Piedmont Realty Trust Inc (PDM) 2014 Q4 法說會逐字稿

Greetings, and welcome to Piedmont Office Realty Trust fourth-quarter 2014 earnings call.

(Operator Instructions).

As a reminder, this conference is being recorded. It's now my pleasure to introduce your host, Robert Bowers, Chief Financial Officer for Piedmont Office Realty Trust. Thank you sir. You may begin.

Thank you, Operator. Good morning, and welcome to Piedmont's fourth-quarter 2014 conference call.

Last night we filed our earnings release in a form 8-K that includes our unaudited supplemental information. Both are available on our website, www.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. I'll remind you that 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 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.

In addition, during this call we'll refer to non-GAAP financial measures such as FFO, core FFO, AFFO, and property NOI. The definitions and reconciliation of our non-GAAP measures are contained in the supplemental financial information that's 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. In addition, we're 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'll now turn the call over to Don.

Good morning, everyone, and thank you for joining us this morning as we review our fourth-quarter 2014 financial and operational results. Our comments today will also include our expectations for 2015, and some of the key assumptions to arrive at our estimates.

Looking first at the past quarter and specifically at leasing, the activity for the fourth quarter totaled 321,000 square feet and resulted in total square footage leased for the year, of 2.2 million square feet. Activity for both the quarter and the year was fairly evenly distributed between renewals and new leases, with 55% being leases with new tenants in 2014. Given our modest lease expiration schedule for the year, this activity resulted in positive annual net absorption for the portfolio, and we ended the year just under 88% leased.

The largest leases executed during the quarter included a 107,000 square foot five-plus year renewal with Advanced Micro Devices at our 90 Central Street building in suburban Boston; and two new leases at 500 West Monroe in downtown Chicago, the first being for approximately 52,000 feet with locked in companies for 11 years, and the second, a 27,000 foot expansion by GE Capital Corporation for 12 years. This expansion, combined with GE's existing lease space at 500 West Monroe, totals almost 400,000 square feet.

In fact, these leases highlight the success we've had recently with our value-added portfolio. In addition to moving the 1 million square foot, 500 West Monroe property up to 73% [re]-leased, we have in fact made significant progress recently on all of our value-added properties. Firstly, a 156,000 square foot Medici Building in Atlanta has been leased up to 88%, with the largest lease of 76,000 square feet to Preferred Apartment advisors. Second, the 176,000 square foot 400 TownPark asset in Lake Mary, Florida, has been leased up to 98% as of year-end, with the execution of a 75,000 square feet with Mitsubishi. And finally, we've had substantial leasing interest during the fourth quarter at our 142,000 square foot Suwanee Gateway property. We anticipate reporting good progress on this asset at the end of the first quarter of 2015.

We've also begun chipping away at our Washington, DC, available space during the quarter. In addition to signing almost of 60,000 square feet of leases in the fourth quarter, we've also signed post year-end in approximately 85,000 square foot new lease with The Corporation for National and Community Service, for 15 years at our One Independence Square building. We continue to see better leasing momentum in the Washington, DC, market than previously.

Similar to 2014, our lease expiration for 2015 is very modest, with approximately 3.5% of our total square footage expiring. Therefore, we will continue to focus on leasing currently vacant space, and driving net absorption in the portfolio. We are optimistic that we will achieve over 90% recorded lease percentage by the end of 2015 for our end service portfolio.

On the development front, Enclave Place was topped out in December 2014, and we are now working on the completion of the curtain wall in order to dry-in the building and complete interior improvements. The overall project remains on budget and on schedule for an early third-quarter completion.

While vacancy rates remain very low for Class A product in Houston, leasing velocity has declined as a result of the substantial drop in oil prices. However, the direct impact to the Houston market, and specifically to the Energy Corridor, remain unclear at this time. Keep in mind the Company's exposure to Houston is fairly limited, with available space to lease representing less than 1.5% of the total square footage of the portfolio.

Our redevelopment of 3100 Clarendon in Washington, DC, is also on budget, and on schedule, with the office tower projected to be substantially complete by the end of the first quarter of 2015. We continue to be optimistic about 3100's potential, given the building's premiere location and nearby transportation and amenities. We are actively pursuing several leasing prospects at this time.

As reported last quarter, we've moved to place a number of properties in the market for sale. We announced earlier this week the successful sale of the first of these assets, and believe that we are being rewarded for our patience in disposing non-core assets in the form of higher sale prices. The low interest-rate environment, improved economic confidence in the US, provide the backdrop to achieve very favorable pricing compared to that of just 12 to 18 months ago.

