Piedmont Realty Trust Inc (PDM) 2014 Q1 法說會逐字稿

Greetings, and welcome to the Piedmont Office Realty Trust first-quarter earnings call. (Operator Instructions). As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Mr. Robert Bowers, Chief Financial Officer. Thank you, Mr. Bowers. You may begin.

Thank you, operator. Good morning, and welcome to Piedmont's first-quarter 2014 conference call. Last night we filed our quarterly earnings release in a Form 8-K, which includes our unaudited supplemental information. This information is also 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 the actual results to differ from those we discuss today.

Examples of forward-looking statements include those related to Piedmont Office Realty Trust's future revenues, operating income, and financial guidance, as well as future leasing and investment activity. You should not place any undue reliance on any of these forward-looking statements, and these statements speak only as of the date they are made. We encourage all of our listeners to review the more detailed discussion related to risks associated with forward-looking statements contained in the Company's filings with the SEC.

In addition, during 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 Chief Executive Officer, discusses some of the quarter's operational highlights.

In addition, we are 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 first-quarter financial and operational results. I will begin today with a review of our current leasing activity relative to previous quarters. As we've discussed on prior calls, at the time of our listing in 2010, we face an extremely high lease expiration schedule that extended through December of last year.

During that time, we leased a total of 13.5 million square feet, or nearly two-thirds of our property portfolio. 2013 brought an end to this intensive lease rollover timeframe for the Company, and 2014 begins a three-year period of very low lease expirations. Therefore, the majority of our leasing activity for the first quarter is comprised of new leases for currently vacant space.

Of the total 415,000 square feet of leasing we have completed during the quarter, 72% or nearly 300,000 square feet was within new tenants, which is in line with our expectations and our historical quarterly average for leasing new tenants.

Our leasing transactions for the quarter include the following large transaction highlights. Preferred Apartment Advisors completed an approximately 62,000 square foot, 11-year lease at our Medici building in Atlanta, Georgia. Amneal Pharmaceuticals signed an approximately 40,000 foot, 10-plus-year lease at 400 Bridgewater Crossing, in Bridgewater, New Jersey. In Chicago, R-T Specialty signed an approximate 27,000 square foot, 14-plus-year new lease at 500 West Monroe. And JL Buchanan signed an approximately 20,000 square foot, 10-plus-year new lease at US Bancorp in Minneapolis.

Two renewals worth mentioning are with Harding Loevner, who renewed and expanded its space to approximately 40,000 square feet at 400 Bridgewater Crossing through 2022. And Children's Hospital of Los Angeles completed an approximately 23,000 square foot, 5-year renewal through 2021 at our 800 North Brand asset in Glendale, California.

As you can see, activity was fairly spread out over our different markets. We are encouraged that 2014 begins as we were seeing a good deal of activity in our leasing pipeline in almost all of our markets.

With very few lease expirations over the next three years, we anticipate occupancy will begin to increase in the second half of 2014, as incremental leasing of currently vacant space takes place.

The Washington, DC, market continues to be our slowest market. But I'm happy to finally report the completion of a 5-year lease extension with National Park Service at 1201 Eye Street, just after the end of the quarter. Activity in DC this past quarter included the commencement of a capital project to redevelop our 3100 Clarendon asset. Our efforts to reposition that asset to capture the potential and incremental value of the property's amenity-rich location are now in full swing. We anticipate completion of the roughly $25 million to $30 million project by the end of this year.

Looking at other capital transactions activity during the quarter, we broke ground in April on Enclave Place, 300,000 square foot, 11-story office tower located in one of the few deed-restricted office parks in Houston. We are excited to get this roughly $85 million project underway in one of the fastest-growing job markets in the US. We expect the investment will generate a mid-8% stabilized yield on costs.

Staying on the topic of capital allocation, we continue to evaluate both marketed and off-market transactions in our core markets; but, while doing so, we are witnessing pricing for commercial property approach all-time highs. Consequently, as we have stated in the past, there are limited opportunities in today's high-barrier markets in which we see compelling risk-adjusted returns; particularly, because buyers of commercial property would have to be underwriting substantial long-term rental rate growth in order to justify ever-lower cap rates, particularly in the face of potential rising long-term interest rates.

Within this economic backdrop, we will continue to upgrade our portfolio by recycling capital from the disposition of non-core assets, and look for select acquisitions in both our concentration and opportunistic markets that would likely be strategic in nature. That is, utilizing our established market presence and knowledge to increase market share in our targeted sub-markets.

