Piedmont Realty Trust Inc (PDM) 2018 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Piedmont Office Realty Trust Fourth Quarter 2018 Earnings Call. (Operator Instructions)

At this time, it is my pleasure to turn the floor over to your host, Robert Bowers. Sir, the floor is yours.

Thank you, operator. Good morning, and welcome to Piedmont's Fourth Quarter 2018 Conference Call. Last night, we published our quarterly earnings release and filed an 8-K containing our unaudited supplemental information. Both of these items are available on our website under the Investor Relations section.

On today's call, the company's prepared remarks and answers to your questions will contain forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements address matters, which are subject to risks and uncertainties that may cause the actual results to differ from those we discuss today. Examples of forward-looking statements include those related to Piedmont Office Realty Trust future revenues, operating income, dividends 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're made. We encourage all of our listeners to review the more detailed discussion related to risks associated with forward-looking statements contained in the company's filings with the SEC.

In addition, during this call, we'll refer to non-GAAP financial measures, such as FFO, core FFO, AFFO and same-store NOI. The definitions and reconciliations of our non-GAAP measures are contained in the supplemental financial information available on the company's website.

Our senior management team is available today to address any questions that you may have. First, I'll review some of our quarterly financial results and 2019 guidance after Don Miller, our Chief Executive Officer; and Brent Smith, our President and Chief Investment Officer, discuss 2018 annual and fourth quarter accomplishments. Don?

Good morning, everyone, and thank you for joining us on today's call. I'm very pleased with our 2018 annual and fourth quarter results in almost every area of the business, particularly in the leasing and capital allocation activities.

Our 2018 leasing was active, totaling approximately 1.6 million square feet, with approximately 256,000 square feet of leasing executed during the fourth quarter. Leasing was spread across our portfolio and a list of leases over 10,000 square feet that were signed during the fourth quarter is detailed in the quarterly supplemental information that was filed last night and is available on our website.

Perhaps the most significant leasing news in 2018 is that we grew the portfolio's overall in-service lease percentage over 3%, with limited expiration exposure for the next 5 years. At year-end, the lease percentage was 93.3%, and this increase is reflective in the continued multiyear growth in our same-store cash and accrual-based net operating income.

Our economic occupancy, meaning occupancy related to leases actually paying cash rents, grew to 86.8% at year-end. That's up nearly 13 percentage point since 2014 and is likely some of the best same-store cash NOI growth in the office sector in the last 4 years.

As we begin 2019, we have approximately 667,000 square feet of leases in abatement from new tenant leases that have recently commenced and from renewals with upfront abatement periods. These abatements, plus 2 known move-outs, will flatten our NOI growth during the early part of 2019, but we project it will pick up thereafter.

For example, approximately 500,000 square feet of these leases will begin paying rents by the end of June 2019 and will lead to an acceleration of NOI growth in the latter half of the year. A list of the larger-executed leases with current or upcoming abatements is contained in our supplemental information for your review. Bobby will address this topic further in his prepared remarks.

Perhaps, more importantly, as we look ahead, we're seeing a great deal of tenant prospects across our portfolio. Activities remained strong in the vast majority of our markets, with approximately 1.5 million to 2 million square feet of space currently under letter of intent or in active negotiation.

The Washington, D.C. market has slowed, however, given the amount of new supply and market-specific issues, such as federal government shutdown. Ironically, for Piedmont, leasing in D.C. represents almost all upside as there's very little lease rollover for the company in the Washington, D.C. area over the next 5 years.

In majority of our other markets, we're seeing nice growth in rental rates, particularly in the Burlington area of Boston and Central Perimeter submarket in Atlanta. Most recent questions regarding lease expirations are related to our 60 Broad building in New York, where we have approximately 800,000 square feet of space with New York State and New York City scheduled to expire over the next 14 months.

While the government contracting process with numerous agencies to coordinate takes longer than with corporate clients, the New York State negotiations have progressed very smoothly, and we anticipate a renewal in the near term. In addition, we've made good progress with the City and hope to announce some definitive information related to these efforts towards the latter half of 2019.

An important point to keep in mind is that once we resolve the New York State and City leases, we will have an average of only 6.7% of our revenues in square foot that's expiring annually for the next 5 years, one of the lowest averages in our office peer group. In addition, the weighted average lease term of our entire portfolio should increase to nearly 8 years, the longest we are aware of the middle office REIT sector.

