Piedmont Realty Trust Inc (PDM) 2013 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Piedmont Office Realty Trust third quarter 2013 earnings call. As a reminder today's call is being recorded. At this time I would like to turn the conference over to Chief Financial Officer, Robert Bowers. Please go ahead, sir.

Thank you, operator. Good morning and welcome to Piedmont's third-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 information 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 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, as these statements speak only as of the date they are made.

We encourage all of our listeners to review the more detailed discussion related to risks 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.

I will review our financial results after Don Miller, our CEO, discusses some of this quarter's operational highlights. In addition, we're also joined today on the call by various members of our Management Team, all of whom can provide additional perspective during the question and answer portion of the call. I'll now turn the call over to Don.

Good morning, everyone, and thank you for joining us this morning as we take a few moments to review our third quarter financial and operational results. I'd like to start with our overall leasing activity for the quarter, which as many of you know totaled a record 1.5 million square feet. The largest single quarter of leasing in our 15 year operating history. Approximately two-thirds of the 1.5 million was renewal related. The majority of which was driven by our previously announced amendment to the Independence Blue Cross lease for 800,000 square feet at 1901 Market Street in downtown Philadelphia.

The lease amendment resulted in several benefits to Piedmont, including a more normalized monthly rental payment schedule than what we had in place previously, an immediate roll-up in rents and an extended lease term with annual steps through 2033 and an increase in lease square footage. The largest new lease transaction during the quarter was executed in the Dallas market. We leased the entire 222,000 square foot, 6021 Connection Drive property in Las Colinas to Epsilon Data Management for 12 years for their headquarters relocation. Epsilon was already a tenant of ours as their leases, approximately 28,000 square feet, in the adjacent 6031 Connection Drive property.

In order to accommodate its expansion, Piedmont negotiated a relocation with long-time tenant Nokia to move its Dallas operation to our Las Colinas Corporate Center II property. Also as part of the transaction we acquired a 10.6-acre parcel of land adjacent to the Connection Drive properties from Nokia. This parcel is currently zoned for future office development, which would accommodate a tenant's expansion needs or a possible build-to-suit, but also could be potentially be used to expand parking for our existing Connection Drive properties if necessary.

To highlight just a few of the other large leases executed during the quarter, also in the Dallas market, Neovia Logistics signed a 46,000 square feet 10-year new headquarters lease at Las Colinas Corporate Center Two. Continental Automotive Systems signed a 77,000 square foot 8-year-plus extension at our Investment Drive property in Troy, Michigan. Qwest Communications Company signed an approximately 63,000 square foot, 7-year renewal through 2021 at 4250 North Fairfax in Arlington, Virginia. And Union Bank completed a 10-year-plus new lease for roughly 52,000 square feet at 800 North Grand Boulevard in Glendale, California. Additionally, subsequent to quarter end in an announcement we made earlier this week, Nestle at 800 North Brand in Glendale executed a 5-year-plus extension for approximately 400,000 square feet.

For a list of all leases greater than 20,000 square feet which were completed during the quarter, please see our quarterly supplemental information. The average cash rent roll-up for these leases was almost 3% and the GAAP rent roll-up averaged over 17%. Our average lease term remaining has grown to 7.3 years as of the end of the quarter. For the first 9 months of the year, we've completed 2.7 million square feet of leasing, with an average capital cost per square foot per year of lease term of $3.47. That's the lowest level we've seen in several years.

While we were pleased with our year-to-date leasing results, you can be assured we are focused on the leasing challenges that lie ahead. Fortunately, Piedmont is now facing a relatively low lease expiration cycle for the next 3 years and we have few large blocks of space expiring after the DIA moves out at the end of this year in Washington, DC. We see this period of low expirations as an opportunity to increase portfolio occupancy and cash flow. However, while quarterly results may vary due to timing of lease commencements and abatements, the level of long-term growth will be dependent upon the continued recovery of the US economy and further job creation.

Our greatest value creation opportunities are in the downtown Chicago and Washington, DC areas, which we have an average lease percentage today of about 80% in our portfolio in comparison to the balance of the portfolio which is over 91%. In downtown Chicago we continue to aggressively market the two large blocks of space at Aon Center and 500 West Monroe.