During the first quarter of 2014, we continued to utilize our share buyback program to accretively purchase our own stock, which we believe is trading at a significant discount for our net asset value. Therefore, this quarter, we used proceeds from the sales of non-core assets of our primary funding source to purchase 3.2 million in shares of our common stock at an average price of $16.54 per share. As of quarter end, Board-approved capacity remaining for additional repurchases under the plan totaled approximately $37 million.

As we noted today and on prior calls, management continues to methodically dispose of our non-core assets. I am pleased to say, economic fundamentals in many of the secondary markets have continued to strengthen, and our patience to sell has benefited us with improved pricing in 2014.

During the first quarter, we sold two non-core assets -- 11107 and 11109 Sunset Hills Road in Reston, Virginia -- for $22.6 million. And we entered into a binding contract to sell two more assets -- 4685 Investment Drive, and 1441 West Long Lake Road, in Troy, Michigan -- for approximately $19.4 million. I'm pleased to report that those assets closed yesterday.

With these dispositions, we have essentially accomplished one of the major goals that we established when our stock began trading in 2010, in that approximately 90% of our revenue is now derived from our target markets, with approximately two-thirds of our annualized lease revenues coming from CBD or urban infill properties.

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

Thanks, Don. While I'll discuss some of the highlights of our financial results for the quarter, I encourage you to please review the earnings release and supplemental financial information, which were filed last night, for further details.

We reported core FFO, which excludes the impact of non-recurring items, of $0.36 per diluted share for the first quarter of 2014, and is comparable to $0.37 per diluted share for the first quarter of 2013.

AFFO for the first quarter of 2014 was $0.21 per diluted share, covering our $0.20 quarterly dividend. All of these per-share results reflect the reduction of our weighted average shares outstanding, as a result of the shares repurchased over the previous 12 months that Don discussed earlier.

Our total lease percentage increased from 86% a year ago to 86.7% as of the end of the quarter. But this occupancy percentage reflects a slight decrease when compared to 87.2% at year-end, with the last significant group of leases expiring at the end of 2013. The stabilized portfolio was 88.8% leased as of quarter-end, and our weighted average remaining lease term increased to 7.3 years.

Our economic occupancy has been impacted by the high level of lease rollover that has occurred since our IPO, which Don discussed earlier. At the time of our listing, the gap between our reported occupancy of 92% and economic occupancy of 90%, was only 2% wide. Today, our economic occupancy is as low as we've ever reported -- 74%. And the gap between reported occupancy is as wide as it has ever been -- almost 13%.

As we've discussed with you for many quarters, our reported cash basis same-store NOI was expected to materially decrease in the first quarter of 2014. That decrease totaled $10.7 million, or 14.8%, due primarily to the temporarily widening gap between reported occupancy and economic occupancy. And we've provided additional disclosure related to this gap and the change in same-store NOI in our quarterly supplemental schedule on page 15, with the major contributors being contractual free rent periods and downtimes between leases, as well as restructured monthly payment lease with Independence Blue Cross at 1901 Market Street, and the expiration of one large lease in Washington, DC, in 2013.

The good news is the vast majority of the items that caused this quarter's decline in same-store NOI has already been contractually addressed. And we expect this dip in same-store NOI to moderate as the year progresses, and turn into a material increase in 2015.

In all, 2.2 million square feet, or 10.4% of our total square footage, is under some form of rent abatement, which will burn off and begin to positively contribute to cash basis same-store NOI over the next year or two.

Also, we have almost 800,000 square feet, or nearly 4% of our total square footage, associated with executed leases for currently vacant space which are yet to begin. These leases are listed among major leases in some form of abatement and leases that are yet to commence, on currently vacant space contained on pages 6 and page 7 of the quarterly supplemental information furnished yesterday.

I'm very pleased to report on our financing activity this quarter. As of March 31, our total debt to gross assets ratio was 35.8%, which is roughly the same as 35% reported at the end of last year. However, during the first quarter, we paid down $575 million of secured debt that was scheduled to mature during 2014, using proceeds from a $300 million, unsecured 5-year term loan that was funded in January, and proceeds from a $400 million, 10-year bond offering completed in March.

