Piedmont Realty Trust Inc (PDM) 2013 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Piedmont Office Realty Trust fourth-quarter 2013 earnings call. As a reminder, today's call is being recorded.

At this time, I'd like to turn the call over to our Chief Financial Officer, Robert Bowers. Please go ahead, sir.

Thank you, Operator. Good morning and welcome to Piedmont's fourth-quarter 2013 conference call.

Last night, we filed our quarterly earnings release in a Form 8-K, which includes our unaudited supplemental information. Both the release and Form 8-K are 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 risks 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, 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 risk associated with forward-looking statements contained in the Company's filings with the SEC.

During the call today, we will refer at times 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'll review our financial results after Don Miller, our Chief Executive Officer, discusses some of the quarter's operational highlights. We're also joined today by various members of our management team, all of whom can provide additional perspective during the question-and-answer portion of the call.

I will now turn the call over to Don.

Good morning, everyone, and thank you for joining us this morning as we review our fourth-quarter financial and operational results. A majority of our comments today will focus on the quarter's leasing and capital markets activities, and our outlook for the next few months and for the year.

For the quarter, overall leasing activity totaled 732,000 square feet. Combined with the record 1.5 million square feet signed in the third quarter, we had a strong finish for the year, with a total of 3.5 million square feet of transactions, or over 16% of our rentable square footage.

We also finished with a 90% occupancy in our stabilized portfolio and an average lease term remaining on our existing leases of 7.1 years.

Almost 70% of the fourth quarter's leasing activity was renewal related, the majority of which was driven by our renewal of Nestle's 400,000 square feet at our 800 North Brand building in Glendale, California. In addition, QUALCOMM completed a lease renewal and expansion totaling 48,000 square feet through 2020 at 90 Central Street in suburban Boston, Massachusetts.

The largest new lease for the quarter was also in the Boston market, with a 46,000-square-foot, four-year plus lease expansion through 2018 with Nuance Communications at 15 Wayside Road. Other new releases included an approximate 26,000-square-foot, 10-year plus new lease with Front Porch Communities at 800 North Brand Boulevard; a 21,000-square-foot lease with Sabal Trail Transmission at 400 TownPark in Orlando, which brings that value-added property up to almost 50% occupancy at year-end, with several other active prospects; and a 20,000-square-foot, 10-year plus lease with Mitsubishi Engine North America at Two Pierce Place in Chicago.

I'm pleased with the overall volume of activity for the year, but this has largely been driven by the heavy lease expirations over the past three years, with over 50% of the portfolio having to be re-leased. The expiration schedule for 2014 and the following two years is much more modest.

As a result, the threshold of leasing activity required in order to achieve net absorption in the portfolio is much lower. And that net absorption will obviously add incrementally to our occupancy and operating results. We are optimistic about that net absorption in 2014.

For us, it's no secret that our greatest leasing challenge continues to be in the Washington, DC, market. As many of you are aware, I've personally spent the majority of 2014 thus far in our Washington office working with our regional leadership, Bob Wiberg and Ken Mulrane and Dan Dillon, and visiting with numerous brokers and tenant prospects.

Updates on major matters in our DC market include the fact that we continue to work with the National Park Service and are optimistic about a renewal of their lease at 1201 I Street. In the RB corridor, we're having some successful leasing of our available space at our 4250 North Fairfax building.

Also in the same submarket, we now have access to our 3100 Clarendon building and have begun the redevelopment and construction which will reposition this asset for the private sector. We expect the redevelopment to cost around $25 million. Given the asset's premier location, transportation access, and surrounding retail amenity base, we are optimistic about the prospects for the building once the redevelopment work is completed at the end of 2014.

Our outlook overall for the Washington office market remains stagnant in the near term, with marginal job growth and modest absorption for this market over the next 12 months.

On a more positive note, we are seeing an increase in job growth and office demand in many other parts of the country, particularly in our Texas markets, where we've had very robust fourth quarter from a capital markets perspective.

