Piedmont Realty Trust Inc (PDM) 2014 Q3 法說會逐字稿

Greetings. Welcome to the Piedmont Office Realty Trust third-quarter 2014 earnings call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Robert Bowers, CFO of Piedmont Realty Trust. Thank you, Mr. Bowers. You may now begin.

Thank you, operator. Good morning and welcome to Piedmont's third-quarter 2014 conference call. Last night we filed our earnings release and our Form 8-K, which includes our unaudited supplemental information, both of which 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 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 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.

Now in addition, during the call today 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 some of our financial results after Don Miller, our Chief Executive Officer, discusses a few of the quarter's operational highlights. Don?

Good morning, everyone, and thank you for joining us this morning as we review our third-quarter financial and operational results. As we will expand upon, Piedmont's operating performance is improving markedly as we transition from a period of high lease rollover to one of low rollover in 2015 and 2016. We are excited about the prospects for Piedmont over the next few years.

Let's start with our leasing activity this quarter. I'm pleased to report that we executed approximately 684,000 square feet of leasing and I'm even more pleased to report that about 57% or 400,000 square feet of that was related to new leases. That's the second-highest quarter of new leasing for vacant space in the Company's history.

Some of the more noteworthy new leases for vacant space signed during the quarter included Mitsubishi signed a 75,000 square foot, 11-year lease through 2026 at our 400 TownPark property in Lake Mary, Florida, taking that value-added property from 19% leased at the time of acquiring to 93% leased today. Lockridge completed a new 49,000 square foot, 12-year lease through 2027 at our 150 West Jefferson Street asset in Detroit, Michigan, which brings our total occupancy in Detroit to over 90%.

FedEx signed an approximately 65,000 square foot lease at our 8560 Upland Drive asset in Englewood, Colorado. We are currently marketing this asset for sale and it's our only remaining JV property.

Engle, Martin & Associates completed an approximately 40,000 square foot, 11-year lease at our Glenridge Highlands II property in Atlanta, Georgia. And Aon completed a 32,000 square foot, 10-plus-year lease at Crescent Ridge II, located in Minnetonka, Minnesota.

From the lease renewal perspective, the largest lease renewals included JLL's 15-year global headquarters lease at Aon Center for almost 200,000 square feet, which expands and extends their expiration into 2032. Other significant renewals during the quarter included a 21,000 square foot, seven-year lease with Caelus Energy Alaska at One Lincoln Park in Dallas, Texas, and a 34,000 square foot, 5-plus-year lease renewal at 400 Bridgewater Crossing in Bridgewater, New Jersey, with Oracle.

Leasing activity was fairly well diversified across all of our markets and we've gotten the fourth quarter off to a strong start as well. Our greatest leasing challenges continue to be concentrated in the Washington DC market.

Most of our available space in that market is in the District and the RB Corridor. We are seeing a number of prospects touring the various available spaces and have several proposals outstanding, but the market remains competitive and bottoming rental rates have not yet begun to improve.

On the development front, our redevelopment of 3100 Clarendon is on budget and on schedule with the office tower work projected to be substantially complete in early 2015. Despite DC's challenges, we continue to be optimistic about 3100's prospects given its premier location.

In Houston this past week we poured the seventh floor of Enclave Place, our 300,000 square foot, 11-story office tower which is under construction in the Houston Energy Corridor. The project remains on budget and on track for completion in the third quarter of 2015.

The Houston leasing market remains vigorous with Class A vacancy in the Energy Corridor below 5%. Of course we are diligently monitoring oil prices and market conditions as we focus upon leasing up this property.

From a transactional standpoint, we continue to execute on our strategy of building concentrations of assets in select, high-quality submarkets within top US office markets. To that end, during the third quarter we acquired one asset, 1155 Perimeter Center West, a 400,000 square foot, Class A property well located within the central Perimeter submarket of Atlanta. Perimeter Center West complements our nearby Glenridge Highlands II asset and brings our Atlanta area concentration to approximately 1.5 million square feet.

The project is 100% leased at below market rates and houses the corporate headquarters for three different companies. It is easily accessed by commuters and adjacent to the MARTA station. We are pleased to add this high-quality property to the portfolio and believe that the going in GAAP yield of 7.6% translates into a strong risk-adjusted return considering its relatively recent construction vintage and the six years of average lease term remaining.