And in Washington, DC, as you might expect in light of the government shutdown, there hasn't been much movement on our renewal negotiations with The National Park Service at 1201 I Street. They are still on hold-over status and we remain optimistic about completing that renewal this quarter. At our 4250 Fairfax building we have a few proposals outstanding and we've had a number of tours at our One Independence building, as well as at our redevelopment project at 3100 Clarendon. Overall, though, leasing activity in the region is fairly light and a significant immediate pick-up in occupancy is very unlikely. Bob Wiberg, Ken Mulrane and their entire team are working tirelessly to get this leasing in our DC portfolio taken care of.

On the transactional front in addition to the land parcel that I mentioned earlier, we also purchased the remaining minority interest in three legacy joint venture assets this quarter for about $14.7 million, with the view that obtaining sole control of these assets will facilitate our leasing efforts and ultimately our capital recycling strategy for these three properties. Also during the quarter we entered a binding agreement to sell 350 Spectrum Loop located in Colorado Springs, Colorado for approximately $30.1 million or $193 a foot. The sale is expected to close this month and will be our last wholly owned asset in the Colorado market. This represents the fourth non-core market that we have exited recently, advanced our stated strategic plan to discontinue operations in nine non strategic markets by the end of 2015.

As one of our efforts to build additional shareholder value, we continue due diligence a potential office development opportunity in the attractive deed restricted Enclave Office Park in the Houston, Texas energy corridor submarket. We plan to make further announcements on this project later this quarter. Finally, we were very active in underwriting a number of capital transactions this quarter, some of which were eventually priced unattractively, but some projects are still ongoing. We continue to be disciplined in our approach as a basis conscious quality oriented buyer with a watchful eye on relative value.

This quarter in particular, we were able to capitalize on the volatility in the stock market and we repurchased over 5 million shares of our own stock at what we believe to be a substantial discount to NAV. These repurchases brought the total shares repurchased under the program since its November 2011 inception to 11.9 million shares at an average price of $17.16 per share. With that, I'll turn it back over to Bob to review our financials and our expectations for the next couple of months. Bobby.

Thanks, Don. While I'll briefly discuss our financial results for the quarter, I again encourage you to please review the 10-Q, the earnings release, and the supplemental financial information which were all filed last night for further details. For the quarter, we reported net income of $0.12 per diluted share, an FFO of $0.39 per diluted share. Both of which included approximately $0.02 per diluted share in insurance recoveries related to Hurricane Sandy and the losses that were incurred there. Core FFO, which removes the impact of nonrecurring items, totaled $61.1 million or $0.37 per diluted share for the current quarter, which is in line with the prior year's quarterly results. AFFO for the quarter was $0.21 per diluted share.

Our total lease percentage remains stable this quarter at 86.7%, that's up approximately 30 basis points from the beginning of the quarter. The stabilized portfolio, that is the certain value-added properties being excluded, was about 89.5% leased as of September 30. Our economic lease percentage improved 80 basis points to 78.6%, primarily due to the expiration of KPMG's abatement period at Aon Center.

At September 30 we had 500,000 square feet of executed leases for vacant space which had not commenced and an additional 1.5 million square feet of leases that are currently in some form of abatement. There are four leases over 50,000 square feet with abatement periods expiring by the end of the fourth quarter of 2013 that will improve our reported economic lease percentage by year-end. However, you should also note that for the next several quarters the reported economic lease percentage and cash NOI will be volatile, as the DIA moves out of 220,000 square feet and the 800,000 square feet BP lease expires and several new replacement leases commence, such as the leases with Aon, INTEGRIS and a Federal Home Loan Bank of Chicago, along with their related down times and rent abatement periods.

Cash basis same store NOI for the first 9 months of 2013 when compared to the same period a year ago was down 2.7%, primarily due to the loss in the first quarter of a 330,000 square foot governmental tenant at our One Independence Square property in Washington, DC. Our operating model, which focuses on serving large credit-worthy tenants, results in a larger average size than our peers. The expiration and commencement of these larger leases and their related abatements create volatility in our same store NOI metric on a quarter to quarter basis.

