Piedmont Realty Trust Inc (PDM) 2015 Q1 法說會逐字稿

Greetings, and welcome to Piedmont Office Reality Trust first quarter 2015 earnings call. At this time all participants are in a listen only mode. The question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press *0 on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Robert Bowers.

Thank you, operator. Good morning, and welcome to Piedmont's first quarter 2015 conference call. Last night we filed our earnings release and a Form 8-K, including our unaudited supplemental information. Both 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 expectations we discuss today. Examples of forward-looking statements include those related to Piedmont Office Reality 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, property operating income and same store NOI. The definitions and reconciliations of our non-GAAP measures are contained in the supplemental financial information available on the company's website.

I'll review with you our financial results after Don Miller, our Chief Executive Officer, discusses some of the quarter's operational highlights. In addition, we're also joined 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 today as we review our first quarter financial and operational results, including our leasing and capital markets activities for the quarter. We are confident you'll find this quarter's results a significant improvement in almost all metrics as previously executed leases have commenced, related abatements have diminished, and the lease up of vacant space has continued.

And first of all, I'm pleased to report that our leasing activity for the quarter was strong, totaling over just over 817,000 square feet with 46%, or approximately 375,000 square feet, related to new tenant leasing. Importantly, 160,000 square feet of this leasing, or 44%, was in Washington, DC and Chicago. Further, the vast majority of this new leasing related to currently vacant space, resulting in over 1% improvement in occupancy in just one quarter.

We are also pleased to note that we experienced compelling same store cash NOI improvement at over 15%, as well as positive spreads on rental rates on both a cash and GAAP basis. We ended the quarter at just under 89% leased, an approximately 200 basis point improvement over the first quarter of one year ago.

Some of the larger leases executed this quarter include: two key renewals in the Chicago market. Comcast at Windy Point I in suburban Chicago signed a seven-year extension for 73,000 square feet. And a large software company renewed approximately 64,000 square feet at Aon Center until 2022. Also in suburban Chicago, Accertify, a subsidiary of American Express, executed an 11-year new lease for approximately 40,000 square feet of vacant space at our Two Pierce Place asset.

In Washington, DC, the GSA tenant, Corporation for National and Community Service, has signed a 15-year new lease at One Independence Square, for approximately 85,000 square feet. Also, Access Intelligence signed an 11-year, 32,000 square foot new lease at 9211 Corporate Boulevard in Rockville, Maryland. In Atlanta, we signed an approximately 60,000 square foot new lease with Liberty Mutual Insurance at Suwanee Gateway One. Those are just a few of the highlights for the quarter, so please refer to our supplemental information for the more complete listing of significant leases executed in all of our markets during the first quarter.

I would like to note that given Suwanee Gateway is the last remaining asset from our original value-added strategy undertaken earlier in the cycle, we've decided to drop the value-added analysis on our supplemental this quarter. We've been pleased with the leasing of these properties, including the Medici in Atlanta, 1200 Enclave in Houston, 500 West Monroe in Chicago, and 400 Town Park in Orlando, and the success of this strategy that has been generated for Piedmont.

In general, we're encouraged by the momentum we're seeing across all of our markets, including some that have been lagging in the recovery, such as Washington, DC. While lease economics are still uneven by market, we continue to believe the quality assets located in superior locations will outperform general market conditions. As we currently have no significant lease expirations for the remainder of 2015, we believe we should drive lease occupancy gains to over 90% for our in-service portfolio by the year end.

Turning to our development projects, the office tower component of the 3100 Clarendon redevelopment project in Arlington, Virginia is now substantially complete, with only punch list items remaining. The retail space facelift is now underway, with the majority of this work expected to be performed in the second and third quarters.

Looking at the lease up prospects for this asset, while the first quarter of 2015 showed negative absorption for the entire DC metro region, for the second quarter in a row the submarkets inside the capital beltway collectively outperformed those outside the beltway, with the most attractive office locations continuing to be metro centric, amenity rich, walkable environments, such as those around all of our DC and Virginia assets, including 3100 Clarendon. We continue to work with prospective tenants and anticipate having something positive to report there soon.