The top three office growth markets, based on a recent JLL survey, are Texas markets. Two of these markets, Dallas and Houston, are forecasted to have 3.3% and 3.2% annual job growth rates, respectively, through 2017, versus a national average of under 2%. In Dallas in particular, we are seeing strong job creation, over 110,000 new jobs in the last 12 months alone, which is resulting in additional space needs and upward pressure on rental rates.

Our acquisitions team targeted this market due to its dramatically improving economic and leasing fundamentals, which we believe have yet to be reflected in the market's pricing of real estate assets.

Taking advantage of this opportunity during the fourth quarter, we announced the purchase of three buildings, 6565 MacArthur Boulevard and 161 Corporate Center in the Las Colinas submarket of Dallas and One Lincoln Park, across from the Northpark Center Mall, one of the top malls in the United States, in the greater Preston Center submarket, all of which were purchased at a significant discount to replacement cost. Combined with the previously announced development of Enclave Place in Houston, these acquisitions will expand our presence in our three strategic Texas markets by approximately 1 million square feet and bring our total square footage in the Dallas market alone to approximately $1.9 million, making it our fourth largest office market, based on square footage owned.

With this growing commitment to one of our strategic markets, we have announced that Joe Pangburn has been promoted to Executive Vice President and will head up our southwest region, based in Dallas. Joe is a Dallas native, a UT grad, and a 30-year real estate veteran. He and I have worked together for a majority of that time at either Prentiss Properties, Lend Lease, and in the last 11 years together at Piedmont. Joe and I -- Joe will be joined by a very well-respected Texas-based team, including Damian Miller, our Senior Vice President of Asset Management for the southwest region.

In conjunction with the Dallas acquisitions, we continued to execute upon our strategic recycling plan with the sale of two non-core assets, 350 Spectrum Loop in Colorado Springs, Colorado, and 8700 Price Road, located on a ground lease in the Arizona State University Research Park in Tempe, Arizona. The combination of those two dispositions resulted in a gain of approximately $15 million, which was included in our results of operations for the quarter. We hope to announce several more nonstrategic dispositions in the coming months.

Finally, as we evaluate acquisition opportunities, you should expect us to continue to periodically take advantage of the public market discounts and accretably acquire our own common stock when we believe it to be trading at a significant discount to estimated NAV. As such, during the fourth quarter, the Company repurchased approximately 3.8 million shares of common stock under our share repurchase program at an average price of $16.49 per share.

Looking ahead, we expect to focus our 2014 capital markets efforts on recycling capital out of nonstrategic assets, where value has been maximized, and redeploying proceeds into strategic investments that we believe will add long-term value to the organization.

I will turn the call over to Bobby to review our financials, financing activity, and expectations for fiscal 2014. Bobby?

Thanks, Don. While I will discuss some of the highlights of our financial results for the quarter, I encourage you again 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 $0.18 per diluted share, which includes the $0.09 per diluted share gain on sales of real estate that Don just mentioned, as well as a net $4.5 million, or $0.03 per diluted share gain, associated with insurance recoveries related to Hurricane Sandy losses that were incurred in 2012. We also recorded $5.6 million in impairment losses associated with two wholly-owned assets, for which we have shortened the hold periods, and one legacy joint venture asset.

Core FFO, which removes the impact of these nonrecurring items that I just mentioned, totaled $59.9 million, or $0.37 per diluted share, for the current quarter, in line with $60.1 million, or $0.36 per diluted share, for the quarter ended December 31, 2012. The per-share results reflect the accretive effect of the stock repurchase program that Don mentioned. As of quarter-end, Board-approved capacity remaining for additional repurchases under the plan totaled approximately $90 million.

AFFO for the quarter was $0.08 per diluted share, reflecting some significant capital expenditures drawn during the fourth quarter related primarily to buildouts for Independence Blue Cross at 1901 Market Street in Philadelphia, multiple tenants at Aon Center in Chicago, and NASA at Two Independence Square in Washington.

Our total lease percentage increased this quarter to 87.2%, up approximately 50 basis points compared to the third quarter, and the stabilized portfolio, that is exclusive of certain value-add properties, was approximately 90% leased as of year-end.