The proceeds from the new financings, in excess of the maturing debt, were used to pay down the outstanding balance on our $500 million line of credit. Given the historical low interest rate environment over the past few years, and the Company strategy to issue unsecured debt to replace maturing debt, we had entered into a series of interest rate swaps over the course of the last year and a half, beginning back in late 2012.

In connection with the $400 million, 10-year bond offering, we entered into five forward-starting swaps, which locked the Treasury rate portion of the interest rate on the replacement debt. At the time of pricing the $400 million in bonds, Piedmont unwound the swaps and received net proceeds from its counterparties of approximately $15 million. After consideration of the swap settlement proceeds, the effective cost of our 10-year financing was reduced from 4.48% to approximately 4.1%.

Related to the $300 million, 5-year term loan, we entered into four interest rate swaps in order to fix the interest rate for a $200 million portion of the loan. The swaps had a blended rate of 1.59%, resulting in an effective fixed rate, after the credit spread is added, of 2.79% on $200 million of the term loan. The remaining $100 million of the loan will continue to carry a variable rate of 120 basis points over LIBOR.

Besides reducing the effective interest rate on this $700 million of replacement debt by almost 1%, the issuance of this new debt -- the unsecured debt -- enabled the repayment of three secured loans, and decreased our secured debt position from 49% of total outstanding debt as of year-end, to approximately 20% as of March 31, 2014. Further, 85% of our net operating income today from real estate assets is now unencumbered by mortgages. We have no further debt maturing until May of 2015, when a $105 million mortgage is due.

At this time, I'd like to raise our annual guidance to a range of $1.42 to $1.50 per diluted share, for core FFO. As I've stated previously, earnings in the last half of this year should be stronger than the first half, as certain leases for currently vacant space commence, such as Integrys lease in Aon Center, and the Epsilon lease at 6021 Connection Drive.

I'll now ask the operator to provide our listeners with instructions on how they can submit their questions. We'll attempt to answer all of your questions now, or we'll make appropriate later disclosure, as necessary. Please try to limit yourself to one follow-on question so that we can address as many of you as possible. Operator?

(Operator Instructions). Anthony Paolone, JPMorgan.

I think the disclosure on pages 15 and 17 of the supplemental are good, in terms of explaining what creates the drag in the same-store. Can you spend a minute talking about what the walk back up looks like, and what some of those replacement dollar amounts might be as these other leases kick in, and just when that occurs? Is this something we should expect to see improved by 4Q, or does it fully come in in 2015? Or can you just put some added color around that?

Sure. Hey, Tony, thanks. Yes, not surprised at the first question. Thanks for referencing pages 15 and 17. That's actually where I was going to direct anybody listening in on the call to, that we wanted to try to -- given the magnitude of the same-store cash decline in the first quarter, we wanted to make sure we provided some additional color to that. And so, as you can see on 15 and 17, we walk through the main components of those items. And so I ask everyone to go and look at that.

But there's a couple of points on that, and then I'll the more directly answer your question. Those four items on page 15 that talk about the change in same-store cash NOI, three of them are issues that are either one-time timing issues, or are issues of leases that have already been fully renegotiated, and those leases are going to be commencing either later this year, or have already commenced and earn free rent periods. And so the vast majority of the downturn same-store NOI are things that have already been addressed.

And so if you actually looked at -- and I know you can't just take out four major items of same-store cash and call it a fair analysis -- but if you were to take those four items out, we actually had growth in same-store cash NOI of about 5% in the quarter, and actually another 5% growth in GAAP NOI, as well.

And so as you take this to the next step and look at what -- it looks like for the year, I think Bobby said in the last quarterly call that we expected somewhere in the 5% to 8% down range from a cash same-store for the year.

Obviously starting in the first quarter at 14.8%, the next three quarters are going to be substantially less negative than the first quarter was. And we're still projecting somewhere in the, call it, 6% range from a cash same-store down for the year. So, a little less than Bobby may have indicated in the last call, but still obviously a little bit of a negative number.

The interesting thing about that is as you move into 2015, we can tell you right now that it looks like that cash same-store NOI is a plus double-digit number for 2015. The other thing that's kind of interesting is that the property cash NOI, because so much has been going on in portfolio in terms of selling and buying and things like that, and obviously we've been buying back shares as well, that our property cash NOI per share for 2014 is actually going to be flat. And for 2015, it's going to be up double-digits as well.