We completed several capital market transactions in the quarter. And I'd like to turn the call over to Brent Smith to discuss those. Brent?

Thank you, Don. As you should expect at this point in the real estate cycle, especially given the discount to NAV where Piedmont and, frankly, most office REITs trade, we continue to be a net seller in 2018.

Piedmont sold a total of 15 properties and over 3.1 million square feet in 2018, with another significant asset under binding contract to sell in early 2019. With regard to approximately $590 million of disposition proceeds in 2018, we recycled a portion of these funds into 3 accretive strategic assets, restructured and strengthened our balance sheet and bought back our own stock at what we believe is a significant discount to net asset value.

Furthermore, we exited multiple nonstrategic markets and bolstered our competitive position by increasing our Class A office market share in key submarkets: in Minneapolis, Orlando and Boston. Focusing on activity in the fourth quarter, we sold our last remaining West Coast asset, 800 North Brand Boulevard, and recycled a portion of the proceeds into 2 assets in our core markets: 9320 Excelsior Boulevard, a value-add asset in Minneapolis; and 25 Burlington Mall Road in Boston.

This redeployment of proceeds will result in approximately $0.03 of FFO accretion annually per share. We begin 2019 with a binding contract to sell a 334,000 square foot Southwest Washington, D.C. asset, One Independence Square, for $170 million. The sale of One Independence hit a number of strategic points for us: reducing our exposure to the Southwest D.C. submarket; disposing of a fully stabilized asset leaves primarily the government tenants with limited further NOI growth potential; and freeing up capital to initially reduce our leverage level and, as appropriate, invest accretively in other higher-yielding opportunities. We expect this transaction to close during this current quarter, subject to customary closing conditions.

Given the pricing achieved from recent property dispositions and our confidence in the underlying value of the existing assets in our portfolio versus the steep discounts in stock pricing in late 2018, we took advantage of this and repurchased 2.2 million shares of company stock at an average price of $17.13 per share during the fourth quarter. As of the year-end, we have $87 million of capacity remaining under the board-authorized stock repurchase program.

With only 2 projects remaining outside our 8 strategic markets, our portfolio footprint continue to become more focused. I will also note both of these projects are well leased and highly liquid, enabling us to harvest the value created when the timing is optimal, aligning with other strategic initiatives.

Future capital transactions will focus upon continuing to refine our holdings with our current target markets, where we have the local expertise, a concentration of assets and competitive advantages. Each of these markets characterize as having above-average job growth, excellent transportation access, heavy amenity basis, all ideal for our targeted corporate users and locations in or near educational centers providing a well-qualified workforce.

Finally, existing properties will be recycled when we believe full value for our shareholders has been attained and better opportunities for growth reside elsewhere. Considerations such as use proceed and tax implications will impact the ultimate timing of these transactions. However, we do envision continuing to be a net seller in 2019.

With that, I'll turn it over to Bobby to review the fourth quarter financial results and balance sheet and talk about our views on 2019. Bobby?

Thank you, Brent. While I'll discuss some of our financial highlights for the quarter, I, again, encourage you to please review the earnings release and supplemental financial information that's filed last night for more complete details.

For the fourth quarter of 2018, we reported FFO and core FFO of $0.45 per diluted share. That's a $0.03 per share increase compared to the fourth quarter of 2017, despite significant net disposition activity during 2018. This earnings growth per share can be attributable to higher occupancy levels to which Don referred and to continued growth in our overall rental rates, which now average approximately $36 per square foot in our portfolio.

This earnings increase is also attributable to fewer company shares being outstanding as a result of our stock repurchase program. During 2019, the company repurchased 16.5 million shares of stock. AFFO was approximately $41 million for the fourth quarter and $171 million for the year, well in excess of our current dividend level. Same-store NOI was up approximately 9.2% on a cash basis for the fourth quarter of 2018 and up 6.5% for the year.

On a GAAP basis, same-store NOI was at 5.2% for the fourth quarter and up 2.9% for the year. While individual quarters vary greatly in terms of the number of leases and the size of those leases completed, almost 1 million square feet of leasing was executed in 2018 from previously leased space. And cash rents for this space increased on average 2.4%, and GAAP-based rents increased 9.1%.