We ask that you please refer to pages 7 and 8 of the supplemental for the details as to the commencement dates and when abatement periods will burn off for our larger new leases. We continue to believe that our 2013 same store NOI will be down between 1% to 2% on an annual basis. Looking ahead, we see volatility in this metric in 2014, an improvement in same store NOI in 2015, as the number of leases and abatements subsides and the number of lease expirations decreases.

From a balance sheet perspective, we ended the quarter with a 32.5% total debt to gross assets ratio. Up from 27.2% at year-end, primarily as a result of borrowings related to the two properties acquired during the first quarter of 2013 and due to our share repurchase program. Approximately $187 million of the outstanding debt is related to our draws on our $500 million line of credit. Our liquidity position remains strong, with approximately $312 million of either cash on hand or capacity remaining on our unsecured line of credit. We've worked diligently this year to prepare for the $575 million of secured debt that's scheduled to mature in the first half of 2014.

As I mentioned in last quarter's call, we've entered into forward interest rate swaps to hedge the interest rate exposure associated with approximately $280 million of the maturing debt. We continue to explore a number of alternatives for refinancing and laddering out those maturities. Including the utilization of unsecured bank loans and senior notes, which would significantly increase our percentage of unencumbered property NOI and reduce the portion of our outstanding debt that is secured to approximately 20% of total debt.

Finally, I'd like to raise our estimates for core FFO for the year to a range of $1.45 to $1.47 per diluted share, partially attributable to our share repurchase activity. We will follow our usual practice of issuing formal 2014 guidance in early February after we've completed our annual budget cycle. However, from a broad perspective, we are generally expecting our core FFO will be comparable to our original range for 2013, with the DIA expiration of 220,000 square feet at the end of this year and the BP lease, which is expiring in December, being replaced by several leases at lower rates or by one lease which is commencing in the middle of 2014.

Now I'm going to turn the call back over to Don for some final comments before we respond to your questions.

Thanks, Bobby. I want to take a few moments to re-emphasize our capital allocation strategy and objectives going into next year. At the time of our IPO in 2010, we stated our strategic goals for increasing shareholder value in a 5-year plan, which included a significant number of strategic capital repositioning transactions that would focus our investments on a select group of major office markets. Immediately following the IPO, we went through a period of extremely high lease expirations. With the exception of Washington, DC, we have withstood the worst of those lease roll-overs and now with the aid of some improvement in employment we feel we're well positioned to be able to grow our occupancy over time.

On the capital market side we've executed a number of nonstrategic geographic markets and continue to cluster assets in a few select submarkets within our stated strategic core and opportunistic markets, such as -- the Las Colinas and Dallas North Tollway submarkets in Dallas; the energy corridor of Houston and Cambridge; and Route 128 North areas in Boston; and the Rosslyn Boston corridor in DC.

We're committed to furthering this process and currently we're marketing 10 assets with a total value of approximately $140 million with the intention of recycling those proceeds into these and other targeted submarkets. Our goal is to accomplish this transition with modest impact on our FFO estimates. Valuations, however, for strategic acquisitions in the private sector remain sometimes at unrealistic levels and are often well above replacement costs. Therefore, as we look for additional acquisition opportunities, you should expect us to continue to periodically take advantage of public market discounts and accretively acquire our own stock when we believe it is to be trading at a significant discount to NAV.

To that end, this week our Board authorized a $150 million for the additional continuation of our share repurchase program for 2 more years. Rest assured that we plan to achieve our 5 year plan on time while maintaining our focus upon delivering favorable risk adjusted returns for the shareholders. That concludes our prepared remarks for today. I'll 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 make appropriate later public disclosure if necessary. Please try to limit yourself to one follow-on question so we may address as many of you as possible. Operator?

(Operator Instructions)

We'll hear first from Anthony Paolone from JPMorgan. Please go ahead.