We're also nearing the completion of Enclave Place in Houston. Core and shell construction is substantially finished, and we are now working on finishing the interior improvements in the lobby and common areas of the building. The project remains on budget and on schedule for completion this summer.

While overall space absorption remains positive in Houston in the first quarter, it was at its lowest level in approximately two years. In addition, approximately 1.5 million square feet of sublease space has been added to the citywide inventory since the end of 2014. That said, we are pleased that we continue to leasing interest in the project, but the drop in demand and the increased inventory may result in a longer lease up and greater concessions than we had originally anticipated. However, given our low basis, we believe we compete very effectively for most prospects. This one project is our only leasing exposure in Houston for several years.

While both of the DC and Houston projects are nearing completion, we've been approached by a number of leasing projects for various build-to-suit opportunities on some of the remaining raw land parcels in our portfolio, and currently anticipate our next development activity will be a build-to-suit project in the attractive Lake Mary mixed use submarket of Orlando. We'll keep you appraised of this as definitive plans unfold.

Looking at capital market transactions, as we stated in the previous quarter's call, given the current demand for quality assets, we believe now is an opportunistic time to shed non-strategic assets. Therefore, during the first quarter, we recycled proceeds from the sale of 3900 Dallas Parkway in Plano, Texas, which is 120,000 square foot five-story building that was 100% leased, into the acquisition of a high quality asset at Park Place on Turtle Creek, and approximately 177,000 square foot 14-story, 88% leased class A office building located in the prestigious uptown Turtle Creek Market.

Like One Lincoln Park, which we acquired last year, Park Place is an infill location and an excellent example of our transactional strategy in that we traded one of our remaining suburban assets, with limited income growth potential, and leveraged our local market knowledge to acquire a multi-tenant asset in a submarket with superior income and value characteristics. Further, the transaction was accretive to core FFO, and given Park Place's below market in place rents, it enhances our overall growth profile.

Also during the quarter, we entered into a contract to sell Copper Ridge, an approximately 268,000 square foot multi-tenant office building in Lyndhurst, New Jersey, constructed in 1989 and approximately 87% leased to various tenants, including the anchor, Ralph Lauren. The contract became binding this month and the sale is anticipated to close in the next few days.

Earlier this week we also completed the sale of two additional assets, 5601 Headquarters Drive in Plano, Texas, for $33.7 million, or $203 a square foot, and River Corporate Center in Tempe, Arizona for $24.6 million, or $185 a square foot. Both of these assets were single-tenant properties located in non-strategic submarkets. All of these dispositions fall within our fiscal year forecast guidance and should not affect our previous year end estimates.

I'll turn it back over to Bobby to review our financial results 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 more complete details.

For the first quarter of 2015, we reported core FFO of approximately $60 million, or $0.39 per diluted share, which is $0.03 higher compared to the same metric last year. The commencement of several significant leases, including a 200,000 square foot lease with Epsilon Data Management at 6021 Connection Drive, and a 160,000 square foot lease with INTEGRIS at Aon Center, as well as the decline in the amount of outstanding operating expense abatements, were key drivers of this increase.

AFFO for the first quarter of 2015 was $0.30 per diluted share, and reflects the items I just mentioned, as well as decreased non-incremental capital expenditures and the effect of lower straight line rent adjustments this quarter as a result of the completion of certain large tenant build outs and expiration of rental abatement periods during 2014.

As Don mentioned, our total lease percentage was approximately 89% as of March 31st, up 100 basis points compared to year end, and 200 basis points over the first quarter of 2014. And our weighted average remaining lease term is approximately seven years. As we've forecasted for the last year or two, and as Don stated, our property level NOI improved with an 18% increase, and our same store NOI increased 15% over the first quarter of 2014. On a GAAP basis, property level NOI and same store NOI increased 10% and 6% respectively.

As of the end of the first quarter, we had 1.7 million additional square feet of leases that were in some form of abatement, and another 500,000 square feet of executed leases for currently vacant space that's yet to commit. Since we have limited lease expirations over the next two years, we anticipate future leasing of currently vacant space to contribute to future cash NOI growth as the leases commence and abatements expire.

From a balance sheet perspective, we ended the first quarter with $2.3 billion in outstanding debt, and approximately 38.7% total debt to gross assets ratio, which is consistent with where we were at year end.