Over 600,000 square feet of leasing was completed during the year for vacant space and was the primary contributor to the growth in the reported lease percentage increase to 93.3%. Our average net debt to core EBITDA ratio for the fourth quarter of 2018 was 5.8x, and our debt to gross asset ratio was approximately 36% as of year end. At December 31, 2018, we had approximately $295 million of capacity available in our $500 million lines of credit.

The financial team was active during 2018. The company paid down nearly $40 million of debt and refinanced or restructured over $1 billion of debt, including the $500 million line. With only 18% of our debt floating and 11% of our debt secured, we have no scheduled debt maturities until fall of 2021. Any near-term cash, operating surplus or unused disposition proceeds will be used to pay down our (technical difficulty) and lower overall leverage.

At this time, I'd like to introduce our 2019 guidance in the range of $1.74 to $1.80 for core FFO per diluted share. The guidance incorporates the sale of One Independence Square in Washington, D.C. during the first quarter of 2019 and the removal of its GAAP NOI contribution, which was approximately $10 million in calendar 2018. No other significant capital markets activity is embedded within this guidance.

Also, with a few large leases in abatement in the first half of 2019, such as the 254,000 square foot Schlumberger lease in Houston, along with the downtimes between leases in Orlando and in Atlanta, our assumptions related to same-store NOI growth were in the range of 1% to 4% on both a cash and GAAP basis in 2019. However, we project that NOI growth should accelerate significantly in 2020 and 2021, as the previously mentioned leases commence and abatements burn off and as 2 large lease renewals in New York are anticipated to be completed with negligible abatement periods and sizable step-ups in GAAP rents.

We're targeting our year-end lease percentage for 2019 to be in the 93% to 94% range. It's important to note, as you prepare your financial models for Piedmont, that our quarterly earnings can vary by a $0.01 or $0.02 based upon the timing of seasonal expense items and, more significantly, due to any capital markets activity, should they occur. Again, we do believe we will be net sellers in 2019. In the event of a significant capital transaction, we'll obviously disclose what we believe the impact will be on our annual projections.

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 all of your questions now or we'll make appropriate later public disclosure, if necessary. Operator?

(Operator Instructions) Our first question comes from Barry with D.A. Davidson.

When it comes to leasing -- and anybody can jump in and take this question. Maybe if there is a little more color on the New York State lease. And then also, if you could provide a little color on the SunTrust -- re-leasing up of that building and where we stand there?

Barry, this is Brent. As you know, regarding the State -- as you know, the New York State is -- resides in 60 Broad, which is our 1 million square foot Class A asset in lower Manhattan, just 1 block from the New York Stock Exchange, it's really a unique building with a wedding cake design that produces some amazing outdoor space and 360-degree views, 3 distinct lobbies. It's really -- creates a unique situation. In that, the lowest portion of the building, floors 2 through 11, has been leased out to New York State. We continue to work through a detailed lease documentation and design of their space and, admittedly, it's been a protracted process. But I'd say it's not been anything out of the ordinary for our GSA customers and tenant. Keep in mind, there are 7 agencies and a multitude of stakeholders located both at the building and in Albany, and that a lot of planning that goes into a lease and build-out of this scale. Both PDM and the ODS who oversee the agencies are working diligently to complete the lease before the end of March. And I'd reiterate the transaction has not wavered from what we've discussed in the past though. We're looking at 15 years of lease term, not inclusive of our renovation period at the building, market level TIs, very limited free rent, and, as we noted before, a slight cash flow down and a meaningful GAAP rollup.

Barry, on the SunTrust situation, there's been a lot of news in the marketplace about what may be happening there. We have not contributed to any of that because we don't have anything ready to announce yet. We do and are planning on doing a fair amount of renovation to the building. Obviously, the building is the most iconic building in downtown, but we feel like we can do some pretty creative things to take that to the -- even to the next level. Our plans are being finalized, as we speak, but we're still little ways away from being able to announce those. And we have some leasing activity at the building that's pretty promising, but too early to get into whether that's going to come to completion or not yet.