Thanks, good morning. Just can you talk a minute about the buyback and just a few things on it. One is $150 million, does it add to any remaining authorization, or is $150 million what's there now? And then how are you thinking about that in the context of where you see net debt to EBITDA or your leverage levels being over time? Trying to just get some parameters around what the buyback can really get to over time.

It's a good question, Tony. Remember, the plan originally was set up back in November of 2011 for two years. It was authorized for $300 million. That plan in essence terminates this week or when the Board voted and we now have only $150 million. So up to, to answer your question. $150 million over the next two years has been authorized by the Board.

If you're trying to do an analysis of impact on debt, certainly that $150 million keeps us significantly below our 40% bogie in terms of debt to gross assets. I think it would get us up to about 35% if we did all of it and still leave us room for $500,000 or $600,000 of acquisition -- million of acquisitions. Does that answer your question?

Tony, I guess, I would just add real quickly, if you think about it we spent $200 million of the original $300 million. We authorized $150 million. So, really all we did was authorize an incremental $50 million and extend it for two more years.

Right. I guess I'm trying to get a sense as to if you continue to sell some assets and acquisitions continue to be tough, you have the balance sheet capacity, EBITDA will seemingly start to come in with some of these leases. Can you actually push that buyback even harder perhaps?

We could, although I'll tell you, as anyone knows who's had to execute a buyback program, they're not as easy to execute in terms of total dollars as it appears just because of all the limitations on how much you can buy in a particular time frame and blackout periods and 10B programs and things like that. So, we were pretty aggressive, obviously, in the third quarter and that's about as aggressive as you can get.

But we were also in a period of time where the stock hovered down in a range that we thought was attractive for quite a while. We could expand that program. And in fact, the conversation of the Board was, guys, let's go out with $150 million, but if we felt like it was attractive enough we could expand that further. But at this point we're not planning on doing that.

Okay. And then just a follow-up on separate item. 2014 DC lease expirations, can you just touch on those a little bit, any of the bigger ones, or how you're thinking about them?

Yes, I'll probably turn it over to Bob for a moment, but, obviously, DC is the big challenge for us right now. We feel like we're hitting on all cylinders everywhere else but maybe DC and downtown Chicago, although we're doing some activity in downtown Chicago. It certainly isn't that we're missing out in DC for lack of effort. Bob and his team are going hard at it.

Obviously, we're losing DIA out of 3100 Clarendon at the end of the year. Everybody knows about that. We also have some expirations coming up at 4250, which will be close to 100,000 square feet, at the end of the year. And then I think everybody knows that we have Lockheed Martin in early 2014 that will be leaving one of the buildings that we have with them. Remember, we have three buildings with Lockheed Martin.

They've extended their leases in two of them, one in Rockville and one in The District and the third one in Rockville it appears they're going to be departing most of that space, if the not all of it, in early 2014. So, those are the big blocks of space we have in 2014 coming up, but that's a big chunk of space and we've got a lot of wood to chop, as one of the analysts said last night.

Thank you.

We'll take our next question from Jed Reagan with Green Street Advisors.

Good morning, guys. Speaking of Chicago, just wonder if you can talk a little bit more about the leasing progress in the Chicago CBD and are you getting any traction at either of those large buildings?

We're seeing decent activity at 500 West Monroe, but mostly smaller stuff, a floor here and a floor there. We've gotten a couple things done recently, or are in the process of getting them done as we speak. But that's relatively marginal because of the size of the building, every 25,000 feet only means 2% in occupancy. And so the problem is there just hasn't been a lot of big deals that are looking any sort of time in the near term for space in Chicago recently. It's been a dearth.

I think the only really large deal that's gone down in the last year or so is Google, and that, obviously, was both too large for either of our blocks and was looking for more of a creative space, B type of space. And so, anyway, it's been very frustrating to not see more big activity in that market when you've got such good blocks of space available at the top of your buildings.

Okay. Can you just provide some net effective rent color on the Nestle and Quest renewals, what kind of re-leasing spread you saw, concessions, that sort of thing?