So we've got a great ramp-up coming. We've been talking about it for a long time. I think we've been indicating that this was going to be the tough quarter, and it was. But the numbers are going to get a lot better as we go through the rest of the year, and then springboard into 2015.

Does that answer the question, Tony?

Yes, I think it does. Is there any way you can give us, on something like 6021 Connection Drive and Aon Center, like those dollar amounts, what are the replacement dollar amounts, once the (multiple speakers) is up and running?

When you say the replacement dollar amounts, I'm not sure I know what you mean.

So, losing BP cost you $7.5 million. The vast majority of that is addressed; it just hasn't really made its way in yet. When it's fully in, how much of that $7.5 million; and, similarly, with the 6021 Connection Drive, the $1.3 million?

I see what you're saying. Well, the vast majority comes back. We'd have to look at it. Obviously there is some roll down on the BP lease to some of the other leases, and a very minor roll down on the Nokia situation at 6021 Connection. so the numbers won't be fully back -- of the $8.7 million that you're missing there, they won't be fully back. But I would say a substantial portion of it will be back, starting in 2015.

Okay.

Or, actually, it's just later on. Some of it comes back in later on in 2014 as free rent periods burn off, and then the rest of it comes back in 2015.

Okay. And then just a quick follow-up to that. Any thoughts on upping the buyback program? Just seem to be burning through the existing one.

Yes, I think for right now we're probably going to stand pat. As we've been looking at this over the last six or nine months, we've been saying, hey, leverage level is getting up closer to where we want, where we think of our maximum leverage level. And so as we think about buyback going forward, it has always been if we can sell enough to use as proceeds for buying back shares, we would do so. I don't think we have any plans to increase the buyback program at this point, but we still have $37 million left to spend.

Okay, thank you.

Michael Knott, Green Street Advisors.

Hey, Don. You know I'm going to ask about DC and Chicago, your two favorite markets. Just curious what change you've seen at the margin and leasing conditions there, if any. And any specific prospects you can cite for One Independence.

Yes, I love talking about that. Thanks. DC, I would tell you that we'll probably stay on the negative side of what you're hearing from others in that market. Activity level is still very flat. We have prospects for all of our vacancies, including One Independence, where we've got a couple of media companies looking at the building. But I wouldn't tell you that I'm highly confident a lot of those deals are going to get done.

And everything is taking a long time right now in DC. Every deal you were talking about three months ago, it feels like you're still talking about them, and saying that they are just -- as is typical in the bottom of a market, the momentum and the urgency to get things done from the tenant side tends to slow, and it just takes a long time to get things done.

Obviously, getting National Park Service done, finally, was a wonderful step for us, and will lead to a nice margin step-up for that asset in the second quarter. But it's still, I would say, slow. We'll knock out some things as the course of the year goes on, but I wouldn't -- I'm not looking for huge momentum from that market yet.

Downtown Chicago, we're seeing a little bit more positive activity because we knocked out a few deals in the quarter. We're working on some deals right now that will fill up a little bit of additional vacant space. We're not knocking out big deals yet. There doesn't seem to be any really big ones out there for us, but we've got good momentum in the one-floor-at-a-time type deals. (multiple speakers).

The last thing I would mention to you is, as frustrated as we are with DC and a little bit with downtown Chicago, it's interesting -- the rest of our portfolio, if you take those two segments out, is 93%. And we think it's going to be 95%-plus by the end of the year, so it shows you that markets have a lot to do with your success.

Indeed, that's true. Just curious if you can expand a little bit on your comment on property values appreciating. It seems like in some gateway markets, we've seen values appreciate just in the last month or so, or two. Just curious what you're seeing in terms of values and cap rates just here recently.

Yes, undoubtedly, Michael, you're right on target. I think the market is just continuing to escalate from a pricing standpoint. I think some of that -- a lot of it tends to be related to the fact that people are more optimistic on rental rate movement in a lot of those places. And so growth in rental rates can drive valuations in a 10-year discounted cash flow. And so, that's what's happening, I think, on some of those deals.

What's remarkable to us is how much people are paying for buildings in markets where there isn't a lot of rental rate run, like Washington or some other markets that we're familiar with. And it's sort of surprising to us the prices we're seeing in those places. We can at least justify and understand what's happening in New York and Boston and San Francisco and places like that.

Thank you.

Dave Rodgers, Robert W. Baird.

Don, maybe just following up on those comments; talk a little bit about accelerating asset sales. You've seen it obviously in the first quarter. It sounds like there's more to come. But can you talk about more asset sales in the pipeline?