During the first quarter we entered into $170 million unsecured term loan priced 112.5 basis points over LIBOR, and filled the empty space in our debt maturity schedule in 2018. The proceeds from the term loan were used to repay a maturing $50 million floating rate loan, and pay down on the outstanding balance on our $500 million line of credit. Additionally, subject to quarter end, the proceeds from the asset sale, as Don previously mentioned, and the line were used to pay off a $105 million mortgage, the only remaining debt maturing for us in 2015.

As of March 31st, we had a total of $500 million in forward-starting interest rate swaps for future fixed rate financing, which capture today's low treasury rates and manage our interest rate exposure going forward. Half of this may be used to hedge potential issuance of debt later in 2015, and the other half in 2016.

At this time, I'd like to affirm our annual guidance for 2015 in the $1.54 to $1.64 per diluted share range for core FFO. As I discussed last quarter, while we expect annual cash NOI improvement to be between 8% to 10% increase over last year, please keep in mind that there will be some volatility between quarters as various abatements commence and burn off, and with some seasonality in general and administrative expenses. Also we expect no significant changes in our balance sheet for the rest of the year, with acquisitions and development funded by our dispositions.

In summary, we're excited to see this quarter's results as a reflection of several years of dedicated leasing efforts, and we believe our outlook will continue to reflect this growth.

I will 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 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?

At this time, we'll be conducting a question and answer session. (Operator instructions) One moment please while we poll for questions. Our first question is from Anthony Paolone with JPMorgan Chase. Please proceed with your question.

Don, I was wondering if you can talk to, you know as you look out through 2016, you have lower expirations, but you've also got some known move outs, and you have a certain leasing pace you're running. Can you kind of tie those together and give us a sense of how you feel about absorbing vacancy over the coming 18 months or so?

Yeah, Tony, be glad to. You know I think we've said very consistently that we tend to produce 200,000 square feet plus a quarter of new tenant occupancy in our portfolio. Actually it's been a little higher than that, but just to be cautious, we try to use a number of around 200,000 square feet. This quarter obviously you saw we did almost double that.

But if you assume that we do 200,000 square feet a quarter in new leasing, and you've got three-quarters of the year left with very de minimis rollout of the portfolio at this point, that's where we're coming up with a 90% plus occupancy. If you believe that we can continue to do the 200,000 square feet a year over the course of 2016, then we should continue to grow occupancy during 2016 as well, but maybe not quite as quickly depending on what happens in Nashville, Austin and New Jersey.

So we still have forecasted growth in occupancy through 2016, despite a couple of those move outs, with using what I would call very conservative numbers, and not giving a lot of credit to whatever renewals may happen in those buildings.

Okay. Thanks. And then just for Bobby, can you talk to where you see leverage, and if you're looking at it from like a target net debt to EBITDA level, or how you're thinking about that considering some ins and outs with dispositions, and also you put in place the ATM?

Yes, I think we've talked before that we have internally a target of not having our debt to gross assets ratio greater than 40%. Today we're sitting a little over 38%. I'm not seeing a great change in our leverage ratio over the next 12 to 18 months.

Okay. And just comment on the ATM in terms of you know decision to put that in place or intentions to use it or not.

The intention's there were simply just to have another arrow in the quiver as an option in case stock price moves. There's no current plans to have the ATM in place.

Okay. Thank you, guys.

Our next question comes from the line of Jed Reagan with Green Street Advisors. Please proceed with your question.

Hey, good morning, guys. Can you share the cap rates you achieved on your recent asset sales, and maybe how the pricing compared to your initial expectations?

Yes, hey, Jed, it's Don. I'll be glad to do that. Yes, the deals we did in Dallas and Phoenix were, as you might imagine, pretty aggressive cap rate deals because they're long-term leased, single-tenant buildings. And so, in Dallas in particular was very aggressive, it was well sub-six going in cap thanks to a slightly below market rented building. And then in Phoenix it was sort of mid-six range from a cap rate standpoint.

The Copper Ridge deal is a little higher cap rate because we have above market lease in Ralph Lauren in that building, but we also got very nice price -- we'll be getting very nice price per square foot for northern New Jersey suburban real estate at just under $200 a foot.