Quarterly cash basis same-store NOI increased 3.4%, compared to the fourth quarter a year ago, and was down less than 1% on a year-over-year basis. If not for the OCC moveout of 330,000 square feet in March of this past year, same-store NOI would have increased 3.9% for the year. At year-end, we still had almost 600,000 square feet of executed leases that were yet to commence and 1.1 million square feet of leases in some form of abatement.

From a balance-sheet perspective, we ended 2013 with $2 billion in outstanding debt and a 35% total debt to gross assets ratio. For $575 million of secured debt coming due in the first half of 2014, we accessed a very favorable bank debt market during the fourth quarter, using our core banking partners, and entered into a $300 million unsecured five-year term loan, which was funded on January 30 of this year. The proceeds were used to pay off a $225 million mortgage that opened for prepayment without penalty last week and the remaining $75 million was used to reduce the outstanding balance on our line of credit. The term loan has a maturity date of January 31, 2019, and a variable rate at LIBOR plus 120. We have, however, entered into four interest-rate swaps during January to fix $200 million of this debt at an interest rate of 2.79%.

Regarding the refinancing of the balance of our 2014 maturing debt, we currently have $350 million in forward interest rate swaps available to hedge the interest-rate exposure associated with the potential replacement debt. The intent, any new debt would be structured to match timing and size needs to pay off this $350 million of secured debt maturing in June of this year. The swaps effectively lock the treasury rate portion of any new 10-year debt at a little over 2.1%.

We anticipate decreasing our secured-debt position from 70% of our total debt outstanding at the end of 2012 to approximately 20% by June of this year, enhancing our overall profile of the organization.

Looking ahead, 2014, at this time I'd like to introduce annual guidance for core FFO in the range of $1.40 to $1.50 per diluted share. This estimate reflects our current view of market conditions and incorporates certain economic and operational assumptions, such as the redevelopment and related downtime of our 3100 Clarendon asset that Don mentioned earlier.

The 2014 guidance is not significantly impacted by any transactional activity. As you know, we typically issue guidance only on an annual basis; however, I would note that I do anticipate a wider fluctuation in our quarterly occupancy statistics, same-store NOI, and core FFO during 2014, with marked decreases in the first half of the year and gradual improvement in the second half of the year.

The first half of 2014 will include the effects of the rolldown of rents and abatements for Aon, ThoughtWorks, and the Federal Home Loan Bank of Chicago for new leases, which replaced BP at Aon Center effective January 1 of this year. Today, these leases are part of 2 million square feet of executed leases that are currently in some form of abatement, the larger ones of which are detailed in the supplemental package to assist you with your 2014 models, such as the GE leases at 500 W. Monroe.

The first six months of 2014 also includes downtime on 222,000 square feet related to a 12-year lease with Epsilon at 6021 Connection Drive in Dallas, which commences in July of this year, and the 167,000-square-foot, 15-year lease with Integris at Aon, which commences in June. As the year progresses, there will be a gradual commencement of several other leases as part of the 600,000 square feet of executed leases for currently vacant space, again.

And finally, while I won't -- while this won't affect occupancy and same-store statistics, the redevelopment downtime at 3100 Clarendon will impact core FFO throughout 2014.

Despite the expected decline in the first half of 2014 same-store NOI, we anticipate that the fourth quarter of 2014 same-store NOI will be comparable to our fourth quarter of 2013. And we believe that the commencement of the existing contractual leases and the burnoff of abatements will improve 2015's results, driving growth in occupancy, cash flow, and operating results. In fact, given that we have very little lease rollover in the coming three years, any positive net absorption should contribute to FFO growth. On average, for every 1% in occupancy growth we get, we estimate there will be an approximately $0.02 to $0.03 per diluted share in FFO contribution.

With that, 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, but we will make appropriate later public disclosure if necessary. Please try to limit yourself to one follow-on question so we can address as many of you as possible. Operator?

(Operator Instructions). Michael Knott, Green Street Advisors.

Hey, Bobby, I might have missed, but could you give your expectations for 2014 full-year cash same-store NOI? I heard you give your comments about 4Q 2014 and sort of the outlook 2015 to 2017 being more positive, but did you give a number for that?

No, I didn't give out a cash NOI number.

Are you guys not providing that this year?