Great, great. And then, switching gears, last question. When we look at the Washington, D.C. asset for $170 million and then we look at the fact that you bought back 2.2 million shares in the $17 range -- $17.13, is it fair to say that the use of those proceeds -- should your share price go back down to the $17 levels, is it fair to say that we could, could see you guys back in the market?

Well, so yes, we bought -- obviously bought 2.2 million shares in the fourth quarter. The fact that we are continuing to dispose of properties and proving out the value of our NAV to us every time we make another transaction does give us more confidence to be a buyer of our own shares just because we're seeing a vast disparity between what we think our underlying real estate value is and what the shares are trading at. So not unlike a number of our peers, we're doing the same thing right now, where we're just seeing dramatic value in our own shares. We feel like that can be a good use of proceeds upon disposition. And just would remind you though we're not going to lever off to buy back shares. We would only do it through the use of disposition proceeds.

Our next question comes from Michael Lewis with SunTrust.

In terms of known move-out [tuck and roll] , you talked about New York State and SunTrust. Could you also provide if there's any update on RBs? I think Siemens has an expiration at the end of the year. And if there's anything else on the radar we should be aware of which will help us kind of with the cadence of the NOI growth for the year?

Yes. I think RBs, I would say, is in a very similar situation to SunTrust. We have a much more modest renovation going on at that building that we'll just update some things, including we have a spectacular fitness center in the basement of that building. And we're refreshing that, and then we're doing a little bit of work in the lobby. But the leasing activity has actually been very strong there as well. And so, I would say, although it's too early to announce anything, we're optimistic we should have some good follow-on things to talk about in the coming quarters, given our activity level. On the situation in Minneapolis, that lease expires at the end of the year. And we're optimistic that we'll have a good outcome there. We've been engaged with the tenant for quite some time. And we believe we'll have a really good chance of keeping them in a majority of that space. There could be a downsize there, but we don't think it would be a dramatic one.

And then, Michael, I'd add, looking into '20, early '20 to get to New York City, as you know, that comprises floors 12 through 23 in 60 Broad [just above the] State, and that lease will expire in April of 2020. And the New York City process, like the New York State, takes time, but there's one bit of good news is this envelope only has 3 agencies. So there's a few less parties to coordinate with. And while it's still early in the process, I think, we are incrementally more positive on our (technical difficulty) to retain New York City, the customer and tenant, at 60 Broad. There's not a lot of detail we can go into right now. But we -- as we have said in the past, we're talking to them about 20 years of term, not inclusive of renovation period at the building, market level TIs, limited free rent and I'd note again meaningful cash and GAAP rollup related to that lease. So we hope to have more details to share with you around the City later in the year.

And as far as your comments about being a net seller in 2019, obviously, there's some -- there's a couple of properties left at this other bucket, 1 in Philly, 2 in Houston. You've got 1 property in Chicago. What kind of -- what do you think for putting stuff on the market? And how much could you really sell? Does a lot of it just depend on use of proceeds and kind of thinking about how much you're willing to shrink the company additionally as well?

Yes, Michael, I think, you just properly characterized the challenge that we deal with every day when we're thinking about various aspects of what we might sell and what we might hold. Obviously, there's tax considerations. There's use of proceeds considerations. There's some business strategy considerations. So all of those go into each individual decision. You'll see, I think, as the year unfolds, the decisions that we're making as we speak right now in terms of what we're going to be bringing to market, we're not prepared to announce what those are right now. But we are trying to signal that we expect it will be likely selling more than we're buying this year because it's still a relatively challenging environment for acquisition. And we do have several things we'd like to try to bring to market for sale. But to comment on those quite yet, it'd be a little bit premature.

I think I would add, we do see a little bit more promising of a pipeline for acquisition. These are markets that are off-market that we could redeploy into very strategic. We think some assets that will come to market should provide a nice opportunity to continue with our strategy and continue to gain concentration within specific submarkets. So please stay tuned as we progress through the year, and we'll give you more detail.

Great. And kind of a Part B to that question. I'm curious how you're thinking about New York, and maybe it's a year still too early to talk about this. But you have some New Jersey assets and then you have 60 Broad. Assuming you resign the State and the City, you talked about maximizing value. That building with long-term 15-year leases on it, maybe that becomes a sales candidate. And then do you keep a toehold in New York? Or do you think since that's, obviously, one of your markets with a lot of competition from REITs and sophisticated investors, do you think New York's a long-term market for you guys?