We closed on one acquisition in the quarter, acquiring approximately 25 acres of land, adjacent to our 400 TownPark property in Lake Mary, Florida. As I mentioned earlier, we've had great leasing success with that property and the Lake Mary submarket continues to be one of Orlando's strongest. It's rich in amenities and well located at the junction of I-4 and Orlando's ring road. The new site is currently entitled for approximately 160,000 square feet of office space, but could accommodate over 650,000 square feet. We're pleased to add this site to our holdings of developable land, and at the same time control a parcel that's adjacent to our existing 400 TownPark building. We are also pleased to see substantial number of inquiries for possible build opportunities on the property, and we'll keep you posted on further development from that front.

Subsequent to quarter end, we completed an investment round-trip in Dallas, by redeploying proceeds from the sale of the suburban asset into a high-quality urban infill property with higher yields and better growth potential. Specifically, we disposed of 3900 Dallas Parkway in Plano, Texas, a 120,000 square foot five-story building that was sold to its primary tenant, Cinemark. A few days prior to that, we acquired Park Place on Turtle Creek, a 177,000 square foot 14-story Class A building located in Dallas' prestigious uptown Turtle Creek submarket, with a host of nearby amenities, including many upscale shops and restaurants, and adjacent to the Katy Trail. Park Place, which is 88% leased, complements our acquisition a year earlier of One Lincoln Park, and furthers our in-town Dallas strategy. If you haven't already, I've encouraged you to reference the presentation regarding the Dallas transactions on our website.

On the dispositions front, we've identified up to $260 million to $270 million of assets we anticipate moving out of the portfolio this year. This does not count Aon Center, on which we'll be testing the waters of a sale or joint venture in the first half of 2015. Obviously, a sale of all or part of Aon Center will cause us to have to adjust our 2015 guidance, but the remainder of the dispositions are already in our numbers.

Turning to a different topic, in January we've had several governance changes take place at Piedmont. As previously announced, our Board of Directors introduced a Director tenure limitation in 2014, which is designed to provide an orderly planned change in our Board membership. We previously announced that this January, Miss Barbara Lang had joined the Board. For those of you who don't know Barbara, she's probably best known for her decade of service as the President of Washington, DC's Chamber of Commerce, which followed stints at Fannie Mae and IBM.

We had intended for Barbara to replace our Board member Don Moss, who is rolling off the Board due to tenure limitations. However, given the unexpected death in January of our Chairman Wayne Woody, and the fact that Mr. Moss was a member of the same Board committees as Wayne, Mr. Moss has graciously agreed to serve the remainder of Wayne's term through May of this year, which will allow the Board time to thoughtfully consider replacements and recruit additional talent to the Board. In the meantime, Frank McDowell, who has served as Vice Chairman of the Board, will carry out the duties of Chairman until a successor is appointed.

I will now ask Bobby to briefly review our 2014 year-end results and outlook for 2015. Bobby?

Thanks, Don.

While I'll discuss some of the financial highlights for the fourth quarter of 2014, I encourage you to please review the earnings release and supplemental financial information which were filed last night, as these items contain more complete details.

For the fourth quarter of 2014, we reported FFO of $62 million, or $0.40 per diluted share. Core FFO, which removes the $2 million impact of insurance recoveries and acquisition cost recorded in the fourth quarter, was approximately $60 million, or $0.39 per diluted share. AFFO for the fourth quarter of 2014 was $0.27 per diluted share, and reflects the decreased non-incremental capital expenditures during the fourth quarter, as several significant tenant buildouts had been completed earlier in the year.

As Don mentioned, our total lease percentage was approximately 88% as of December 31. That's up compared to the third quarter of 2014, as well as [that at] the end of the prior year. In addition, the stabilized portfolio was almost 89% leased as of year-end, and our weighted average remaining lease term was 7.1 years.

As has been the trend over the last two quarters, cash NOI continued to improve on a sequential quarter basis, reflecting continued improvement in our economic occupancy, as abatement periods for certain significant leases continue to expire during the second half of 2014. As of December 31, 2014, the Company had 1.3 million square feet of leases that were still in some form of abatement, and another 400,000 square feet of executed leases for currently vacant space that had yet to commence.

From a balance sheet perspective, we ended 2014 with $2.3 billion in outstanding debt, and approximately 38% total debt to gross assets ratio. During the fourth quarter we obtained a $50 million term loan, at a rate of LIBOR plus 115, the proceeds of which were used to fund the acquisition of Park Place on Turtle Creek, which occurred a few days before the disposition of our 3900 Dallas Parkway asset, as well as to pay down on the balance of our debt outstanding on our $500 million line of credit.