I think on a same-store basis, understand it's impacted by acquisitions and dispositions, but if you're looking at same store, I would say 5% to 8% down.

Remember, the big thing that's happening this year is much like happened this past year, in 2013, you've got a significant -- you got a DIA moveout of 200,000 square feet, and we've got an awful lot of leases that are contractually obligated that are coming online that are going to generate cash later, but it's in abatement. But on a cash basis, we should be down 5% to 8% on a same-store NOI basis. And on a GAAP basis, I think only down 2% to 3%.

Okay, thanks for that color. And then, Don, just curious sort of your feeling about the opportunity or prospects for re-leasing the OCC space, since that will be a key driver of your 2015 and 2016 growth.

Yes, it's -- and Wiberg is on, as well, and I let him comment, if he has anything to add. But I would say the government market is starting to pick up. We're starting to see a little bit more activity coming out of the GSA.

Those are not quick moves, but probably the most optimistic thing we could tell you right now is there are not a lot of really big blocks out there. And some of the things that are going on at the GSA right now would predicate their behavior to be consolidating into larger blocks, where they have multiple blocks around the city. And so, I'd say the optimism we feel is around the fact that the GSA is likely to need a couple of big blocks of space out there by consolidation, and we are one of the few available, and we are a great fit from a location and quality of building standpoint.

Having said that, it's still a little bit early to predict how many of those opportunities are to come out and how quickly they are going to commence.

So you feel a little bit better with the way -- maybe the budget agreement, but it's still --

I think just in general, having spent a month up there, obviously it's not taking off, by any stretch of the imagination.

But there is bits of optimism here and there. We are seeing certainly more activity. Some of that may just be beginning of the year kind of stuff. But we are seeing more activity than we certainly saw in the third and fourth quarters in DC, and there is a general sense that it's bottoming out. But I also am not going to sit here and get Pollyanna-ish on you and tell you that I think it's going to really take off this year. We are not suggesting that at all.

Got you. Yes, it seems challenging. Thanks for the color. I'll get back in the queue.

Anthony Paolone, JPMorgan.

Thanks, good morning. Can you maybe put some parameters around how much -- I don't know if you want to call it speculative leasing or what the go-get is to get to either the high or low end of your guidance ranges?

Yes, Tony, how are you? I know there's another REIT or two that do some work along the lines of -- I think they call it spec leasing, where they suggest how much of the leasing they need to complete for the year is already in place by now, because obviously, especially with larger leases, they almost need to be signed by now or in the next few months to have any impact on 2014.

We've done an analysis. It's not quite the same, but it's very close, where there's really only a few pennies left of revenue to achieve for 2014 for us, to achieve our guidance. And so, we're very -- I think you heard me say on the call somewhere in there that we are very optimistic that we will achieve that 2014 revenue guidance.

And so, I would say that we hope there's more upside than downside in those numbers. And obviously, as we've done in the past, I think we've outperformed our guidance every year. That's not an intended goal of ours, I promise you. But we do tend to be cautious on how we project.

Okay, thanks. Then just my follow-up is just on the buyback. Can you give us, A, any sense of maybe what you have done to date, and/or, B, how far do you guys feel comfortable taking that before you start to think about your overall leverage levels and so forth?

As you know, I think a number of folks commented last night, there's about $90 million left to spend in our authorized allocation to share repurchase.

Obviously, we've been buying back in the mid $16s. The stock continues to be in the mid $16s. I don't want to comment on what we've done in the first quarter. I don't think that would be appropriate. But you can probably appreciate that we still find the stock to be very attractive at its current levels and we will continue to deploy that program as appropriate.

But I don't know that you should expect any announcements on future increases in that share buyback program, given that we're bumping up against the leverage levels that we've promised everybody.

Okay, thank you. Appreciate it.

Michael Salinsky, RBC Capital.

Good morning, guys. You talked a little bit -- at length about DC. Can you give us just an update on Chicago, how that's going? In terms of (multiple speakers)

I would say -- it's kind of funny. Everything you read in Chicago right now, and I think generally it's true, is that there's this big move from the suburbs to downtown. And generally, there's more movement in that direction than the other.