I don't have specific details on spreads on Quest, but it was a very positive net effective spread. They were in a long-term, old lease, and so, although we only renewed a portion of their space, the space that we did renew was a meaningful markup, and I think Eddie's checking that right now. Might be able to give that before we get off the call.

Obviously, Nestle was a strong roll-down, but with very little capital associated with it. They had a five year option to extend in the building and the last time they extended under the five year option we captured it at just the right time in the market cycle in 2008 and we got them for a really good rent.

This time around they're able to time it a lot better and extended the lease. But they were, obviously able to extract more pain from a rental rate standpoint. The good news is we had to put up very negligible capital to keep them. Wasn't a big capital exposure at all.

Okay, that's helpful. I guess lastly, as we look out to 2014, do you think the same store cash NOI could finally turn positive, or is it just too early to tell on that?

No, I think 2014 is -- we've been telling you this for quite a while, I think. Because of the lumpiness of the quarters, it sometimes gets made a little bit opaque for you guys. But let's start with sort of where we are today. We had a, what, a negative 5 plus number this quarter, which was a little bit misleading because we think we're going to be actually fairly substantially positive next quarter, which should lead to, I think Bob, you said flat to slightly down total same store NOI for 2013.

You move out to 2014 because of those activity in Washington, particularly a lot of it early in the year, the 2014 same store NOI numbers are going to be pretty ugly. Then when you roll back up into 2015, if we do any leasing during 2014 the same store NOI numbers ought to start looking really positive in 2015, because not only do we have, hopefully, some more leasing coming on, but we also have a lot of this space that's in free rent today, and in the first half of 2014 in free rent that will be rolling to rent paying tenancy by the latter half of 2014 and into 2015.

So, you'll see very volatile same store numbers over the next two years. We think very negative early next year, getting better as the year goes on and then should be very positive in 2015 and beyond.

Okay. Great. Thank you.

Eddie just pointed out to me Quest was up 15 on a cash and 30 on a GAAP.

Okay. Can you give specific numbers for Nestle?

Do we have that yet? No, because it was done after the end of the quarter. We'll release that at the end of fourth quarter.

Okay. Thank you.

Sure.

Thank you. Our next question comes from Vance Edelson with Morgan Stanley.

Good morning. Just a little more granularity on the third quarter share buybacks. Am I right that they seemingly came late in the quarter, and you mentioned the volatility in the shares, so was it the stock's decline mid-quarter that got you to start buying in September, or was it at all because the authorization was coming to an end?

No, it's exactly what you said first. It was where the stock price was towards the end of the quarter, and that's when the more aggressive acquisition. That's where we thought it would be more accretive for our shareholders.

Okay. Makes sense. And then --

So, Vance, the impact in the third quarter to our numbers was muted because the weighted average number was a lot higher during the third quarter. The impact in fourth quarter will be more positive.

Yes, perfect. That's what we figured. You've spoken quite a bit about DC and Chicago, but especially on the pricing front and the direction of rents. Could you share with us how some of the stronger markets are doing and walk us around the country and touch on any standout markets when it comes to the direction of rents.

I'll be glad to. Thanks, Vance, it's nice to talk about something positive once and things are really going well in most of our other markets. I wouldn't say that all markets are, obviously, anywhere near the same, but as you can imagine, we're seeing very strong rents in the Texas markets, rents are moving up strongly. We're continuing to try to build our position there as a result.

Obviously, anything that's technology oriented that we're exposed to, and that would be Boston and Austin in our cases, we're seeing solid rent growth, good activity in those markets. And then if you look at more of the corporate markets, I'll call that Atlanta, Florida, Minneapolis, Chicago, it's not nearly as strong, but certainly getting better in most places. The one exception to that seems to be downtown Chicago, where we thought that was ahead of the rest of the markets in terms of its comeback, if you go back 24 months ago, and then it sort of leveled off again on us.

But overall, I'd say rent growth is solid. We have seen for the first time in some time places like Atlanta start to see rent growth and burn off of concessions and, obviously, we're 91% plus leased in our other markets, and expect that that number is going to go substantially higher over the next 12 months, because we just have so little rollover.

