical of your comments and maybe it is still down 2% to 3%, or if it actually has maybe migrated a little bit lower.

No, actually our same-store cash NOI projections for the year are right at 2%, and I was conservative. You are right in the comments to say 3%, but still forecasting negative 2%.

Well, you are staying true to form, I guess, with your conservatism.

Just to give you a quick little more color commentary on the occupancy change, if you look at it very simply, it was 334,000 of OCC move-out, 100,000 of progressive move-out in Cleveland, offset by about 100,000-some square feet of new leasing. I mean if you want to oversimplify, that is about what it looked like.

Yes, okay. And OCC, there was no real NOI impact in the quarter, right? That we get in the second quarter, it was just the occupancy.

Actually there was. We lost the rent from March. So we took a third of the hit, if you will, for the quarter. But you are right, obviously starting sector quarter it will be a zero.

So it was like [$1 million] in the quarter and it is [$3 million] for a full quarter?

That sounds right, yes.

And then, sorry, so, Don or Ray, it's probably for both of you guys; 1200 Enclave -- a great round-trip on that transaction, probably 80%-plus value creation in a couple of years. If I look at the rest of the value add assets on page 37, how would you grade yourselves on your value add strategy thus far? And what does that say about the likelihood of doing more or less of those deals going forward?

Let me start and Ray will jump in. Obviously if we get an A+ on Houston I would give us an incomplete on the rest of the portfolio at this point. We have some stories that are starting to develop that are going to be very positive.

I think a couple of the deals that we just bought so inexpensively that it almost doesn't matter whether we lease them up, we are still going to make a lot of money. And then there are one or two, like for example the small one in suburban Atlanta, where I think the jury is still out whether we are going to have a really nice story there or just a very modest story there.

But we don't think any of these, based on what we bought them for, are major risks to not doing pretty well and things like 500 West Monroe and Medici. And depending on what happens with a couple of places we are working on at Town Park, all of which could still be very, very positive stories for us.

And we appreciate you giving us kudos for the performance on Houston, but I would hope that we would not be held to that high standard for every deal because it is going to depend on what the momentum of the leasing environment is in each particular submarket. But the thing that we hold our hat on is that we bought high-quality at a very good basis, so that we could fight the leasing game and get our fair share of leases, and then, however long that takes, decide what we want to round-trip those properties.

Do you think you do more value add deals over the next 12 months or so?

I think only to the extent we can find something that makes some sense. If you remember we had a pretty disciplined return on cost model built into these deals, where we felt like we needed we had a certain return on costs to get to make sense out of them. And frankly, as others have seen our story and other deals get done, there seems to be a lot more capital chasing those deals today.

So it is going to be hard to get those deals done to be honest with you. Maybe we knock out one or two, but it is not going to be easy.

Sure. All right. Thank you.

Vance Edelson, Morgan Stanley.

Good morning. What is your level of optimism going forward on backfilling the vacated space, especially the big blocks? Do you think the tech or energy or healthcare industries might step up? Or will it be more conventional? And what kind of concessions do you think might be needed?

We have got, ballpark, say 15 blocks of space that are 50,000 square feet and greater in the portfolio. And to give you sort of a sense of optimism, we would almost have to go individual group of space by group of space.

But I would say that some markets, like if we had space in the Texas markets, we would have no problem knocking out a block of space. If we had more space in Boston available, no problem knocking out a block of space. Unfortunately, a lot of our blocks of space are not in the better markets at the moment.

And so I would say we have a balanced view on that. We are seeing more activity than we were seeing six months ago. And I think we have told you many times that it is sort of a six-month process from the time we start seeing activity to when we are executing it, given the size of leases we typically work on.

And we have definitely seen a pickup in the last 30 to 45 days in leasing activity. So we are optimistic that will translate into some good activity and the third and fourth quarters of this year from a leasing standpoint. But obviously it is still too early to tell for certain.

I wish we were seeing more activity on our big blocks of space in downtown Chicago, for example. We are not seen as much as we would like, and same thing in Washington, not seen as much as we would like there. Having said that, I think we are going to have some successes here in the next couple of quarters because of the level of activity we have got going.

Okay. That's helpful. And just as a follow-up on the nonstrategic asset side, are you still eyeing Philadelphia as maybe the best candidate for divestitures, or have some other markets come more into the picture?

The Philadelphia asset is one we go back and forth on. We like the asset an awful lot. The location is probably the premier location in downtown Philadelphia, in some respects, or at least within a block or so either way, depending on how you look at it. And obviously we have got a great tenant in there. So we go back and forth on that one.

That might often be affected by other things going on within the portfolio on that individual decision. But having a downtown tower in Philadelphia, long-term lease to a great credit, is not the worst thing that ever happened to anybody. So we feel good about that one, but we have probably said that that is something we are evaluating, and will continue to do so as we move closer to the ten-year mark on the lease.

That's great. Thanks, guys.

It appears there are no further questions at this time. Mr. Miller I would like to turn the conference back over to you for any additional or closing remarks.

I think we -- I think our perception of the quarter was more positive maybe than the market's perception based on some of the overnight reading we did, and the quick reaction this morning to the stock. I don't think we feel like the story is not a good one. In fact we are very pleased with where we are headed.

We would have liked to see a little bit more leasing in the quarter, and I think one or two other numbers, like the rolldown, had sort of an overly dramatic impact on people's perceptions when it was on -- like I explained earlier, on a very light number of square feet and was a result of not spending as much capital on a couple of big leases. So we actually felt better about those than maybe the market has reacted this morning.

But overall we continue to be very optimistic as we move into 2014 and 2015. And I know a lot of you are just trying to figure out what the right time is to own the stock because, as we do, we feel like this is a great opportunity longer-term and we are excited to be here.

So thank you very much for your time and energy and watching and listening to the call. Have a good day.

That does conclude today's conference. We do thank you for your participation. Have a wonderful day.