Okay, thanks. And with still a pretty good amount of room left to run your disposition guidance, what other markets are you looking at selling at this point, and maybe what kind of interest are you seeing in those assets?

So we've got the last remaining JV assets on the market. We've got Cleveland on the market. We've got a couple of smaller suburban assets in Atlanta and Phoenix coming to market. And then we hope later in the year to move maybe some product in Detroit as well.

If that's all the case, then I would tell you, the deals that are in the market so far are getting very good reception. In fact every deal we've sold this year has been well above our own internal NAV, and the pricing we're getting, initial pricing we're getting on those deals in the markets I just mentioned are also well above NAV. So we're very pleased with the activity level we're seeing in the market. I'm not sure anybody else isn't seeing the same thing who's selling today, it's just a very active buyers' market right now.

Okay. Thanks. And I don't think I heard you mention this in the opening comments, but any update on the Aon sales process and if you could give us a sense of the bidding pool there, how that's shaping up?

I lost the over/under. I thought it was going to be the first call question, not the second call question. So yes, Jed, we're getting very good activity levels, as you might imagine. The combination of a long-term lease, really stable rent roll, with some upside in the income stream and some creative plays you could make, whether it's residential or an observatory or something like that, that the market sees as an opportunity there, I think drives us to believe that we're very -- more optimistic than we've been in quite some time that that will clear.

But having said that, it's going to take a very aggressive cap rate given the economics of the building, and a price that if we don't get we won't accept. But I would tell you that we're far more optimistic than we were even three months ago on finding someone who will move to that pricing level. We've gotten -- we're well into the you know 60, 70 type numbers on the signed CA level, which for that size of asset is pretty remarkable.

And optimistic for you know a partial sale or maybe the whole kit and caboodle?

Still, I would say still way too early to tell, Jed, just because you just don't know who might emerge on one side or the other that makes it more sense for us. So we're going to evaluate each of those individually and try and see where they go.

Okay. Thanks. And I guess just a last one for me, if I may. Just kind of curious if you could give a little more color on what you're seeing on the ground in Houston. Have you moved asking rates of the project yet? Are your competitors nearby, are you seeing them move theirs? And then also are you seeing any kind of oil related impacts in Dallas recently?

You know, when a market like falls as quickly as this market has fallen, and I don't mean the market fundamentals because we don't know yet, but when the perception of a market falls like this, I think it's very unusual to see people move asking rents and things like that. Because if there's no actual activity to prove out pricing, there's no price discovery from a rental rate standpoint, it doesn't make any sense for anybody to actually change their asking rents. They'll change their take rent substantially if they want to try and make a deal if there's a real deal out there. But so it's very hard to tell this early into a downturn what really is happening because there's so little rental price discovery.

We have some activity at our building. I'm sure there's a handful of tenants out there that are pretty actively looking. We're getting all the tours and all the looks, but I'm sure it will be much more aggressive economics than we wanted to accept if we were able to be successful. So you know obviously we're less optimistic than we've been on that building (inaudible).

Okay. Thank you.

Our next question is from Dave Rodgers with Robert W. Baird. Please proceed with your question.

Thanks. This is Steven here with Dave. I just had a question relating to the same store NOI guidance. Started the year I believe around 10% and then headed back down to 8% to 10%. How do you feel about the metric now and I guess how do you get back up or what's the route to getting back to 10%?

Okay. Hey, Steven, thanks for asking. Yes, I think there probably was confusion, probably led by us, on that issue because I think last year we were saying we felt very strongly that 10%, I think the term I used was baked, for 2015. And then in the last quarterly call we revised that number to 8% to 10%, and I think that created some consternation among the investor base because of the term I'd used being baked previously.

The reason for the change last quarter to go to 8% to 10% was because we felt like we wanted to just have some flexibility in the event we wanted to restructure some of these leases that are coming up down the road, or do something that's just in the best interests of the company, and maybe that's to offer some free rent now on a larger lease or something like that, and that gives you a little flexibility where you don't have a situation where you're locked into the 10% number.