But interestingly, we have seen pretty solid activity for our suburban buildings, to the point where we are pretty well getting them leased up at this point. We've still seen good activity, particularly at 500 West Monroe downtown. We are having -- we have some questions whether we going to convert a few of those deals right now or not, but there is a very good level of activity at 500 West Monroe. Aon is a little slower, and not sure if that's just a function of which deals are out there and what part of town they are looking in. But I would say west suburbs and West Loop at 500 West Monroe are very active. Aon, a little slower.

Okay, appreciate that. This is my follow-up. Can you give us a sense of what you're expecting in transaction activity? I know you guys don't include it in your guidance, but should we expect that recycling steps up a bit more this year, just in light of the activity in the fourth quarter and what you're seeing in terms of pricing?

I would say that we have a pretty active pipeline of dispositions right now. A lot of them are smaller, in terms of the smaller nonstrategic deals that you are aware of.

I don't think they amount to a huge amount of volume, but they are disproportionately a fairly large number of transactions. I think we think we will complete seven, eight, nine transactions this year, maybe $100 million, $150 million worth of value. And we are seeing much better values than we would've seen even a year ago in some of those, what some people might consider, secondary or tertiary markets. So that's why we are seeing it is a better time to try to transact.

Are you seeing improving opportunities in your primary markets or still too aggressive at this point?

On the sales side or buy side?

On the buy side.

On the buy side, continue to see a very aggressive environment. It's going to be hard for us to deploy a lot of capital into primary markets right now. But frankly, when our stock is trading at $16.50, we see that to be a much better buy, anyway.

Fair enough, thank you very much.

Dave Rodgers, Robert W. Baird.

Good morning, guys. Bobby, maybe a question for you, and I guess maybe diving into the guidance a little bit more. Development, redevelopment spending, and then the flipside to Mike's question in terms of the amount of capital that you're looking to deploy. Maybe on a total basis, so maybe if you threw in what your capital budget was for the year, both acquisition, stock buyback, kind of the net outlook for that, as well as development and redevelopment.

We haven't disclosed what we're doing on the stock buyback. But you see what's available to us is up to the $90 million.

On the non-incremental expenditures, that -- expenditures that impact your AFFO calculation, we're probably looking at a smaller number than we incurred this past year. We had a lot of large leases, you remember, that at $103 million spent in non-incremental. I would expect that number to drop back down to about $80 million from that standpoint. And any acquisition activity is pretty much back-end loaded at this point and wouldn't have much impact on your FFO guidance.

Obviously, I think you know for years we've disclosed the forward pipeline of CapEx that we've committed to contractually. And in every year up to now, that number has gone up fairly steadily as our pipeline of leasing and renewal leases have been getting completed.

And you will notice now there's a fairly big drop off of that number. That's a pretty good indicator of the direction of what our non-incremental capital will look like going forward, as well. And that dropped pretty materially from the second and third quarter into the fourth quarter of 2013.

On the development and redevelopment side of that, obviously you've announced Houston. Give us a little bit of color maybe on how much you would expect to spend this year, where that is in process, as well as, Bobby, can you recap for me what the number was on Clarendon that you kind of expect to spend there?

During the current year, I think out of the two major development projects, remember, it's the DIA that we've said would be up to $25 million in total, and then the development at Enclave for the year, probably $50 million to $60 million.

That's if we don't bring a partner in on it. I think we've mentioned that we may consider bringing a partner in on the Houston deal. If we did that, obviously it would lower our outlay substantially. But we haven't decided whether we're going to do that yet or not.

Maybe just following up on Enclave, any activity there since you've made the announcement that you were willing to move forward with that?

It's still a very active market. I wouldn't say that -- you really, in almost any market these days, you've got to break ground to really generate the activity. And given that we expect to do that in the next 30 to 60 days, we would expect that is when you really start getting people to take you seriously.

Okay, thank you.

Brendan Maiorana, Wells Fargo.

Thanks, good morning. I had a couple of points of clarification I wanted to get from either Bobby or Eddie. In the same-store number that was reported in the results, I think you guys had the lease term fee part of it from Nokia that was in Q3. I think there was part of that that's in Q4, as well.