Looking ahead, we have $105 million in a mortgage that is maturing in May of 2015, and currently anticipate issuing unsecured debt to repay that mortgage in the term loan and pay down on the revolver. To that end, during the fourth quarter we entered into $250 million of forward starting interest rate swaps, to lock a portion of the interest rate for the potential issuance of debt in 2015.

At this time I'll like to introduce annual guidance for 2015, in the range of $1.54 to $1.64 per diluted share for core FFO. Additionally, we expect 2015 cash basis NOI and same-store NOI to increase 8% to 10% over 2014 results. Don mentioned earlier, we anticipate the existing in-service portfolio occupancy to increase over 300 basis points. And we are confident the overall lease percentage will be over 90% by the end of 2015. Similarly, we project our economic lease percentage will vary during the year as abatements commence and burn off, but by the end of year in the low 80% range. AFFO will improve dramatically in 2015 to $1.05 to $1.15 per share, as total non-incremental capital expenditures decline.

I'll now turn the call back over to Don for some closing thoughts before we take your questions.

Thanks, Bobby.

I'd like to conclude this portion of the call by simply stating that this is the most excited we have felt as a management team since our IPO five years ago. We feel considerable momentum from recent anticipated leasing, which should lead to substantial growth this year and next. We've been messaging this into steady growth in NOI and cash flow for some time, and we believe that we are now in the midst of that growth. It's nice to feel like the wind's at our back at this point in the cycle.

With that, I'll now ask the operator to provide our listeners with instructions on how they can submit their questions. We'll attempt to answer your questions now, or we'll 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)

Jed Reagan, Green Street Advisors.

Good morning guys. Just wondering how we should think about the trajectory of cash, same-store NOI growth over the course of the year and think we'll see any noticeable changes quarter to quarter as we go through?

Hey, Jed, yes, we do have actually kind of an interesting trajectory, if you will. Just as we did last year where we had the big decline in the first quarter, that low denominator will produce a big uptick in the first quarter followed by some very solid upside after that. But more steadily in the mid- to upper-single digit range in the last three quarters, but well into the double-digits in the first quarter.

Okay, thanks, that's helpful. Just wondering, there was some guidance introduced on a potential contraction in Austin, and just wondering if you can give a little color on that and what the potential exposure there might be, needing to backfill. And then just a quick tag onto that, if you could give an update on leasing activity for that KeyBank space in New Jersey?

Yes, let's start with the Austin building. The Austin building is 195,000 square feet. About half of it or so is currently sub leased to a variety of tenants. And the lease expires in 2016, I think as we indicated in there. We're in negotiations to renew the tenant, whether we'll be successful or not we don't know yet.

But we are also working with a handful of the sub tenants to convert some of them as well. Obviously Austin is a whole lot healthier than Houston, probably more like Dallas where there's still good activity and things like that. We still feel reasonably positive about that. The second question was on the KeyBank space in New Jersey?

Yes.

The KeyBank space, that thing has been sitting vacant for a long time now, although the lease doesn't expire until early 2016. We're working on some plans to reposition the asset as we speak, and probably later this year we'll be looking into spending some money on that. If we choose not to do that, we could sell the asset as well.

And a lot of it will depend on what kind of activity level we see, it's very well located, but it's early to mid-80%s, it's one of the few buildings we have in our portfolio, I would say is not current state-of-the-art. That'll be a little bit more of a challenge, but we're thinking about all of our options right now on that, Jed.

Okay, thank you.

Keep in mind, Jed, the other aspect of that is the other half of that building is 400,000 feet, the other half is leased to a very good credit tenant who's using it as a data center. And they've got a lot of infrastructure in there all the way down to solar canopies out in the parking lot. So you've got a very strong income stream coming out of the other half of the project for a number of years yet as well.

Have they expressed an interest in maybe expanding next door?

Not that I'm aware of, no.

Okay. All right, thanks a lot, Don.

Sure thing.

Dave Rodgers, Robert W Baird.

Good morning guys. I want to talk about the leasing. Don, you seem to have pretty good confidence with regard to your ability to begin or continue to lease up in 2016, but as you look at -- 2015, sorry. But as you look at the track for 2014, I think on a new leasing activity peaked in the second quarter, dropped in the third, dropped in the fourth, economics on lease got weaker into the end of the year. And you've had this 2 million square foot, plus or minus, vacancy level in the portfolio going back I think to 2011. So I guess my question is, what's given you the confidence that you're really going to see that ramp in 2015 in terms of the lease up? And do you have the stubborn vacancy that's just not leasing that we can see move out of the portfolio faster this year?