Well, what we're trying to do, Dave, is find a good balance here. I would say we are running out of assets -- that's not exactly the case -- but we're running out of assets that are non-strategic for us. We've got a few left in a couple of secondary markets; a couple buildings up in Detroit, and one in Cleveland. And so but we really don't have a lot left to do in that realm. We do have a couple of buildings under contract right now that should move out in the next quarter; probably another one in the third quarter, we would guess.

And then we're going to continue to evaluate some of those next tier of assets that we're thinking about longer-term, as whether they would be good fits for sales candidates. But we're trying to balance that with growing the income stream and things like that.

So, we're being thoughtful. We still think the best buy out there, of course, on the buy side, is in our own stock. But we'll also be continuing to chase after the occasional strategic market deal which we think can enhance our aggregation strategy in the key markets that we're trying to grow in. So that's how we're thinking about both the buy and the sell side right now.

And with regard to your confidence in the second-half ramp in occupancy, certainly there's a lot that's already been leased but still has to take occupancy. It sounds like you're expecting some additional leasing as well. The additional leasing, again depending on where it hits, how does that start to impact how you look at cash flows and AFFO going into 2015? Does the ramp in AFFO follow the ramp that you're talking about in same-store results as we move into 2015? And I guess I'll tie in one more thought for Bobby there, is talk about that with respect to the dividend.

So, David, let me see if I can -- there's two or three questions within there, but let me see if I can address them. As we move through the rest of this year, I think we feel like the leasing activities should stay fairly solid. At least, so far, we're seeing pretty good, steady activity for our portfolio. Obviously if we don't have success in DC and downtown Chicago, given that's a disproportionate share of our vacancy, then it's going to be harder to continue to make a momentum in those other markets, because we're getting so full in those other places.

Having said that, the number I quoted you earlier, the double-digit growth in both same-store cash NOI next year, and double-digit property cash NOI per share, those numbers were basically on virtually no additional leasing through the rest of this year. So, to the extent we get a lot of leasing, particularly leasing that pays cash sooner than later, those numbers should go up from there. And so we're very optimistic about where 2015 is going to look, because we don't have a lot of action to have to take place just to achieve those kinds of numbers.

The AFFO number is even more compelling, because obviously we've been living with the big rollover for three years. The capital that tends to hit in those rollovers tends to get delayed beyond the timeframes of the leases rolling themselves. And so we're still going to be facing a fair amount of capital hitting this year, from leases that have been signed going back a year or two or three. And so 2014, as we've said all along, we don't expect to cover the dividend this year, but we expect a dramatic ramp-up in AFFO next year.

Because not only are we getting some accounting benefits from all this free rent burning off, and rents starting to get paid next year, so you don't have that impact hitting you, but you also have less capital going out the door as well. So the percentage growth in AFFO next year, we think, is going to be dramatic. And probably the last -- to answer the last question is, we're starting to think about whether that means there's a dividend increase on the horizon.

Okay, great. Thank you.

Young Ku, Wells Fargo.

Great, thank you. Just had a question regarding the page 6 of your supplemental. The 2.2 million square feet of leases that in abatement periods, that's a pretty big, sizable increase from 1.1 million square feet last quarter. I was just wondering if you could help reconcile where the big increase was coming from.

Yes, Young, that one is actually fairly easy. The vast majority of that is coming from the BP lease expiring in December of last year; and then the Aon, ThoughtWorks -- and I'm trying to remember what else would be hitting off of that. Well, Federal Home Loan, I think, was already -- no, sorry, Federal Home Loan had part of that as well. So of the increase, probably half was related to that one rollover of lease.

Shouldn't that already have been reflected last quarter?

, No. Actually, Young, the free rent periods began January 1. The expiration of the BP lease was during December, and the free rents began January 1.

Okay, okay. Maybe I can catch you guys off-line for that. Just one (technical difficulty) if you can talk about your 2015 a little bit further. I know you guys have roughly 50,000 square feet of contraction in National Park, and I was wondering if there are any other potential move-outs or contractions that you see for the year.

Yes, 2015 looks pretty compelling for us, because the only two large leases that come up next year are a Comcast lease in Chicago and an AMD lease in Boston. And we feel confident that those are pretty good situations for us, where we've got good relationships with the tenants and we're actively talking to them.