Having said that, you know now that we're a little further along, we're still guiding to 8% to 10%, but I would tell you the betting line internally is we'll be closer to the 10% than the 8%. And if we do end up at 8%, it's going to be because we've done some really good things long-term for the portfolio. So we still feel very good around the 10% number and we'll just have to see what happens.

Obviously sometimes that gets impacted by what buildings fall out of the portfolio in 2015 as well based on our disposition activity, and that can change things a little bit. So anyway, hopefully that clarifies more broadly the change that we gave you last quarter from 10% to 8% to 10% because it really is still very much towards the upside of that range is in our internal belief.

Thanks. That's good color. And then we talked about the markets you're exiting, is there any color you can give on you know where you're turning your attention to in terms of acquisitions perhaps this year, and maybe even more long-term the way you think about your current markets? Thanks.

Yes, will be glad to, Steven. Nothing's changed along those lines from what we've talked about previously there. We're still doing the best we can to find you know reasonable value in places where we have a combination of factors, you know existing product, boots on the ground, good insight and relationships with all the players in the community, what we think is a competitive advantage because there's not a lot of other substantial REIT exposure to those markets.

And so those are the places that we're focusing our attention, and it tends to be right now you know Route 128 North in Boston, it's the Dallas submarkets, it's some places in Florida where you heard we mentioned we may be doing some things from a build-to-suit standpoint down in Orlando. We feel like we got a nice play going on there right now. And in Minneapolis to a great degree as well we're very still focused on. So all those places are places that we'd like to try to continue to build our portfolio.

And then if we find an more opportunistic play in a place like Washington or other places where there's some dislocation, then we would probably get after it, but we don't necessarily anticipate that's going to happen any time soon.

Great. Thank you.

Our next question is from Brendan Maiorana with Wells Fargo. Please proceed with your question.

Thanks, good morning. So Don, if you, you know I appreciate kind of the answer to the last question about where you're looking. If you were able to get strong pricing on Aon it would obviously be a lot of capital in the door for the company, and probably be at a very low cap rate, given you know one where the occupancy isn't just (inaudible) it's in a big market like Chicago.

Would you sort of think about that from maybe a little bit more of a, you know I wouldn't say transformational deal, but it would embolden you to take those proceeds and look at one of the primary markets and redeploy there where it could be?-- it may be earnings neutral, [NAV] neutral, but kind of stair step you into a bigger position in one of the primary markets that I know you look to go into?

Yes, good question, Brendan. I think that you're hitting on one of what we would call kind of four possible strategies with proceeds from Aon. And of course what happens over the course of the next four to six months as that asset comes to fruition will give us the ability to sort of focus on which strategy we might decide to employ.

But it could range from very much what you just said, which is one of what I would call the offensive strategies, which would be to redeploy that money back into primary markets, not necessarily the Atlantas and the Minneapolis's of the world, but the Boston, New York, Washingtons of the world where we have a good presence as well. And we could probably do that without being substantially dilutive, or even dilutive at all, and obviously change our exposure from Chicago to a place like that. So that's strategy number one.

Strategy number two would be if our stock continues to trade at what we deem a material discount through NAV, then maybe we plough some of our proceeds back into buying our shares back again. We've had great success with redeploying back into the stock, and given where we think our NAV is, I would say where we're confident our NAV is, we very comfortably would be considering buying back shares, and there's lots of ways to go about doing that as well.

And I think there's always the possibility of using that cash hoard to become more offensive in the strategic or M&A realm as well. You know that's one of the offensive strategies to consider. And then finally, maybe the last way to look at it is, maybe you give some money back if you just don't feel like it's the right time to use it. I think that's the least likely of the scenarios, but it's one that we would have to consider.

Okay, great. And is the sales of the Sears or the Willis Tower, is that a good comp for Aon? And how do you sort of strip out the non-office portion of that sale, and like how should be think about the sale? If that is a good comp, what do you think kind of the office portion of that price then?

You know we don't have much more insight than others do, but one level Sears is -- you know Willis is a good comp because it's an older iconic building in Chicago, [they're] West Loop or East Loop, so there's a little difference there. But overall, from the office building component of the buildings, I would say the comp is not far off. We've heard all kinds of different numbers about where the income stream is for the antenna and the observation deck relative to the building's NOI, and so it's a little hard to get your arms around it.