Actually no, I don't think we do. Let me see if I can try -- there's three or four questions in there, I'm sure I will only answer one or two of them but I'll do my best. The stubborn vacancy of going back to 2011 is an obvious answer. That is, we've had so much rolling out of the portfolio that I would say, if you look back at 2011 and looked at our vacancy and looked in 2015 at our vacancy, there'd be very little overlap of vacant space. In fact maybe one block of space at Aon center would be the only common vacancy in our entire portfolio, so it's not as if there's a bunch of stubborn vacancy that's been hanging around.

It's been the fact that we've had much of tenants rolling over in the 2011 to 2014 period. And now as we go from 2014 to 2015 to 2016 to 2017, we have a lot less roll over, in fact virtually none. I think as of today we have less than 2% of our portfolio rolling the rest of this year. We said 3.5% on the call because that was the number at the end of 2014, but we've done some activity here in the first quarter already that's had us under 2% for 2014. So, it doesn't take a whole lot of leasing to add a lot of occupancy to our portfolio for the remainder of this year, because there's nothing going out the back door. That's the main big picture answer to your question, Dave.

That's helpful. Then just on the confidence in terms of the new leasing in terms of what we saw maybe a decline rate of new leasing in 2014, but you seem to have pretty good confidence in 2015 that that's picking up. A little color on that would be helpful.

That was the other aspect of my answer, sorry I didn't get to, sometimes we all get so caught up in what various quarters you're doing, that you've got to look at bigger pictures. We did over 1 million square feet of new leasing last year. If I did 1 million square feet of new leasing this year, with a little bit of lease rollover I've got, then I'm well into the 90%s occupancy. I pick up 400 basis points of occupancy. We're only suggesting we might pick up 300 basis points of occupancy. So, I'm telling you that it doesn't take much to get there and I wouldn't read anything into the third and fourth quarters being down. I think we're going to have a very solid first and second quarter based on what we're seeing at this point.

Great, thanks. And a follow-up maybe on part of that was last quarter, I think you guided to upwards of $200 million on asset sales for 2015. I though you maybe quoted a number that was just slightly above that on the call earlier, but I might have missed it. So just maybe what your plans are in terms of sales this year and timing for dispositions?

Yes, I know it's hard to follow the entire written script sometimes when you guys are listening quickly, but we said $260 million to $270 million of one-off dispositions are going to be in the market. In fact, most of those are already in the market. And are out for sell as we speak and we're pretty confident a lot of those will move.

Then of course we also suggested that there could be something happen on Aon center. That's the only thing that's not in our guidance at this point, and obviously given its size and impact in the portfolio, that would be a little bit more of a Company changing event. But I don't think it's anything if we were successful in executing at the kind of pricing that we anticipate, that I don't think anybody would be disappointed by that.

Okay, great, thank you.

Michael Lewis, SunTrust.

Hi, thanks. So you give some good detail on the occupancy ramp up, I was hoping maybe we could just drill a little more specifically into DC, which Don mentioned is doing a little bit better and there's some room to go in there. Maybe you could tell us what kind of industries are driving the improvement and what kind of the opportunity is there?

I think DC is a little bit harder to give specific guidance on in terms of occupancy in that market by year-end. Partly because we have a fair number of sizable leases that we're working on today. And unless I can tell you which of those will hit and which of those won't, it's very hard to give you could guidance on that occupancy ramp up.

I would tell you that we're seeing a little stronger activity from the government, but it's not anything that we hadn't anticipated for a while, it's just sort of the peg is working its way through the pipeline, if you will, from following on sequestration. And so we're starting to see some of those GSA requirements coming out now. Obviously we mentioned in the call that we've knocked out one of those. We knocked out an 85,000 lease at One Independence, here during the fourth quarter already which obviously is a very positive sign. And then we have some or activity coming there, and then we're starting to see a little bit more contractor activity.

It's interesting, I saw a statistic the other day, and I don't read too much into these kind of one-off statistics, but I thought this was very fascinating. That the thing that correlates most highly with office leasing in Washington, D.C. is the numbers of bills passed by Congress two to three years before that. And so if you think about that, it's happening again in the sense that we had almost a complete lift by Congress for several years during the Harry Reid administration, and now we're starting to see bills potentially getting passed.

And so I think that gives us a little more optimism down the road that there may be more activity generated by that, because it stimulates both GSA and contractor activity. I don't want to read too much into that, but I think better times are ahead for DC, it's just we're bumping along the bottom right now.

Great, thanks, and then second. You acquired some land in Florida and you talked a little bit about the enclave opportunity. I was wondering if there were additional opportunities to acquire land adjacent to any facilities, where there might be more of a focus on development whether it's starting building on the Irving land or in Atlanta?