A number of the other, smaller leases that are coming up next year are already in process of renewal. And so we feel really good about our 2015 expiration schedule. Obviously it's not big to begin with, and then the ones that are coming up, there doesn't appear to be a lot of move-outs on the horizon for those.

Okay, that's helpful. And one last for me. We've been hearing that the government agencies have been looking to consolidate space. And I was wondering if some of your government tenants have been coming to you to potentially renegotiate some of their lease terms, and so forth.

Actually, Young, we're down to only couple of government leases at this point, from a GSA standpoint. And the main one is the NASA lease, which has 15-plus years of lease term left on it. So, no, there really hasn't been any of that type of activity.

We have more broadly seen a fair amount of GSA consolidating activity in DC. And obviously that's negative overall for the market, for sure. It could be, in a weird sort of way, a positive for us, because there could be some consolidations that could need bigger footprint of space, and obviously our One Independence asset could fit that very well. But at this point, that's not imminent.

Great, got it. Thank you.

(Operator Instructions). Vance Edelson, Morgan Stanley.

If you found strategic acquisitions -- which I know is a challenge, given the capital flowing into the space -- would the buybacks take an immediate breather of viewing the acquisitions as a better use of capital? Or would you instead look to ratchet up some of those non-core dispositions -- the second tier, as you phrased it -- to fund any acquisitions?

I think more the latter, Vance, would be the likely strategy for us. Obviously finding a lot of really compelling stories on the strategic market front is going to be difficult. But to the extent we -- and we're working on one or two right now that we are optimistic about. But to the extent we get those done, they'll probably be funded out of sales of secondary market assets, because we don't look to try to grow our leverage level at this point.

Okay, got it. And then some of the economic headlines yesterday were that economic growth almost stalled nationwide during the first quarter. Did you feel any sort of macro headwinds during the quarter, versus what you experienced last year? And whatever you did see during the March quarter, would you say that there's been any noticeable changes in April?

You know, that's an interesting question, Vance. We really haven't seen it. Actually, I would say the economic momentum has been at least as strong this year as it was in any time in 2013. And I think we've always been a believer that the first-quarter number was understated, due to a lot of the weather concerns and things like that.

We haven't mentioned, by the way -- and I know most of our peer group has -- we haven't mentioned that we had a minor impact to our first-quarter numbers from snow removal and increased utility charges, as a result of what was going on up there. But we didn't have a major impact, so we didn't spend a lot of time talking about it. But, fortunately, because most of our portfolio is in pretty good shape up there, we really didn't have much of an impact.

But I would say the economic question is that we feel like the market is actually as strong as it has been in some time, and feel -- absent the Washington, DC, challenge -- feel pretty good about the momentum in the economy at this point.

Okay, great. And then on the weather impact, I guess it was small, but it was significant enough to call out in the press release. Probably tough to isolate the impact, but can you quantify at all the impact on NOI, for example?

Well, it's a little hard to break it down on NOI, because you have to go through a tenant-by-tenant analysis on, who is in base years, and who's in net rent, and things like that. It was about an increase of $1.3 million of expenses, of which probably a majority of that -- half, to a majority of that -- probably flows through to the tenants. And we might have eaten half of that, so maybe it's $0.005 in impact to us. Something like that.

Okay, makes sense. Thanks a lot.

John Guinee, Stifel Nicolaus.

Great, great. Can you help everyone understand the whole redevelopment process? Maybe, Bobby, if you look at 3100 Clarendon, you're going to put $180 to $200 a square foot into the building. Probably half is base building, and then half is TIs and leasing commissions. If you look at what the DIA, Defense Intelligence Agency, was paying when they left, do you have that number handy, on a gross and a net basis?

Bob Wiberg, can you help us with that? I'm not sure if we have -- anybody have that number? It was upper 30s gross, if I remember correctly, John. And I think your numbers are a little high on the overall rework at 3100.

But, Bob, if you want to give him some ballpark, that would be helpful.

Yes, I think our total -- we have a breakout of the base building costs versus the tenant work, which really drives the total investment. But I think, end of the day, we're going to be in that project about $450 a foot when we complete the whole redevelopment project.

Is somebody chasing you, Bob?

(laughter). Sorry. That was the fire truck going by.

Yes, that's what they all say. Okay. (laughter) So what do you think the gross ramp for DIA -- you think was in the high 30s -- and then what do you think it will be -- what's your pro forma re-leasing this, sometime in 2015?