But suffice it to say, their building on a per square foot basis is worth materially more than ours because of the sky deck and antenna income that they've got that we don't have. We actually believe that there may be an opportunity in ours, and if we didn't sell it we may pursue some of those opportunities. But the point is, it's a little hard to disaggregate it, and if I was to throw numbers out I would be kind of unfair to our competitor there because I'm not sure our numbers are accurate.

Fair enough. And then just, Bobby, so you guys have 1.7 million square feet that is under abatement. You've got the roll forward schedule. So you know we've kind of got the NOI based on your roll forward schedule and probably likely move out of Key Bank and maybe partial with [Harcourt]. Beyond that, how should be think about just kind of the in-place annual escalators that are in the portfolio and how that could impact the next 12 to 18 months? And then how should we think about the 1.6 million square feet of roll that you have over the remainder of 2015 and 2016, and free rent or likely free rent that might come from new leases that would come from -- or renewal leases that would come from that roll?

We're struggling because I think there's three or four questions and we're not quite sure which one comes first, Brendan. I think the easy answer to your first question is 2% to 3% is pretty common across our portfolio. You know in some markets, like Chicago, it's pretty consistently 3%, in other markets it's as little as 2%. It's very rare that we ever get less than 2% on a step. It's occasional, but it's not very often. So I would say if you went to the midpoint of that, that's probably a reasonable guess from that standpoint.

Okay. And then what I was trying to get at with the roll that's coming due is, you know is it fair to think that as that roll comes up, I think you've got 1.6 million square feet, let's say you renewed all of it, or you replaced it with existing tenancy or what have you. Is it fair to think that you're going to have free rent on that upon either renewal or a new tenant coming in that might be six months on average or a year on average or something like that, such that you know that's not all going to be cash flowing the same way it is right now?

Yes, let me?-- yes, that probably falls into the real estate area a little bit more so, Brendan, so I'll take that as well. But you know if you're really focused on sort of the -- if you look through the end of 2015, we've got virtually no -- I mean we've got a couple of 20s and a 40 or something like that that are rolling through the end of 2015, but the rollover is so de minimis it's almost a rounding error.

So really what you're talking about is the three larger leases in 2016, and you've got to remember they're in three different places. One's New Jersey, where yes of course there'd be a dramatic amount of free rent if we were able to retenant it. You know we may turn around and sell that building towards the end of this year or early next year, and so that may not be an issue for us. But the point is, if we were to hold it and try to lease it back up, yes there would be free rent associated that.

If you go to the other two, Nashville and Austin, that's probably two of the strongest markets in the country. And no, I don't think we'd see much in the way of free rent in the event of renewals of either the primary leases or the subleases in the case of the Austin building, because those markets are so strong. So the free rent would be pretty de minimis.

So it really, kind of you almost have to break it down to which market you're in and what the prospects are for that particular building. And so hopefully that helps you because two out of three, the downtime should be relatively minimal.

Okay, great. Very helpful. Thanks for the time.

Hey, and by the way, I never answered Jed's question on -- you reminded me of that -- on Dallas. And as it relates to Dallas and Austin, we're really not seeing dramatic changes in those markets from a leasing and activity level as it relates to oil. You know I think we've seen different statistics and I wouldn't want to be quoted as this being a fact, but the general numbers we see from the brokers are that Houston is substantially in excess of 50% from an office occupancy standpoint in the oil or related industries, and a Dallas is like 5% to 7%. So it just shows you what a dramatic difference there is between those two markets. And so given that they're both in Texas, I can see why people might feel like they'd behave a little more similarly, but we really haven't seen that and haven't seen that from an activity level standpoint either.

Okay, that's great.

So hopefully that helps.

Yes, that's helpful. So Jed and I both thank you for that one. Thanks.

Thanks, Brendan.

(Operator instructions) One moment please while we poll for questions. Our next question is from Vance Edelson with Morgan Stanley. Please proceed with your question.

Thanks. Good morning. So you know it's clearly a big positive that you have limited expirations this year, not a huge amount next year either, but can you capitalize on the relative calm this year by proactively focusing on next year's expirations and perhaps getting some of those squared away?