As we have done for previous acquisitions, we have posted to our website a detailed transaction overview for our review.

Subsequent to quarter end, we also entered into a binding contract to purchase approximately 25 acres of land adjacent to our 400 TownPark property in Lake Mary, Florida. This property is the only remaining undeveloped office parcel in TownPark, the highly successful mixed-use development in Lake Mary, one of Orlando's strongest performing submarkets.

This land is located at the intersection of I-4 and Highway 417 and we believe it is the best site in the metropolitan area, particularly given the impending completion of Orlando's Ring Road, which will create immediate access to our site. We believe this site can accommodate over 650,000 square feet of office space.

As has been our long stated strategy, we continue to refine and narrow our footprint and we will also continue to exit nonstrategic markets. Specifically, we will focus our ongoing efforts on aggregating properties in select submarkets where we have or can build a significant relative presence. You have seen this strategy unfold since our IPO in Cambridge and along 128 in Boston and Las Colinas and Preston Center in Dallas, in Buckhead and Central Perimeter in Atlanta, and a few other select national markets.

We will be discussing this strategy in more detail during the NAREIT meetings beginning on November 4 here in Atlanta and we look forward to seeing many of you during this event. We will be posting the presentation to our website for those who will be unable to attend.

A critical part of this strategy is having strong regional leadership in place with deep relationships and a strong local market knowledge. On that note, I am pleased that Tom Prescott, a Twin Cities native and 30-year veteran of the Chicago real estate market, has officially joined the Piedmont team this quarter to head our Midwest region. Tom as well as Bob Wiberg in Washington DC and Joe Pangburn in Dallas have joined us on the call today with all the other executives on our management team.

Also, regarding our corporate leadership and governance, I am pleased to announce that Washington DC area resident Mrs. Barbara Lang will be joining our Board of Directors this coming January. Barbara was most recently the long-tenured and influential president of the Washington DC Chamber of Commerce and has held prior executive leadership positions with IBM and with Fannie Mae. She now runs her own strategy consulting firm in DC and is on the board of publicly-traded Cardinal Bank in Washington.

We undergo this planned transition within the Board as two of our longest-serving Board members tenure out over the next 12 months. Mr. Don Moss will retire from the Board at the end of this December and Mr. Bill Keogler will be leaving by September of 2015. I wanted to personally thank both for their leadership, thoughtful counsel, and support since I joined Piedmont in 2007.

Before we take your questions, I will now ask Bobby to briefly review our financial results and expectations for the remainder of the year. Bobby?

Thank you, Don. I will touch on some of the financial highlights for the quarter. However, as this information was included in the earnings release and supplemental financial information which were filed last night, I encourage you to please review these reports for more complete details.

For the third quarter of 2014 our reported FFO, core FFO, and AFFO were largely in line or slightly ahead of expectations. Our total lease percentage was 87.5% as of September 30, up from 87% in June of this year. In addition, the stabilized portfolio was 89% leased as of quarter end and our weighted average remaining lease term increased to 7.3 years.

As anticipated, same-store NOI in the third quarter increased over 3% when compared to the second quarter of 2014 based on the expiration of rent abatements for several significant tenants. We expect positive sequential quarter growth to continue for the next few quarters as we still have 1.7 million square feet of leases that are still in some form of abatement and another 600,000 square feet of executed leases are currently vacant space that has yet to commence.

Turning to the balance sheet. As of September 30, our total debt to gross asset ratio was 37.8%, up slightly with the acquisition of the 1155 Perimeter West property. During the third quarter, we amended our $300 million unsecured 2011 term loan to extend the term of the facility from November 2016 to January 2020 and to decrease the stated interest rate spread over LIBOR.

Further, subsequent to quarter end, we entered into additional forward-starting interest rate swap agreements that fix the interest rate for the extension period. As a result, the all-in rate on the facility through the original maturity date of November 2016 is 2.39% and for the extension period the rate is 3.35%.

Also during the quarter we entered into two new swaps for the last $100 million of the $300 million unsecured 2013 term loan. Therefore, that facility is also now fully hedged and effectively fixed at 2.78% including the spread.