Well we, as you know, have tried to be strategic about picking up a handful of parcels that are adjacent to existing buildings that we own. I think we've got five today, including the land that we bought down in Orlando. Two of those are in Atlanta, two are in Dallas, and one in Orlando, regional heads in those areas are working hard to try to find opportunities. But I don't think you're going to see us do much in the way of additional speculative development.

Might there be a partial spec component to a pre-leased deal? Yes. We are bidding a fair number of build-to-suits in those markets now, they're both -- they're all fairly active energized markets from a build-to-suit activity standpoint, so we're optimistic something like that may come down the pipe over the next year. But I don't think you're going to be seeing us buy a lot more land and/or going into the speculative development business in a big way.

One last thing I'd add to that though is, you will see us probably by a handful of small land parcels adjacent to buildings where we might want to try to expand our parking fields. Or build a parking deck or something like that where you can further strengthen the functionality of a building. So there's a couple places where we're in the process of doing that, but it's not to add product to the portfolio as much as it is to ensure, and more of a defensive move to ensure the functionality of assets longer-term.

Got it, thank you.

Brendan Maiorana, Wells Fargo.

Thanks. Good morning. Bobby, appreciate the details on the same-store. It looks like if you guys are 9% growth at the midpoint, that's about an incremental $10 million of higher NOI relative to your Q4 run rate, I think, if your Q4 run rate is about $280 million on the same-store. I think they do 9% over your average for 2014 of $266 million would suggest the same store pool would be about $290 million of NOI. That seems like it's all contractual based on the leases that will commence and the burn off of abatements. So is your same-store outlook the 9% growth, is that effectively kind of all contractual from leases that are already signed that will come online during the year?

Roughly you're correct. Obviously in all of our projections there's an element of speculative leasing that's in there, but yes, you're pretty close.

Okay, and I understand the response to Jed's question about the year-over-year of same-store numbers from a comparison purpose standpoint. But just from just an actual NOI dollar standpoint, do the numbers move up meaningfully during the year, or is it kind of just from an NOI progression standpoint as we move throughout the year, is that roughly sort of uniform during the year?

Yes, it does move up during the year, particularly in the second half of year, but I will tell you from a modeling standpoint, perhaps we can talk later and get in great detail on this. What you described in terms of growth in the same-store is correct, it will grow as much as maybe $5 million by the end of the year on a quarter basis, from what the run rate is this quarter. I will remind you one thing, the population changes when you start saying same-store and you've got dispositions baked in, what you're trying to do is fairly difficult.

Yes, understood. Okay and second question, the 85,000 square foot lease at One Independence, can you provide some color on economics, and then maybe just as we think about that building coming online, what are the economics like from an NOI perspective for a building that was, from an operating perspective mothballed, but now will have a tenant that comes online for 25% of it. Assuming that there are additional leases, but initially for 25% of that?

Yes, good question, Brendan. The rents that we're achieving on the new lease are very much online with where we were previously. The concessions, as you can imagine, were elevated and the lease commences early next year. So high level if you're trying to model it, that's how you go ahead about modeling it.

Obviously, you have a fair amount of fixed costs in a place like DC because property taxes are such a high component of your property expenses. That you probably have a lower threshold to open a building in a place like DC, than you do in places that have a little lower fixed costs. So, I don't have off the top of our head, I don't know we've got it calculated anywhere nearby, what our NOI would look like with just a 25% tenant, but probably the best news of all is that particular tenants, they took the absolute worst space in the building, if you will. Not that there is a bad space in the building, but they took the lower floors and we kept the best part of the building to be able to lease. So we achieved the rental economics we wanted. We had to pay for it a little bit on the front end to get there, but we also leased the lower quality space in the building, so we feel really good about that.

Okay, all right, thanks for the color.

(Operator Instructions)

John Guinee, Stifel.

Great. Thank you very much. A couple, just curiosity, then the numbers question. If you look at Lake Mary, you said you're going to buy something that's currently entitled for about 160,000 square feet, but you can I guess up zone it or put in structured parking and get up to about 650,000 square feet. What's the increase or decrease in development cost per square foot on your base case at 160,000 square foot building versus an up zoning or increased density of 650,000?

John, it may be a little confusing by the way we presented it, there's 25 acres, there's actually two parcels. The first is a already entitled and ready to go parcel that we can do about 160,000 feet on, that if we were to do a full 160,000 we'd have to do some structured parking. But it's adjacent to an existing building we have that has some additional parking already associated with it, so that's made it strategic and helpful to us. Then the second piece is immediately to the north of the first piece, and that's un-entitled today, but we have very strong signals from the jurisdictions there that office is desirable element that would be put or that site, and we have a pretty good sense of what the density can be and so we're working on getting that fully entitled as we speak.