Interestingly in downtown New York, the one place that might be a little hard to get your arms around because you hear so many different things coming out of New York right now. Our what we call BB plus building at 60 Broad, has a modest amount of space coming up next year for rollover and we've got an enormous amount of activity on it.

You hear different things from different people in downtown, but that type of space seems to be trading very well right now. Lots of activity, and rents have actually moved up nicely in the last six months there as opposed to where they were 12 to 18 months ago. So, it's a mixed story across the country, but generally pretty positive other than Washington and, like I said, lesser degree downtown Chicago.

Okay. That's good to hear. Thanks a lot.

Our next question today comes from Dave Rodgers with Robert W. Baird.

Hey, guys, it's Matt here with Dave. Could you maybe talk about the acquisition pipeline, and which markets you think are attractive and which markets you think are transacting at maybe prices above replacement cost.

Yes, sure, Matt. The markets that we think are most attractive to us right now, unfortunately, to meet our long-term strategic plan don't necessarily meld quite as well, but we see some good value and some good rent growth in places like Dallas, a little bit not as far along but still pretty good value in places like Atlanta.

We're going to continue to be looking in the Florida markets. We see the Florida markets starting to get a little bit stronger and so we may see some activity there. But, obviously, we're going to continue to focus on trying to build our presence in those core strategic markets.

But those tend to be the markets that are most overpriced. I think most interesting to us is how strong Washington, DC remains for pretty good core quality product. When what we see in the leasing side is remarkably the opposite. And to the point where there are even people talking about building buildings in Washington, DC and I think I've used this term before, but they absolutely ought to have their head examined. There shouldn't be another building built in Washington, DC for a number of years. It makes no sense whatsoever.

That's helpful. Thanks. Then my last question, I was wondering if you had the cash release spreads excluding the Independence Blue Cross lease?

Do we have that, Eddie? Eddie's going to try to pull that. Let me make a little bit of a commentary on that first, Matt. I understand why you guys like to do stuff like that, but that's the lease that I would tell you is the most important lease we did. We did a 20-year lease with 3% steps, or 2.5% steps for 20 years with a great credit tenant in a nice building in downtown. I would tell you, you ought to be putting more weight on that layer than less weight.

Now I'll answer your question. It was -- let's see cash rents were -- what was the quarter? It would be down 2.7%, straight line on accrual basis would be 5.5% up. So, down 2.7 cash, up 5.5 accrual absent IBC.

All right. Thanks, guys.

Your next question comes from Brendan Maiorana with Wells Fargo.

Thanks. Good morning.

Morning, Brendan.

Hi, guys. The lease term in the quarter, how much was that, a Nokia lease term fee.

Brendan, I assume you're talking about the termination fee net income and expense. That was approximately $4 million, or about a $0.02 impact in the current quarter related to that.

Okay. $4 million. Bobby, what's the difference between that $4 million and I think what was listed in the disclosure when you originally announced that transaction, which was $6.3 million, and is there anything that will be recognized in that delta in Q4?

Yes, you're exactly right. You're referring to the presentation that's available on our website. It talks about the transaction. It's a total of $6.3 million. $4 million of it was recognized this quarter as being amortized over the remaining term of the lease.

Yes, the other $2 million plus will amortize into the income stream over the next four quarters.

Oh, it's over the next four. The lease isn't up --?

I'm sorry, during the fourth quarter. I'm sorry, I misspoke.

Okay. So, your guidance in Q4 assumes another $2.3 million of that fee.

Yes.

But keep in mind that from a fourth quarter standpoint, it gets backed out, so it's not really factored into our guidance.

Oh, okay. So, that's backed out of the core FFO number, the guidance number, the $0.37, I think, which is fourth quarter guidance.

Actually, Eddie just shrunk back in his chair. He realized he misspoke. That's not true. It actually is in our core FFO guidance.

Okay, got it. Okay, thank you. Other question, Don, I appreciate all the color that you gave in terms of the NOI outlook for 2014. I think that's very helpful. If we just sort of sit here and look at the portfolio as it stands today and the $80.6 million of NOI, minus $4 million that you got from the term fees, let's call that $76.5 million in Q3. If we think about how much NOI on a quarterly basis you're likely to be generating from your portfolio of assets 12 months from now or fourth quarter next year, do you think that number is higher than what it was this quarter? Lower? The same? How should we think about that?