As a result of the acquisition during the third quarter that Don referred to, we have increased our utilization of our $500 million line of credit to $440 million as of quarter end. However, we do anticipate receiving sales proceeds related to some potential fourth-quarter dispositions and we are actively considering financing options, both secured and unsecured, to reduce the balance outstanding on our line of credit and to pay off a $105 million mortgage note coming due in May of 2015.

Now at this time with stronger new leasing than we originally forecasted for the year, I would like to narrow our annual guidance for 2014 to the top end of our previous guidance to a range of $1.48 to $1.50 per diluted share for core FFO. We will follow our usual practice of issuing formal 2015 guidance in early February after we have completed our annual budget cycle.

However, from a broad perspective, as we have been indicating for some time, we are expecting our core FFO to grow on an annual basis in the range of $0.08 to $0.12 per diluted share and cash NOI to increase significantly as our 2015 lease expiration schedule remains low as executed leases commence and as rent abatements burn off. As such, we are announcing the first of what we hope will be a recurring event, that is a raise in our dividend rate by 5% to a quarterly dividend of $0.21 per share starting with this December's dividend.

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

Operator?

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

Good morning, guys. Thanks for the color, Don. Wanted to reach out and talk about dispositions a little bit.

I think, Bobby, you mentioned some 4Q disposition proceeds, but maybe go into a little bit more color of kind of what that program might entail in terms of disposition assets. Given the recent success you have had on leasing of some of the non-core assets, do we expect those to move a little bit faster now? Any color around kind of what you are thinking on dispositions in the fourth quarter as well as 2015? It would be helpful.

Sure, I'd be glad to, Dave. The specifics on what we anticipate right now is we got a handful of deals in the market right now, a couple of under contracts, and we anticipate, if everything worked like we thought right now, which you know how that never goes quite the way you expect, but if it went just the way we thought today, we would probably close say 50 to 100 between now and the end of the year. And then another 100 to 125 in the first half of next year.

That ranges from some assets that we have done some recent leasing on to some assets that are in nonstrategic markets that we've talked about for some time that have finally had some things happen that allow us to move them for the value we think they are worth. Hopefully that gives you a bit of a sense, but I think we've got, between now and the end of next year, a little over $200 million budgeted. That does not count anything we might do with Aon Center, which obviously changes the metrics dramatically on that.

Any sense of pricing on those, Don?

Well, good. I don't know that -- I'm not sure we have calculated an average FFO yield on that group of assets. At least I don't have it with me. We may be able to talk about that later, but nobody in the room -- everyone is shaking their head. Nobody has that number in front of us.

Okay. And then follow-up. On the DC proposals you talked about, it sounds like it's maybe too early to talk specifics, but I guess in terms of economics, sounds like they are still challenged.

But can you talk a little bit more about kind of the size? Would those be meaningful leases that you are talking to now and maybe some of the locations, whether you are talking Clarendon or DC proper with some of these former OCC space, etc.?

Both Chicago and Washington look like we're going to have a much better fourth quarter than we had third quarter. We had several deals slip from the third to the fourth quarter that have now already been signed, frankly, in the fourth quarter that are in those markets. So we expect to have a little better fourth quarter in those markets, including some activity in some buildings that we hadn't been seeing up to now.

We have some optimism around a decent-sized lease at One Independence and some good 10,000 to 20,000 foot activity across the broader portfolio in DC. So we expect the fourth quarter will be materially better than the third and, frankly, in DC we are seeing fairly good activity, albeit at very lousy economics.

All right, thank you.

Jed Reagan, Green Street Advisors.

Good morning, guys. I guess just following up on DC and Chicago a little bit; do you feel like there is sustained momentum in those markets? I know you kind of expressed some more optimism on the last call and now this call. Does it feel like something has fundamentally changed there? Are things still seeming tenuous?

And I guess just maybe how would you characterize kind of generally those two markets that you're feeling?

I think at a high level we are seeing the Chicago market tighten up nicely, particularly downtown. But frankly, as I think we've said for a number of quarters now, we've had some pretty good activity in the burbs and we're fairly well leased in the suburbs now. But downtown, and particularly at 500 West Monroe, we are seeing pretty good levels of activity there.

Then I would say on the tour side in Washington we have seen a big pickup in activity in recent months, particularly in that, like I said, that 5,000 to 20,000 foot range. We converted a few in the third quarter and I think we're pretty optimistic we are going to convert quite a few more in the fourth quarter.