And can you also clarify, is the lease at 1901 Market, are you recognizing cash NOI in your same store in Q4 versus what I think was no cash, given the nature of that lease, in Q4 of last year? Because if I make those two adjustments, it looks like same store was probably down about 3% on a year-over-year basis, if I'm doing that correctly.

Let me take a shot at this. You've called something a termination fee income and that may be our fault, so I apologize. It's a restructuring fee.

We actually renegotiated the lease and moved a tenant out of the building so that we could make room for a full building lease there in Dallas. That was the 6021 building where we made room for Epsilon. We've got downtime right now for the first six months. But their revenue will start contributing, I think, in June or July of this year.

Don't forget, Brendan, yes, that was -- you can call it a restructuring fee, you can call it termination, you can call it whatever you want. But there also would been revenue coming in from that tenant, a substantial amount of revenue, in the third and fourth quarters that you have to subtract out, however you might calculate it, from that analysis.

So no, I don't agree with you to take $2.3 million out and try to figure out what the real same store was. That's not accurate at all.

Plus you've got to go back, if you're doing that, and take out termination fee income last year if you're trying to do an apples to apples (multiple speakers)

How much was that the year before?

That would've resulted in a 1.8% same-store growth in Q4.

So to answer your question, yes. You've got to compare termination fee income to termination fee income if you're going to do that, Brendan.

And 1901 Market? Can you give us a clarification on that?

They paid rent in fourth-quarter 2012. So --

You are referring to the [salties] nature where in January, they make a large payment, and then through the balance of the year, the payments would be lower. We were reflecting cash revenue in Q4 of 2013.

I guess -- I understand that you've got the cash in there. But then you're going to comp against a $5.3 million payment in Q1, which you are not going to get $5.3 million in Q1 of next year.

It's one of the many, many items that are all hitting in the first and second quarter of next year, which are all -- we'll call them temporary in nature, going to drive same-store cash NOI down. I used the term ugly last quarter and got beat up for it. But it's true. The first quarter and second quarter numbers are going to be very substantially down, they're going to be coming back in the third and fourth quarter, and then they're going to flip in 2015 and they're going to be substantially positive in 2015, if we do nothing else from here.

So the real question is -- getting sort of some of the details out of the way. The same-store numbers are probably up a little bit year over year, if you kind of strip out some of the noise out there. But you've got -- the economic leased percentage moved up about 350 basis points relative to where it was last year. And I think the argument you guys have made is that as this economic lease rate, as the leases that are in abatement come online, we should start to see a big ramp in terms of the NOI growth.

But it looks like -- when I kind of adjust for some of the noise, there's not as much flowthrough in terms of NOI growth as I might have expected, seeing a 350 basis-point move up in the economic leased rate. And as that continues to move up over the next year or two, is there something that should drive what seems like a little lower NOI growth that you realized this quarter versus that move in economic rate up versus what's going to happen over the next year or two?

I think that, obviously, we have a much tougher analysis than most because our lease activity tends to be so lumpy.

But I think what you may be missing there is the big downturn you're going to see in same-store NOI next year is on a dramatically lower economically leased percentage in the first quarter of the year, first half of the year, than we have today. Yes, it went back up in the fourth quarter marginally, and then it's going to drop off precipitously in the first and second quarters because of all that free rent period coming out of the BP lease and a couple of -- I think it's the Deutsche Bank lease in Gatehall, Miller Canfield. There's a couple of others.

So there's a group of leases that are going to free rent early next year, which is why you see that big same-store NOI decline early part of the year that then flips, and it flips all contractually. It's not that we are saying it's going to get better because we have leasing to do; it's leasing that's been done, it just happens to all hit at the same time in early 2014.

Okay. All right, right. Just last question or point of clarification. Bobby, the same-store number that you gave, does that include -- is 3100 Clarendon in your same-store pool for 2014, or is that stripped out because it's redevelopment?

That's stripped out because it's redevelopment, Brendan.

Thank you.

(Operator Instructions). John Guinee, Stifel.

This is all so complicated. Bobby, do you want to just give quarter by quarter for 2014?