Brendan, I think if you project just four quarters out, it clearly will be lower. How much lower will depend on how much leasing activity we get done and whether we're more successful on keeping a couple tenants that may be coming up for renewal than we currently are anticipating. You go out eight quarters and I would tell you we think we're back and potentially stronger.

So, I think on a four quarter basis, yes, we're not expecting strength in the NOI number over that period. In an eight quarter basis and beyond, because so little roll over in 2015, 2016 and into 2017 that you're going to see we think is very strong growth in that period unless we just do zero leasing, do nothing at all.

Sure. Okay. That's helpful color. Thanks, guys.

(Operator Instructions)

We'll move next to Michael Salinsky with RBC Capital Markets.

Good morning, guys. Just had two quick questions, one small and one big. First of all, just on the disposition front, can you give us a sense of what you're marketing, what realistically could close in addition to what you've announced in the fourth quarter and then what you're thinking for the first half of 2014.

Sure, Mike. I think I mentioned in the earnings call that we have about 10 assets on the market right now, that total about $140 million of what we think is value. Most of those are in the market right now. We're waiting for feedback on pricing.

A couple of them we're starting to move forward with someone or very close to moving forward with someone. Obviously, given you're in some more difficult markets to transact in with challenges from a financing standpoint and otherwise, I wouldn't tell you we think we'll execute on all $140 million by any stretch. But I think we'll execute on a good chunk of it.

And if there's one or two that we just don't feel like we're getting fair pricing on and we think there's some things we can do to still add value, then we might be a little bit more patient as you've seen us be in the past on those kinds of things. But I will tell you that every one of these assets we're executing sales on now, had we sold them two years ago we would have had much worse results and outcome. We've been very well rewarded for the patience that we've exhibited so far.

Do you think any of those could close in the fourth quarter, or are those mostly a first half 2014 event.

There are a couple that could close in the fourth quarter beyond the Colorado Springs asset, but I would say most will dip into early part of the first quarter.

Okay, that's helpful. The second more of a bigger picture question. As you stepped up repurchase in the market you talked about your stock trading below a discount, just trying to understand what you guys see as the discount in your stock today versus relative to market values for asset pricing. I'm just trying to understand how big of a delta you see there.

Without getting too specific, because we feel like that's sort of a, I'll call it a trade secret in quotation marks, but we do our best to underwrite the value of every asset in our portfolio every quarter. We have a model we build up from the baseline. I think we've talked about this before in the call.

Eddie Gilbert leads that effort with input from our capital transactions and asset management teams. We feel like we have a really good sense of valuation on most of our assets and if we're wrong on some high and some low, we think overall we should be in pretty good shape. And then you roll that into a balance sheet analysis and it comes up with a value per share.

That value per share has been fairly consistent over the last year or two. Obviously, some income impact to us has held it back, but cap rate improvement in some of the secondary markets has improved it. And that's why you're seeing us bring some of those dispose to market as we speak.

But having said that, obviously, we think there's a material spread between what we've been buying shares back at and what we think the underlying value of the Company is, and obviously we think our -- if we thought the underlying value of the Company was only the consensus NAV analysis from the Street, then we probably wouldn't be quite as aggressive as we are in the shares. But, obviously, our NAV analysis is higher than the collective view.

Okay. Just a final follow-up. Given your comments on DC earlier, any thought to paring down that market a bit?

If we -- yes, I would be doing that aggressively if we had a lot of buildings that were stabilized and in good position to try to move. I think we're very positive on DC longer term, but there's obviously a window of time we're going to feel some pain in the meantime.

But if we had some assets that were well positioned for sale, we would probably be moving them to market because we think people are still paying pretty fair pricing in the market relative to what the fundamentals over the next few years would look like. Unfortunately, we just don't have very many of those assets.

Okay.

Your last question from John Guinee with Stifel.