So I wouldn't say there's a fundamental change in the marketplace. There's still a supply/demand imbalance and it's still a tenants' market, but I think it is slowly but surely starting to try to climb back out. But that is not reflected in the economics yet.

Okay. Then for Chicago CBD, are you seeing a decent number of bigger requirements floating around the market that could be candidates for your buildings or is it sort of more the small to midsized guys?

It is more the midsized guys. The 25 to 50 is seemingly where we are getting most of the activity, and so we are working sort of from the bottom of the stack on up on 500 West Monroe for some of those kinds of tenants. And a lot of them are very good credit tenants, so it's the Piedmont kind of credit that we are looking for.

Okay. On the Orlando land site, just wondering what the game plan there is and if you have any kind of immediate plans to move forward on something. Maybe just talk a little bit about the timeframe and how you (multiple speakers).

I'm sorry, on Lake Mary land you said? Well, that's a fairly lengthy conversation and maybe we'll talk about it a little more at NAREIT next week.

But basically, because of the opportunity that we had with owning the building down there and the leasing activity going on, we were seeing a lot of build-to-suit candidates that were larger than the vacancy we had. We were fortunate enough that Mitsubishi came along and decided to take the remainder of the vacancy in that building, so we are in effect full there now.

But the activity we saw encouraged us to see if we couldn't take a position in what is a very desirable submarket and an environment that was created at TownPark that is first class. So what we thought we would try to do, given that we've got some strong relationships down there and strong local partnership with a group down there that we are working with, we feel like we're going to be in front of all the major activity that's going on there and it will create some build-to-suit activity for us.

I don't think you will see us do anything in the speculative realm unless it was just a partial building that we added on to an existing pre-lease or something like that. But we feel very bullish about the land and feel very good about the basis that we are in at.

Okay, that's helpful. Just last one from me. Curious on the JLL renewal, just wondering if you could talk a little bit about how their space usage changed in that requirement. And did they -- was there any major changes in employee density or kind of increased common areas or sort of how they approached that new fit out?

You know, interestingly, because they are still a couple years away from the expiration and probably a year or more away from starting to change out the use of the space, it's still a little early to tell how they are going to use it. They had been bumping up against base capacity constraints in the space already and so it didn't surprise us that they wanted to expand, but I think their expansion is just a demonstration -- not to speak for them, but a demonstration of their confidence in their business going forward.

But I do believe that they will be reformulating the space pretty dramatically, even though it was already fairly advanced in the era that it was put together in 2006 and 2007. But as you know, space needs continue to change and so I suspect they will do something pretty creative there.

Okay, makes sense. Thanks a lot.

John Guinee, Stifel.

Thank you. Clearly you guys have done some good things in the capital market side of the equation. Share buybacks $320 million, a little under $17 a share. The share price is now over $19 a few years later. Are you an issuer of equity at this number or not?

John, that's a fun question that we deal with around the shop quite a bit. We are probably an issuer as we get very close to our NAV or above, which I think we have been fairly transparent that we believe that that has well into the two-handle range on it. And so I would say there's probably a fair distance to go for our stock before we would be willing to issue at these levels.

But with the volatility we've seen in the market that could be only a week or two sometimes, and so we are always trying to be cognizant of the opportunity to issue if we think that makes some sense. Given the growth we think we have over the next year and some of the good things happening in the firm, we are optimistic we are going to get there. But time will tell.

Okay. Then can you drill down a little bit on the 1155 Perimeter Center West? I think that is a little nontraditional in terms of the square footage.

A little bit, John. It's actually an interesting building. Cousins built it; I thought they did a great job with it. We have always loved the bones of that building, the infrastructure that they've got there, whether it's from the loading docks are above standard, the fitness center is spectacular. They've got a really nice cooking facility there and that's partly the reason Arby's is in the building. But they've also got a big trading floor kind of space that's about 80,000 feet of the 370,000 or thereabouts.

As a result, when we first looked at the building back in 2007 when the previous buyer bought it, we kind of looked at that as sort of challenging space. It might be a little bit difficult. That space has now become really, really attractive space. In fact, you've seen that three different tenants have occupied that space over the course of time now and there is virtually very little downtime between the tenancies in that building.