That might also include, however, a retail it pad or two, a hotel and some office, so the 650,000 is probably includes some other uses in that project. If you know the TownPark project at all it was a fantastic full mixed-use project, one of the early ones done in the cycle by Colonial, they built a lot of the office product around it and this was the last land associated with TownPark. And then, of course, the last part of the excitement on that land site for us is that, the last piece of the ring road in Orlando, which is funded and going to be moving forward here shortly, ties right into the north end of our project. So we are right there on the ring road as it ties in. It's something we're extremely excited about.

My recollection is Colonial is maybe the Southwest corner, Duke's the Southeast corner, not particularly well located. Somebody's -- merchant builder built a very nice project on the Northeast corner as I recall, but I might get those corners wrong. Where specifically is your dirt?

Yes, your memory is good, John. So the Northeast corner is the merchant developer you're talking about. A group of five or six buildings, not highly amenitized. And remember on the East side of I-4 is, I'll call it the consider to be the poor side, the West side is the good side, so the Northeast corner was the spec developer product.

The Southeast corner was the Duke product that they've now sold off, Blackstone now controls it. The Southwest corner was all Colonial, Heathrow they bought a lot of that, and they sold that off to DRA along with some of the TownPark that we're in, and that's on the Northwest corner. So basically DRA controls a lot of the west side of the highway. We have the rest of it, and then the former Duke product and the former spec development product is on the east side of the highway.

Great, okay, and then I guess for Bobby B, if you look at your same-store NOI -- if you look at your mark-to-market on page 28, that's really solid, Brendan obviously hit the nail on the head on your same-store NOI numbers. That would imply to me a lot bigger increase in FFO than your guidance indicates. Is there some de-levering and some -- or have you included your dispositions, but not included any incremental acquisitions in that guidance, or what's the rest of the story?

Acquisitions are a little bit less than your disposition scenario and the timing of those acquisitions come into play, John. We have about $200 million in acquisitions on the books in these numbers. But later in the year, so there is some de-levering elements and there's some, I call it dilutionary element in our forward projections, based on that so I think you're interpreting that right, John. It slightly more dispos than acquisitions, and the acquisitions tend to be later in the year.

Okay. And is there any increase in cost of debt in your projections, Bobby, or not?

No, there's no increase in cost in debt.

Is it safe to say that you're pretty much guaranteed to exceed the high end of your guidance?

No. We gave our guidance and there are a lot of variables there. Don introduced one of them with what happens with Aon center, so we're comfortable with the guidance we've given.

Great, thank you.

Mike Salinsky, RBC Capital

Good morning guys. Bobby and Don, first question. Any preliminary thoughts just on [Aon] the taking in to market in terms of pricing expectations and how you would like to structure that, I think you mentioned a JV. If pricing comes in better than expected, would you look to sell that asset outright?

Yes, Mike, I probably won't give anybody the idea of what we want to sell it for, but you can probably imagine there's a lot of NAV calculations out there with people who have expectations on numbers that might be a relatively good guidance on that. But in terms of the outright sale, JLL got the package out, they're going to be bringing it to market here soon. They will be quoting 100% sale-ask, that doesn't mean that's what we're necessarily trying to accomplish but if we did accomplish 100% sale offer that was attractive we would seriously consider that.

I think we'd also very seriously consider a same-val on a 50-50 basis. Either is still optional for us and if somebody doesn't come in at the right structure and the right price then we won't do anything. But we think now is the right time to do it and we're very optimistic about the future of the building. So we think we can share some of that optimism with whoever that will be, whether it's a buyer or a partner.

Okay, that's helpful. Then just going back to, I think John's question, you talked a little bit about the acquisition pipeline being a little bit more backend loaded. Just can you give us a sense of what you're looking at today in terms of acquisitions, is it mostly infill in your existing markets, are you looking at expanding a little bit more and are you seeing more core value add opportunities?

This is Ray Owens. What we're trying to focus on are really more urban in-fill assets in the submarkets where we have the [presence]. As you know, we've put regional people in the field like Bob Wiberg, Tom Prescott, Joe Pangburn and you will probably see us being more active in those markets that they're covering in addition to Boston and hopefully New York. So we're really focused on more on where we have on the ground presence and trying to build up those portfolio. Really select submarkets. And just like everybody else, it's going to be difficult to find the kind of deals at the pricing levels that make sense, but we're trying to really refine our focus around the select submarkets.

Thank you.

Vance Edelson, Morgan Stanley.

Thanks. Good morning guys. On Park Place in Dallas, just wondering when negotiations started roughly and whether the fall in the price of oil and the impact on the Texas economy or the potential impact became a topic in the final months of negotiating, whether it factored into the price paid and so forth?