Last question, guys. Okay. Great. Couple questions. First, you guys, Bobby, I think, and Don are really, really good about putting in both incremental and non-incremental CapEx and that's the good news. The bad news is that it continues to be a number that actually exceeds FFO every quarter.

Two questions. Can you sort of define the difference between the two, and then second, talk about if that number has a chance of subsiding in the next handful of quarters.

Yes, John, I'm not sure what you're looking at on those numbers, so we have to go back and check and see if we agree.

Page 32. It's the last quarter it was $22 million non-incremental, $38 million incremental. The quarter before it was $18 million non-incremental, $57 million, I'm sorry, $38 million incremental.

I mean, that's not higher than FFO but --

You're right.

But it's a large number.

I apologize.

Nowhere near our FFO number.

It bounces around $45 million per quarter. I apologize.

So, I guess the point is, obviously, we try to track the breakdown between incremental and non-incremental the same way everyone else does. That is, if we buy asset with vacant space in it, you probably know all those sort of value-added criteria that require something to move from incremental to non-incremental. So, it's that group of assets plus assets where leases, space has been down for more than 12 months and so there's -- because of our rollover schedule, there's been more of that type of space more recently than there would be going forward.

And then you couple that with the fact that there is very little rollover in the latter half of 2014, 2015, 2016, early 2017 period, then we wouldn't expect a whole lot of that rollover space. What I can't tell you is if we were to do some large value-added plays that would have incremental capital going into them, then there could be still a high incremental number, but presumably that would be because we're creating value in those assets. So, I would say it's hard to give you a projection without knowing what our mix of assets are going to look like going forward, but I think you understand probably the point.

Great. Okay. And then the second question, and this is becoming a huge issue with some of your peers in the office world, is that you have got some old assets that have been pre-1985 or so that have been single tenant, maybe secondary locations and when the -- you finally get the lease expiration, the realities are that these assets are not leasable at any price. Do you have any of those in your portfolio that are worrying you, and that when that tenant does move out there's nobody moving in?

I'm glad you brought that up, John. I think I would tell you I think I've got maybe one asset like that left. I don't want to name it because I wouldn't want to have people say gee, I don't think that -- but we have one fairly sizable asset left that has some challenges physically and otherwise.

But I would tell you beyond that, the only other asset we had like that recently was the 1111 Durham deal that we sold in effect for land value in northern New Jersey earlier this year. Beyond that, as you know, almost all of the assets in our portfolio are 1998 and newer. There's very little that is older than 1998 in our portfolio with the exception of a handful of assets.

We always try to give you soft balls, Don.

Thank you, I appreciate it.

All right, have a good weekend. Thanks.

Thank you. You too, John. That's it, operator, for the questions?

There are no additional questions. I'll turn the call back to Mr. Miller for any additional remarks.

Okay, thank you. Thank you, everyone, for your interest in the call today. I did want to reiterate, I mentioned this on the call, but we really feel like that we're firing on all cylinders right now with the exception of DC.

That's a big challenge. We've got all of our attention focused on that, because of the nature of the impact it's going to have both pro and con on us over the next year or so. We're, of course, focusing some attention on downtown Chicago, as well.

But we've also been doing a lot to sort of set up what we hope is some good long-term value creation, whether it's the redevelopment of 3100 Clarendon in what is the pin corner location in the best submarket in DC. Or the Houston development parcel or some other land parcels we've picked up very inexpensively in the bottom of the cycle, which are getting closer to creating potentially development opportunities, whether build-to-suit or otherwise going forward.

So, we're very excited about some of the things that we've done, and then if you look at the quarter, we feel like we had some two really major accomplishments in the IBC lease extension, which created a lot of value for the Company, and in the swapping out from Nokia to Epsilon in Dallas and Boston, the lease restructuring we did with them.

So, we feel like we had a great quarter. That doesn't mean we don't have challenges ahead in 2014. Those challenges will be -- will require some wood to chop in deference to Vance Edelson. Thank you very much, everyone. Appreciate it and we'll talk to you soon.

Thank you. Ladies and gentlemen, that will conclude today's presentation.