Right. Mid-40s on the re-let.

So, essentially what happens is if you're looking this on a before-and-after, essentially I'm just looking at page 38, and your estimated capital is $180 to $200 a foot. And the net-net is you think that you can raise your net rents $5 or $6?

Yes, I'd say that's probably right. I'd make that comparison to what the market would be without the redevelopment. I don't know the expiring rent for DIA offhand.

Okay. And then on One Independence Square, that's most likely -- well, maybe it won't go to a GSA -- but the GSA is now very LEED-certified, blast-proofing, defense-oriented. What do you think the base building dollar you'd have to spend to get that GSA-compliant? And then what sort of TI leasing commission package do you think it will take to backfill One Independence?

Well, from the interest we've seen so far, there really has not been any blast-proofing, that type of requirements, associated with the users we've seen. Now, that may be different if you had Homeland Security or someone else come along. So we don't anticipate, really, a large base building project to comply. We have done work in the building, which is just to make it appeal more toward the private sector, modernization of the facility, but we don't anticipate a lot more base building cost.

The GSA generally does not have huge tenant allowances built into their leases. Now, there may be additional funding that they have to come up with; but I think on the GSA side, we'd probably be in it for another $50 a foot maybe on TIs, plus a commission.

Does that give them turnkey space, $50 in TIs?

It may not give them, but they may have to come up with some funding on their own, which has happened with other transactions we've looked at.

Great. All right, thank you.

Michael Knott, Green Street Advisors.

I'm sorry. You made some comments on National Park Service earlier. Do you feel like this is a precursor to them vacating the building? Can you just -- I'm sorry, reiterate that answer?

I never get into the business of predicting what the GSA will do, or an agency, because things change for them fairly frequently. I know that at least one of the reasons why they were considering doing a shorter-term renewal with us, initially, was because they just weren't sure whether they were going to ultimately combine into the Department of Interior at some point. I know that there is rumor in the marketplace that they may continue to do that. But I've learned not to traffic in rumors in Washington, DC, on GSA tenants; and believe them very closely, because those change rapidly.

So, I think the answer is -- I'm not suggesting that we're optimistic we're going to keep them, but we just don't know.

Okay, thanks. And then just to follow up earlier, when I asked about One Independence, I thought I heard you say that there were of couple of media company prospects. I've never thought of Southwest DC as anything other than an administrative, government part of town. Can you help me understand that?

Well, I think that we are fairly close to the Capitol, and as a result -- and people may not realize that, but where our buildings are situated, we got really nice views of the Capitol at One Independence, and media companies like to have proximity to the Capitol. Some of the Capitol buildings don't have the same quality of improvements that we have. And so I think the media companies have been attracted to that proximity and views to the Capitol, and things like that, that we have that some of the other buildings that they would look at don't.

So they're not more interested in that Mount Vernon triangle, north of Massachusetts area, on the other side of the Capitol?

They could be, but in many cases they wouldn't get the views they were looking for. And obviously we have a great, big block of space. Now there are a couple of them up in NoMa as well, but I don't think they have the same views of the Capitol that we have.

Okay. And then one last one for me. Your cousins, so to speak, over at Columbia recently acquired a building in San Francisco at seemingly a pretty low cap rate. I know they were already there, and you're not. But just curious if you -- if expanding to San Francisco is something we might see you guys do.

I don't think you'll see us expand in San Francisco anytime soon, particularly if that's what it takes to get in there. So, probably not.

Okay, thanks.

Thank you. There are no further questions in the queue, so I would like to turn it back over to Mr. Miller for closing remarks.

Yes, thank you very much for everybody. Obviously we knew we were going to have a challenging same-store NOI discussion this quarter. And hopefully we've answered that satisfactorily for everyone.

I think the one thing that hasn't come up that we spent a little bit of time talking about on the earnings call, but want to just make sure we reinforce, is we did a lot of rework of the balance sheet this quarter, and did a really good job of getting a fair amount of those loans restructured; and did so, at the same time, by doing some swaps and adding $0.10 to the NAV of the Company by bringing in $15 million of swap proceeds.

So I hope everyone will make sure they take a look at that, because I think we've done really good job of re-laddering the maturity schedule on our debt, and getting some really good, long-term, aggressive debt in the portfolio.

So, thanks again for everybody's time, and we appreciate your interest.

Thank you. This will conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation. Have a great day.