Yes, I'll start, Vance and Joe Pangburn is here with us, who runs the Southwest region, if you need any more color commentary. I think he started negotiating the deal, Joe, in November? We were certainly aware of what was going on with oil at that point in time, we feel very comfortable that because we were not only selling an asset but buying an asset at the same time and moving in town, that we were making a really smart trade given that we were selling at a much lower yield than we were buying at.

And relative to replacement cost we bought at a much bigger discount that we sold at, even though the place was slightly higher per square foot. Just a quick fact, I think it's less than 10% of the tenants in Park Place are energy-related and I think we would suggest that that's -- there's just no comparison between Dallas and Houston in terms of the impact from the energy sector. It doesn't mean that a slowdown in the energy sector doesn't have an impact on Dallas, but it's nothing like Houston. They're just apples and oranges.

Okay, that's very fair. Then you mentioned the build-to-suit inquiries on Lake Mary and it sounds like you won't do a lot of spec development, so given that, how does the Florida property rank relative to your other four parcels in terms of likely priorities? Is a pretty far up the list? In terms of the likelihood of moving forward with development. And back on the price of oil, does that drop at all, move your Texas land further down the list at all?

No, I don't think so. I would tell you that, like anything else, there's probably a parcel in each market that is most prime for development. I think Joe is sitting here with me would tell you that our Royal Lane land is probably such good in-fill site in Las Colinas, that if there was the right build-to-suit property that came along that could be really good fit.

Similarly, GH III, the Glenridge Highlands third land parcel there and that project could be a very near-term opportunity for us in Atlanta. And then of course the Lake Mary. So I'd say that there's probably three that have more near-term opportunities and that we're actively working on things on each of those sites, but obviously nothing is easy in the build-to-suit world as you know.

Okay, perfect. Thanks, guys.

(Operator Instructions)

Jed Reagan, Green Street Advisors.

Just keeping on the Dallas topic. Look like you sold that asset at of [5-3] cash cap rate, seems like a pretty strong number for the market and wondering if you could talk a little bit about the dynamics going in there. Whether in place rents that were well below market and then how the pricing came in for that sale, relative to expectations, or where you think you might have been able to sell that a year ago?

Yes, Jed we sold that off market to the user tenant who had built the building and sold it off a number of years ago at a lower price. And we'd had a long-term relationship with them. They were evaluating all their options, and I think it just came back to them being very strategic building for them for number of reasons. So we didn't actually bring it out to market for sale.

We did have a tenant that was departing the building on the second floor, that factored into that below market cash cap rate. But it was one of those binary decisions for us. We either sell it to this tenant or take it back through the redevelopment process, because the tenant likely moves to another location. Then at the same time a second tenant was departing, and so that would've required some more capital be put in there. Having said that, obviously I think we feel like that we've got user sale pricing all day long on and felt really good about it because of that.

Okay. That's helpful. Thanks. Just curious that you can talk a little more about Houston, what you are seeing on the ground there. Maybe if you made any adjustments to your development underwriting at this point in terms of lease up timelines or stabilized yields?

The answer is all yes, all of the above, but we're not quite sure how to quantify it quite yet. Obviously there is still some activity there. In fact we've got prospect or two that are looking at sizable chunks of space. I don't know -- they tend not to be oil related, they seem to be other types of tenants. So I don't know how to read into that, whether we should have some optimism around those kinds of prospects or not these days.

But having said that, I think you'd be foolish not believe that your underwriting might be a little bit impaired, certainly timing and probably concessions. My guess is you can try to achieve the rates we've been all quoting because we had pro forma this at a below-market sort of a below new building market rent to begin with. So we feel comfortable that base rate might be able to hold but we might have some more concessions to achieve something. It's still little early to tell, because there's so little activity down there right now it's hard to get your arms around what market is, so that's always an interesting challenge when you're at this point in the cycle.

If you were hazard a guess on the type of cap rate impact you see in Houston in the last three to six months any guess, or just too early to tell?

It would be a complete swag. We really just have no idea -- the only thing we have seen is people dropping deals. That would tell you that the market has moved a lot, we just don't know how much.

Right. Makes sense. Last one for me, just in terms of releasing spread, you guys finish here last year around 3% but it bounced around quite a bit. Do you think 3% is a decent betting line for this year, or do you think there's maybe some upside if you're able to push rents here and there?

You've probably heard us answer this one before. I have no idea. It has so much to do with, do we do a big early renewal on a deal in New York, or do we do -- it depends on what the population set is, and so it's so hard to give you good guidance on that.