What we'd indicated before was there would be more variation than you've seen in the past. Because of the free rent periods, contracts that are written, free rent to Aon, Federal Home Loan Bank, ThoughtWorks, Gemini that Don just went over, that's going to impact your cash NOI.

You're talking about on an FFO basis, the downtime at Aon Center for Integris was 167,000 square feet. It will certainly impact your FFO number. The downtime for Epsilon at 6021 will impact your FFO number in the first two quarters. But the variation could be as much as $0.05 or $0.06 from the end of the year and from the beginning of the year. Does that make sense? Does that help you a little bit?

Yes, okay. So basically a trough versus peak is $0.05 to $0.06 beginning of the year to end of year.

Yes, you've got it. On an FFO (multiple speakers)

(multiple speakers) thank you. Now my second question is if I'm doing this quick math right, I think you said you're not going to increase your leverage anymore, and you're going to sell between $100 million and $150 million of assets, and you've got a $90 million share buyback program, then you got some development and redevelopment. That sort of implies that you are not acquiring anything in 2014, on the basic math. Is that correct?

John, if we use the full $90 million, that would in effect take the place of some acquisition we might otherwise do. So if we use the full amount of that, it's likely that we will be limited in how much we can do in the acquisition side without generating more dispositions to fund that. Yes, we're moving into more of a pure capital recycling mode, rather than a you use the balance sheet and lever-up mode.

Any chance that you really turbocharge the disposition plan and get closer to $0.5 million -- or 0.5 million?

It always depends on what decision we make at Aon and what happens there. So I think that's the hard part, John, is without knowing what leasing we might get done or what market -- what buyer might show up in that market that might make it attractive for us to consider that. Obviously, that is such a big decision that could move things dramatically if we changed our mind on that.

All right, thank you.

Vance Edelson, Morgan Stanley.

Thanks. Just two related questions. In the past, you've mentioned something to the effect of your leasing success ultimately depends on the economy and job creation. We obviously just had another disappointing data point this morning. When you're on the front lines with tenants, how much of a headwind do you think the economy is for you right now?

That's an interesting question, Vance. It's funny. Other than Washington, DC, and to a smaller degree downtown Chicago, but more really Washington, DC, we are really seeing really good activity.

Our overall lease percentage is 92%-plus outside of Washington and Chicago. And I think that number is going to go up dramatically over the course of 2014 because we have no rollover in those markets. And so, I would tell you that if you look at -- now, obviously, this is only 50% of our portfolio. But if you look at the non-Washington, non-Chicago part of our portfolio, we are absolutely kicking it.

So I'm not sure that the economic cycle is really hurting us that badly. I think it's more a function of what's going on in Washington and the impact of a lot of vacancy that came all at one time in that market. But having said that, we would all like to see a little more growth in the economy because it's been hard to get to a landlord favorable situation in any market, other than maybe Texas, for us anyway, recently.

Okay.

I think that's the answer.

Okay, that makes sense. And then, speaking of the cycle, could you give us a feel for whether the lower overall rates upon renewal are largely due to what you would consider to be cyclicality and that what's expiring now was largely signed during the last boom, the last economic cycle? Is that the main reason, as opposed to anything more of a secular nature or anything else?

Yes, I think it's interesting. I know there's much more concern in your group from our rollover -- the lease rolldown number in the quarter and what we've seen periodically over the last couple of years.

We've been telling you for some time now that we thought our lease rollover number was -- at the time we went IPO, around negative 10. It was moving down to, we thought, negative five a year or two ago. Now we will tell you we think we are basically at parity.

That's because there was a group of very large leases, as we've been telling you all along, that when they rolled over would hit us disproportionately. Nestle was not the last of those, but one of the last of those in our entire portfolio. And so, as a result, there's very few additional big rolldowns to come.

I'm not suggesting that we are going to be seeing plus 10% numbers in that category going forward, but I am saying that I think we are at parity now. So hopefully, the only big negatives you'll ever see going forward on that is if we happen to do one big lease and it involves a rolldown of sorts.

Keep in mind that when we did, for example, the Nestle deal, we basically took the rolldown -- we didn't give them much in the way of capital, but we took the concessions and did it into a rolldown. So the rolldown looks worse than it would otherwise be because we had put so little capital into the deal. So you got to remember -- and that was 4/5 of the number, the denominator, that went into that calculation this quarter.