It shows that a lot of different types of tenants use it. The technology tenants, particularly the one that is there now, really likes it a lot. And I think it's actually an asset to the building now rather than a detriment where we might have thought seven or eight or nine years ago when we looked at the building originally.

Great, thank you very much.

Vance Edelson, Morgan Stanley.

Terrific, thank you. Another question on Perimeter Center. Could you describe the competitive landscape for the acquisition? We are all aware of the strong private and sovereign wealth demand, even in markets like DC, where the fundamentals aren't there yet. So how would you characterize what you experienced in Atlanta with this purchase? How competitive was it?

Little bit of an interesting process that took place there. Since it's a building that we knew well and wanted for a long time, we had been in constant contact with the seller of that building over the last number of years expressing our interest in it.

They, to their credit, went -- decided to go to the market through a broker, but we preempted the brokerage process and put in a strong offer on the front that they thought was worthy of acceptance. And so they went ahead and accepted that offer rather than going through rounds of proposals.

Don't know where the pricing would have gotten to if we had gone through rounds of proposals. We could all debate that, but we feel really good about the price that we got and so we were very happy about moving forward on the transaction.

Okay, well done. Given your continued solid land position, you already answered on Orlando, but any thoughts on additional development priorities, which markets might be attractive and would most projects be build-to-suits and so forth?

What we are seeing, and it's sort of a funny phenomenon at this point in the cycle, Vance, but we are seeing a lot of people coming out and saying they need a build-to-suit because they've got name the number, 100,000 square feet in a building somewhere in the various submarkets they are in and their landlord is jacking their rent up. And so their natural reaction is, gee, I need to go out and look for other space because my landlord is jacking my rent up only to find out there really isn't very many other existing spaces available.

And so then they go out to the build-to-suit market and find out that oh, lo and behold, the cost to develop a build-to-suit is far in excess of what the landlord was trying to jack them up to. And so a lot of this demand is relatively false demand, admittedly, but you got to sort of go through the process with people to make sure that they understand what is available to them out there.

So having said that, there will be some who are serious because they just need more space or whatever the case may be. But what we are seeing across the board -- Atlanta, Dallas, the Orlando opportunity -- that we are seeing a lot of activity on the build-to-suit front. Now whether they will come to fruition given the pricing gap between existing rents and the cost to build, we are not sure.

The other thing we should point out on 1155 that we maybe didn't make -- highlight is that property does come with an acre of vacant land. Don't how much we can do with that, but at a minimum it's an additional parking site. At a maximum it may be an outparcel pad or something we could do with it.

Okay, very interesting. Thank you.

(Operator Instructions) Michael Lewis, SunTrust.

Good morning. You reported a very small loss on litigation settlements after several quarters of recoveries. And I realize that's not in your core FFO calculation, but I was just wondering if we are basically done there or if there's potential for additional gains or losses.

I'm not sure what that small amount would be. Bob, do you know what that is?

Not in the current year. You must be speaking cumulatively. There was a small loss that we are seeking still insurance recovery, but there's no additional expense associated with that.

Everything that was ever paid out on a litigation issue was reserved at the time of the payout. We are still pursuing insurance firms for additional reimbursement and -- but that hasn't resolved yet. So to speak, nothing but upside at this point because it's already [there].

So potential gains, if anything?

I mean I guess there could be a modest amount of legal fees still to pursue the remainder of the insurance proceeds, but that's small dollars.

But the gain would be excluded from our core FFO projections to you guys.

I was also wondering if you could talk a little bit more about your decision to raise the dividend and how that kind of fits into the best uses of capital. Your yield is already very competitive. I realize you have some proceeds coming in to pay down the line, but maybe you could give a little more behind that thought process.

Michael, I think it's really sort of a twofold issue. One is that we have always said we would try to be forward looking in all the things that we make decisions on. And as you know, we expect to earn less than the dividend we are paying out this year from an AFFO standpoint, but that's largely as a result of a really positive event that took place last year when we extended the lease with IBC up in Philadelphia and gave them a pot of money to draw at their discretion, not knowing if they would or not, and getting a really solid return on that money.