I think the only good advice I can never give an analyst on this segment is, don't worry about what it is quarter to quarter it just is almost meaningless. Especially for someone like us who's sort of lumpy, and so to us I think if you were to look at our overall portfolio it's pretty flat. If you were to look at individual years and we're just rolled market individual years, some are below and some are above and it's just so hard to predict. But I'd say overall we would say flat, to getting better because rents are growing in more places than they're declining.

Okay, great. Thanks so much.

Brendan Maiorana, Wells Fargo.

Thanks. Don, I think you mentioned in your script that you thought that the ending economical leased rate, or the maybe it was the average, economic occupy percentage would be low 80%s doing 2015, but it seems like your 81.3% in Q4, I guess that's low 80%s maybe low 80%s has a lot of variability in it. I would've thought that number would move up given the abatements that are burning off, and some of the known commencements that are going to happen, so maybe can you just provide a little clarity around that stat?

I think Bobby said that in the prepared script remarks. What I think he's getting at is, the number's low 80%s today, it goes up over the course of the early part of the year because we have a number of free rent periods burning off and things like that. And then you have another chunk of free rent coming at Nestle in the fourth quarter of this year, that moves the economic occupancy back down in the fourth quarter.

So it goes up over the course of the year, and then moves back down in the fourth quarter. And then of course, any new leasing we're doing this year of any size, probably has some free rent on the front end of it, so that's not contributing anything towards the end of the year. It's a little bit of a bell curve goes up, goes back down over the course of the year, but then should continue to go back up in 2016.

Brendan, importantly for 2014, we averaged in the high 70%s, in 2015 we'll average in the low 80%s. So you see an improvement in that overall number.

About a 5% improvement.

Sure. Yes. So if you're over 90% by an occupy percentage -- or I'm sorry, a leased rate percentage, and your low 80%s average on economic. You're a big tenant landlord, so presumably those tenants take time to get in the door and then probably also carry, certainly while you're in lease up phase, carry a fair amount of free rent. Given the long lease terms. Where do you think normalized your least percentage to economic occupy percentage should be for the portfolio, mid cycle.

Brendan, let me see if I can take that because it's probably hard to think about it in terms of our portfolio because things are moving in and out all the time. But I think if you just do a math equation, I think you can come to as good an answer is any, and that is, if you say we're doing -- on average most of our bigger deals are 10 to 15 year leases. At one point we were doing a month a year free in free rent, and then you have your structural vacancy on top of that, you start doing the math. I would say a month a year has come down to something less than that, it's not half a month, but it's probably somewhere between half a month and a month in most of our markets right now.

You can start to do a math equation that gets you to what our loss to lease would be if you want to use that terminology. In the office space sector. Then of course some of that depends on how strong certain markets are versus others. Somebody in Houston last year that wasn't having to give any free rent would've had for which had a much lower number of loss then we did -- than we would've with something in Washington, D.C. So you have to factor that all together, but I would say we should run closer to 5%, 6% difference coming forward in the next few years, as that free rent starts to burn off.

Okay, that's helpful. And if I look at just your overall occupancy -- or lease rate percentage, it's excluding DC which has got the chunky vacancy which we all underwrite when that happens, it's close to 91%, I think I calculated it at 90.8%. If you look at your portfolio, ex DC, where do you think you can get that lease percentage to?

I'm not sure I have it ex DC at the moment, Brendan, I know ex DC and Chicago, we're a little over 95% right now. And we are pretty optimistic that Chicago's number is going to be coming up pretty dramatically. Excluding DC today --

If it's ex DC and Chicago, so 95% ex DC, Chicago

91% excluding DC today, including Chicago.

So let's say, do you think 95% ex DC, that is a good number and the number that you guys can hold over cycle? Would that be accurate? Because I think we can all figure out where we think Chicago and DC ought to get to during the next couple of years.

Keep in mind, as we lease up some of these buildings, we're probably going to be selling off 100% leased buildings, and maybe buying things at a little less occupancy to them. So it's a little bit of a hard number to peg, and then of course you know what will happen, the minute I say yes we can hold 95% in the other markets, the other markets will go into the tank and DC will improve and you will be worried about the other markets then. I'm not sure I can tell you -- I think 95% -- anybody underwriting more than 95% consistent occupancy in the market is probably kidding themselves.

Yes, fair. All right. Thanks for the time.

Okay. Thanks, everyone and I think that was the final question so we'll just wrap up now. And we just want to let everybody know how much we appreciate your attending the call, and a lot of good questions today. We appreciate that so thank you very much for your interest.

That does conclude today's teleconference. You may disconnect your lines at this time, we thank you for your participation today.