Yes, Vance, as you can probably imagine, we're actively, especially in those larger deals, we're actively in negotiations on all those deals, and that's why we've been able to give you fairly good guidance on where we think things are headed. But you know they could still change because there's always other people trying to get those tenants away from us.

But the point is that we're actively engaged in all three of the larger deals. I think there's maybe two other deals of any size that we're actively engaged and working on those as well. So yes, absolutely, is the answer.

Okay, great. And then could you also expand on the decision to unload Copper Ridge in New Jersey, whether that was a more asset specific decision, or whether it's any reflection of your views on the future of the office market in Jersey?

I think I can probably honestly say both, Vance. You know obviously that's a building that's approaching 30 years old, still a pretty good quality asset, but you know northern New Jersey, especially certain submarkets, aren't terribly robust right now. We still had some term left on the Polo lease, and so we just felt like it was the right time to move it. We found somebody who thinks very highly of the building and wants to move forward with it.

And so for all those reasons we think it's a good overall transaction for us, very pleased with our execution on that. But yes, I think the market in New Jersey is?-- we're certainly not going to be rewarded for having more concentration rather than less concentration in northern New Jersey going forward.

Okay. Great. And then finally, if you could just expand a little bit on DC and Chicago and the way that office demand is coming back. Some of your more significant lease signing during the quarter were in those two markets, which have been slower to recover. So do you think the recent signings at Aon Center and Windy Point and One Independence Square are a real sign of improvement and a sign of more leasing demand ahead?

Yes, you know it's interesting, Vance, we've had some pretty good success the last year or two in suburban Chicago in particular. I mean we're virtually fully leased with you know the exception of a couple small little spaces in suburban Chicago. And then in downtown, you know the activity level has been strong enough that the overall downtown office market statistics are just getting better and better.

So as a result, we feel, and in particular in Chicago, we feel pretty darn bullish and we think that's part of the reason why we're seeing the activity level we're seeing on Aon, is I think the market sees that there's pretty good activity level there and some upside in those stories. So we're optimistic that we're going to see continued activity levels at 500 West Monroe in particular right now, and then we've got some new activity at Aon that we hadn't been seeing up until recently that we're starting to see now, so we're encouraged by that.

In Washington, I think the recovery is far from ongoing, but we are seeing continued increase in leasing requests, tours, and RFEs. And so that's been encouraging, but it's going to continue we think to bounce along the bottom for some period of time, and I don't think there's any reason to believe that there's huge upside there. But having said that, we've got more large activity going there than we've had in probably 2 to 2 1/2 years. Whether that converts to actually activity or not, you know completed activity or not, we'll see.

Okay. That's very helpful. Thanks.

Our next question is from John Guinee with Stifel. Please proceed with your question.

Great. Okay. Hey, thanks, Don, et cetera. Wonderful to see the asset recycling kicking in. Your timing is turning out to be pretty good I think and I hope. A couple of, sort of a combination question. You mentioned three big leases, Independence Square, Rockville, that building out in Gwinnett County, big leases, those were sort of stubborn vacancies. And if you could sort of elaborate a little bit on the TI leasing commission packages to get those things leased, that would be great.

And then also tie it into page 32, which is your non-incremental versus incremental CapEx, because what's interesting about it is over the last couple of quarters a lot more of your CapEx has been incremental or value creating, and less has been non-incremental. There seems to be a significant shift there and I'm trying to tie the two together.

Okay. Fair enough. I think we can do that for you, John. On the three deals that you referenced in particular, of course every story is a little different. The deal in Gwinnett County was actually relatively low TIs because it was a smaller -- or shorter term lease. They didn't want to go long-term so I think they're coming out of pocket substantially as a tenant themselves to spend some money on the building. And so that was relatively low lease rate. I'm sorry, low TI allowance, and a fairly solid lease rate. So we felt very good about that.

The Maryland deal, the smaller one up in Maryland, the 30,000 footer, was relatively strong -- sorry, relatively high TI package. I don't remember the exact amount, we've got somebody checking on that right now here. But and as a result we did relatively market rent on that deal, but I'll give you that in a second.