Well, they have drawn a fair amount of that money this year, so it is going to drive down our AFFO during 2014. But that also allows us to look forward and see that we expect a very dramatic increase in AFFO next year. Of course, AFFO is a little harder to project than FFO because of the timing that you don't control on the call of capital, but all of our models are showing us earning $1 or more, probably between $1 and $1.10, on an AFFO basis next year.

And if that's the case and we are right, and we think we are, then raising that dividend to $0.84 from $0.80 still keeps us well within the payout ratio range of our peer group and just signals to you guys that we are very optimistic about our business. We feel really good about where things are going and we just want make sure everybody knows that.

Thanks, just one last one. You talked a little bit about your two active developments. If my math is right, it looks like the cost of the two projects is either at the high end of the range you gave last quarter or maybe slightly above and you pushed back the stabilization date for Clarendon just a quarter or two. So there may be nothing there; I was just wondering if there's any additional detail to give or if your yields are kind of still on track.

Actually, Michael, nothing has changed at the real estate level. I'm not sure we've done the best job we can of communicating consistently on what's happened, but we have always thought that the Enclave Place would be a July 15 delivery. We have known that from day one. If we had ever communicated anything differently than that, that was our mistake.

But July 15 is delivery date and the dollar amount was sort of $85 million to $90 million total delivery. That includes land value. We have reported things between $84 million to $88 million and $85 million to $90 million, and that is a nomenclature differential that's our own fault. And I think a couple of analysts picked up on that last night.

But the $85 million to $90 million number includes land. The $84 million to $88 million doesn't. So that's sort of the explanation on that.

Now in Clarendon, that hasn't changed at all as well. The confusion probably comes around whether we're talking about Phase 1 or Phase 2. Phase 1 is the office redevelopment. That is still scheduled to be done in the first quarter of 2015, as we've always said it would, and the dollar amounts haven't changed on that, although we reported slightly different dollar amounts depending on which report you've looked at.

And, again, that is our fault. We need to be more concise on those kinds of numbers.

The second phase, which is the retail phase, which doesn't affect our income stream because the retailers are already in place is scheduled for more like the second quarter of next year. But because they are already in place we have moved that piece of the delivery back and focused on delivering the office space so that we can try to accommodate tenants there as early as possible. Does that make sense?

Yes, I follow. Thanks.

Brendan Maiorana, Wells Fargo.

Good morning. Don, so I understand kind of the ramp in AFFO and that spurs you to kind of look at the dividend. But is AFFO really the right metric to look at given that you guys have been running at around $10 million to $12 million a quarter of incremental leasing dollars and TI dollars?

I don't really think that's related to development, given that your two development projects -- I presume you haven't spent any TI dollars at Enclave Place or 3100 Clarendon. It is a pretty meaningful kind of impact to true cash flow, not AFFO, so how do you kind of think about the operating cash flow of the business relative to the dividend level? Because it seems like it's, even with a big ramp next year, probably going to be below $0.84.

Boy, I'm not sure we agree with that, Brendan, but suffice it to say that we often don't. So I guess what I'm trying to get -- trying to explain to you is that we had a value -- series of value-added properties we bought in 2011 and 2012. We have been leasing those up; we have had particular success with those recently, as you know, and as a result that's driven up some of the incremental costs.

Clearly, if we are down longer than we would like to be in DC on some of the buildings, there may be some more incremental costs that come associated with that. And that is part of the reason for the strong increase in AFFO.

But we continue to see strong growth in AFFO as we move forward, because there's so little lease rollover over the next few years that we don't have a lot of capital coming out that's non-incremental. So as a result, that's just the call that we made and we feel like that's the right call.

But your -- I understand the roll from the existing tenant base is low, but you are also 85% occupied and I think 87% or 88% leased. I know you want to move that number up, so I'm not sure if stuff is going to be classified as incremental or non-incremental, but regardless it is TI dollars. It's leasing dollars and it's dollars going out the door. And your leverage is at a point where I think you are comfortable, but I don't feel like you think it's below target.

And as you stated earlier, your NAV is -- you are trading below your assessment of NAV. So I would think, given that you are still a lease-up story, that you would want the most optionality on your capital. And I know we are only talking about $6 million here, but just from a signaling standpoint I would think you would want the most optionality and it feels like taking the dividend raise gives you a little less of that optionality.