So I guess the point is it depends on which leases hit which quarter. That number is going to continue to be lumpy for us, but we don't see a lot more big negative numbers coming in that category going forward, because we've now done all of our re-leasing from the old days.

That's good color. And then, just one last quick one, you made reference to the higher property taxes in the release. That's generally recoverable. But just wondering, is that a theme throughout your markets that taxes might be on the way up?

Not necessarily, Vance. We've seen a little bit in a couple of places, but not a lot. Frankly, I thought that it would be worse than it's been so far in this cycle, with all the pressure on the municipalities. But we really haven't seen big increases. Obviously, assessment values have come down and rates have gone up slightly. But overall, property taxes have been fairly inflationary the last few years for us.

That's great, thanks.

Michael Knott, Green Street advisors.

A couple of Texas questions for you. First, just curious if with the opening of the regional office there, does that signal anything with respect to your thoughts for Texas being a concentration market, as opposed to opportunistic?

No, Michael, I don't think it changes our view on that. We still see the Texas markets as cyclical and ones in which we want to move in and out of.

But I think having a team there, particularly one that's been working there for a long time and knows it really well, will allow us to get ahead of making those decisions more rapidly. And it tends to be just one more step in the direction of adding some other regional offices. I hope that in the first part of this year we will be announcing some others, as well.

But as you've come to learn, we are very cautious about hiring the right people and we don't like to rush into those kinds of decisions. But we have been working on both the West Coast and Chicago for some time now, and just trying to find exactly the right person to lead those efforts.

Okay. And then, with respect to getting in and out of a market like that, just curious your view on more broadly where we are at in the cycle, both Dallas and Houston. And then, can you also give us any updates on your prospects at your Houston development?

So in both Dallas and Houston, we are still pretty bullish on what we are seeing from a job growth and absorption standpoint. I think pricing is starting to catch up in Dallas to what we are seeing from a fundamental perspective.

And so, I don't know if we will be doing a lot more there, but we were very pleased that we were able to get in before the end of the year and get some deals that we thought were well priced. And so, I would say we are still seeing pretty good optimism on the absorption and rental rate front in Dallas.

Houston, it's been such a feeding frenzy there. Rents have been very, very strong the last couple of years. We've probably underbudgeted, if you will, the rental rates in our new redevelopment. But as I think we told you on the last call, we wanted to do that just to give ourselves comfort that we had plenty of room in the event that rents didn't stay as strong as they are today.

But I would tell you that until we break ground, as we mentioned earlier in the call, until we break ground you really don't get seriously considered by the bigger tenants, and now that should happen in the next, say, 30 to 60 days.

Okay, but your view on Houston is that it's still all signals clear, full steam ahead, even though there's quite a bit of new supply?

The supply is the thing you worry about the most, for sure. But from our standpoint, the demand side continues to be strong.

So no let-up on the demand?

Not that we are seeing yet.

Thanks.

Thank you. That does conclude our question-and-answer session. I'd like to turn the floor back over to Mr. Miller for any further or closing comments.

Thank you, Operator. I think that we want to try to make sure that everybody really understands where we are headed here over the next 12 months, because it seems to be a drag on our stock to have this uncertainty around the negative same-store sales number for early 2014.

I think what we are trying to make sure everybody is understanding is that, yes, that number is going to be tough in the first half of the year. It's going to be ever better over the second half of the year, and then it flips extraordinarily positively into 2015. And so, I think we want to make sure that people understand that this is a contractual event that's already -- we've already solved the problem, but you're going to still see the effects of that problem in the first part of next year.

But we think that unduly people are not looking past that first six months of next year yet in the stock price, and that's why -- sorry, this year, 2014, thank you. And so, that's why we have been an active acquirer of our stock up to now and continue to believe that there is a lot of value in the stock because of where we believe our NAV to be.

Anyway, we just want everybody to hear that and look forward to any follow-up questions that we have. Thank you very much.

Thank you. That does conclude today's teleconference. You may disconnect your lines at this time and have a wonderful day. We thank you for your participation today.