And then the deal in downtown DC, which may be the reason for your question to start with, was the GSA came out with a fairly high TI ask. It's a common practice for them more recently to come out with very high TI packages, and they make it that's sort of a non-negotiable part of the transaction. And so then you're just bidding on the rent to reflect that higher TI.

So yes, the TIs were very high in the (inaudible) in the triple figures, but we also built that into our rate and were able to get rents that were at or above where OCC was when they left the building back a couple years ago. And as a result, I'm not sure we felt like in this market environment we were going to be able to maintain rate and we were, but it cost a little bit more money to get there. And in fact, on that particular deal we were told that several people bid below us, but they wanted to go for the higher quality building, so that's exactly what we hope. That's the story we hope to hear in these markets.

Back on the Access Intelligence deal, I think we were in the -- sorry, people are putting small print in front of me. I think we're in the $60 range on that, John.

Okay.

And that's an 11-year deal. And then, in answer to your question on the incremental versus non-incremental, yes absolutely, more is coming from incremental. But I think it comes from the very issue you're referring to, and that is that a couple of these stubborn vacancies we've had, particularly as you look at some of the Washington, DC stuff, you're going to see a much higher relationship of incremental to non-incremental going forward because we have so little rollover and deals that are not, you know renewals or leasing right after we're losing another tenant, that would be considered incremental capital the way the market does that. And so I don't make the rules, I just live by them, but because I've never thought that that process made a lot of sense, but that's the way the market does it and so we emulate the market on that.

So the deals that you just described, those TI dollars show up in incremental value creating CapEx?

That's correct. And of course they have all the new additional revenue to go along with them as well in places where we weren't getting revenue in actually a number of years now.

Perfect. Okay. Hey, thanks a lot.

Thank you.

Our last question is from Jed Reagan with Green Street Advisors. Please proceed with your question.

Hey, guys, just a quick follow-up. Can you remind me what the Nashville exposure is for 2016 on the leasing front? Maybe just a little color around status there and sizing of the exposure.

Yes, so we've got two buildings there, Jed, as you may know. One is leased to a company called Comdata, and the other is leased to Caterpillar Financial. Caterpillar Financial lease goes out into the 2020s. The Comdata lease goes out into mid-2016. And so that's the lease that you're seeing as the exposure in 2016 in Nashville.

And how many square feet is that?

Right at 200,000.

Two hundred thousand, okay. Thanks. And then just you also talked about the potential build-to-suit opportunity in Lake Mary. Can you give any color around potential size or timing there?

Yes, as you may remember in the last quarter we announced that we bought some land there that is -- part of it is part of the town park complex that Colonial Properties had built as one I would call one of the early stage live/work/play kind of projects around the country. Had a lot of success with it, built a number of office buildings in there.

We bought the last building they built in there, while it was virtually vacant, a couple of years ago and have now leased it up. And then subsequently, form Mid-America, we bought the land because it was no longer residential land, it was commercial land. So we bought that and closed on it late last year, about 25 acres. So we've got in the ballpark of 500,000 to 600,000 feet of developable office sites, plus some retail and hotel, that we would probably bring into further the amenity base of the park, which should -- you know, it's a fantastic park right at the intersection of I4 and the beltway that's being completed right now, and so it's really sexy real estate.

And as a result what's happening is a lot of people are looking at Maitland and realizing they're about to go through four or five years of construction on I-4, and so a lot of folks are getting out of Maitland and going up to Lake Mary, and we're sitting right in the path of a lot of those build-to-suit opportunities. So we're in final throes with one and optimistic about another. Whether they'll come to fruition or not, I don't want to you know jinx myself, but we feel optimistic that we're going to see a lot of activity there over the next year or so.

Okay. Thanks so much.

Okay.

At this time, I'd like to turn the call over to Mr. Don Miller for closing remarks.

Again, as always, thank you very much for your participation on the call. I think, as you can see or sense from our enthusiasm, we're really excited to be at this point in our evolution rather than going through the last three or four years of all that lease rollover and having to report numbers that weren't as fun to talk about. So we're very excited about where we're headed, and hope you all share in that enthusiasm, and we look forward to catching up with you further as you have other questions. Have a great day.

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