Well, I think your point is the way we look at it: $6 million isn't changing a $5 billion organization dramatically. It's a recognition of the fact that we want to maintain a strong payout ratio in our space and it is a recognition of the confidence we have going forward. So if you don't accept that answer that's okay, but that's how we feel about it, Brendan.

Fair enough. Just anything that we should be thinking about -- Bobby, I know there's lots of details in terms of the tenants that you have that are the renewal deals that you did, which there's a lot of. Is there anything we should we thinking about from a free rent period that could have a big impact beyond what you've disclosed in the supplemental?

No, Brendan, we detail on page 7 of the supplemental 1.8 million square feet of leases that are greater than 50,000 square feet. That will have a significant impact on our increase and forecast of cash flow and cash NOI for us.

You have already seen in the third quarter and here going into the fourth quarter where Aon and the space that was in downtown there will start producing cash for us. Catamaran, Union Bank out in California will start producing some cash for us. All that is detailed for you on page 7 and those are the significant drivers for your --.

Brendan, we are always going to try to give you advanced warning, say 12 months or so in advance, of any unique free-rent periods that are going to hit that might be a result of a lease we did some long time ago or something we took over on a building that we bought or something like that. But to try to project it multiple years in advance makes it a little harder, so we just try to stick to the discipline of providing that information 12 months or so in advance.

Sure, that's helpful. Last one just KeyBanc. Any -- what is the likely mark-to-market as you guys try to re-lease that space? Is it roughly in line with the market or are they significantly one way or the other?

No, I think the market is rough there. That is not -- that expiration isn't for six more quarters, so a lot of it will depend on what happens to the market. But presuming that not a lot changes in New Jersey, that would be a markdown to the extent we can get some leasing done there, but that will be a leasing challenge for us. That will be one of our leasing challenges.

Okay, great. Thanks for the color.

John Guinee, Stifel.

Great. This is just sort of a curiosity question, whoever handles the lease negotiations.

When I look at page 7 -- thank you for focusing me on that, Bobby -- it's got some interesting abatement periods which are a few months here, a few months there, here a year, there a year, everywhere a year. What is the thought process from your perspective on wanting to do this? And what is the thought process on a tenant wanting to have sort of a non-traditional abatement schedule?

John, I will be glad to answer that. It is art, not science, obviously. What we have always tried to do is upfront as much of the free rent as we possibly can, unless there's a situation where we have some concern about the credit of the tenancy and then we want to try to get some money as soon as we can to recoup some of our investment.

But in most of the cases you are looking at where there are fairly good credit tenancy, quite often we stagger it out a little bit because they have some reasons, the tenant quite often has some reasons to pay some at a certain point in time and not at others. And quite often we are at the mercy of what they want to do timing wise and we just have to sort of build it into our model.

I would say, more often than not, it's driven by the tenant where they don't really care when they take it but they want to take it in multiple years. For same-store NOI reasons we try to match up the months of the year that it happens so that it creates as little volatility in our same-store NOI numbers as we can. But like I said, quite often that's just derived by the tenant's desire, not ours.

Any chance in the future you would bifurcate your straight line effect on lease revenues to free rent and more traditional straight lining, just to help people understand this sort of lumpy nature?

Have you seen other people doing that, John, because I don't know that we have? I understand the benefits to you guys of it and it's something we ought to think about. But have you seen anybody else do that yet?

You know, I've got to think about that. If we ask for it, we always get the information, we just only ask for it on occasion when it seems to be significant.

Obviously we want to be careful about giving it to anybody without giving it to everyone at the same time, but I -- let us think about that a little bit. I understand the need. That's why we tried to put the information on page 7 in there because I think that should help you model it as well as you possibly can.

Yes, but we are not going to go to that level of detail. Thank you.

Thank you. At this time I would like to turn the floor back to Mr. Miller for closing comments.

Thank you, everyone. What didn't come up in the call was the fact that we have a new Board member joining us. I hope it isn't missed that we brought on some of that we think has got a lot of great capabilities for our Board.

She will be joining us in January. She is the former chairman of the Chamber of Commerce of Washington DC and a lot of local relationships there. Hopefully that significance and symbolism isn't lost on the marketplace.

Then obviously the optimism we've expressed from the dividend increase and the activity we're seeing on the leasing side is very exciting to us. So we thank you for attending the call and we look forward to following up with some of you. Take care.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.