This is Brent, Michael. It's a good and fair point. At that point when we and if we are fortunate enough to accomplish signing both the City and the State, we will definitely evaluate if it is the right time to monetize, whether that's a full stake, partial stake, ground lease, fee hold, everything in between. Rest assured, we'll look for the best way to monetize value for shareholders. Longer term, there actually are no other REITs to play in lower Manhattan, which would be our focus. But there are, as you noted, other larger private landlords, and we'll take that into consideration as we evaluate the long-term strategy for New York. But overall, we've had very positive returns and very good success there and would like to continue that at least through the New York State and New York City deals, and then we can probably evaluate further.

Our next question comes from Dave Rodgers with Baird.

I don't know if this is for Don or Bob, but maybe just going back to D.C. leasing activity prospects in the market. And can you kind of dive in? Has that just been a slowdown since the government shutdown or kind of throughout the quarter what are you seeing between the RB Corridor and kind of the B quality assets that you have in the District itself?

Bobby, you want to take that?

Sure. I would characterize the market as really being down here in the sense that absorption in 2018 was the highest level since 2010. So generally, I think, it's positive and in Virginia, even more so. I think the challenge in D.C. is really with the new supply coming on, which is pushing vacancy rate and making it a very challenging market. On the Virginia side, I think, it's much more bullish. I think there's good size of continued growth across the market, which we'll continue to see. And so, I think, there's a continuing amount of activity that's pretty good in our Arlington holdings in Virginia. And I think we'll expect to see that continue to grow. Amazon will have some peripheral effect probably to the positive on that. But downtown does remain challenged. And with law firms continuing [to contract] and the federal government moving into their own space, it makes it that much harder. So we'd like to see more activity. We'd like to see less competition. But we're day-to-day slugging it out in that market to fill the buildings.

Great. And then maybe for -- oh, go ahead.

Dave, I think that just -- well, I'd just say just to slightly distinguish. I think you were asking about our comments in the prepared remarks. We're really getting at sort of very short-term trend movements in terms of leasing. We had some really good activity second, third quarter of last year. It seemed to slow down later in the year. And then, I think, with the government shutdown things just sort of shut down for a couple weeks, pardon the pun. And then -- but so I think Bob's really talking about longer term. The other thing we like to point out and we mentioned in the prepared remarks is just that the good news is, although we may not be adding to our occupancies quickly as we like to in D.C. all the time, we've got nothing going out the backdoor because there's just very little in the way of lease rollovers for the next 5 years in D.C. for us. So the good news is we haven't got any loss out the back door.

Great. And then maybe second question, either Don or Brent tackle this. Can you just talk about overall lease economics in your portfolio and the leases that you've been signing? And kind of how those economics are trending both at [a phase rate] as well as kind of the net economics on the deals?

Yes. And obviously, every quarter is a little different for us. Some of it's lumpiness. Some of it's just a matter of where the leases get signed. Fourth quarter, the mark-to-markets were worse than we've seen in quite some time, largely because of the relatively small quarter from a total leasing standpoint and the 2 largest leases that we did that fell into the same-store pool, if you will. One was in Houston and one was in Washington, so, obviously, 2 of the weakest markets that we deal in. And so the numbers were not as attractive. Having said that, when we look at our portfolio more broadly, I think, we're still forecasting as rents move up in some places that we're still around 5% -- a little north of 5% on a mark-to-market basis across the portfolio. That doesn't mean there isn't going to be a substantial amount of lumpiness on a cash mark-to-market basis going forward quarter-to-quarter.

Our next question comes from Daniel Ismail with Green Street Advisors.

Just curious as to as you guys continue to shrink, are there any tax implications of the upcoming sale or future sales down the road?

There are no tax implications thus far, obviously, other than the one special dividend that we made at the end of last year, I think, we ended up paying it at the first quarter of 2018. That was -- that special dividend was made because we obviously had a gain that was in excess of what we need to distribute. That same thing could happen again to us if we're unable to redeploy proceeds back into 1031s or otherwise. We do have some assets that have some very large gains in them. The good news is that usually means we made a pretty good round-trip transaction. So it's not a -- it's a high-class problem, but it's a problem nonetheless. And so it will either be forcing into 1031 assets or doing special distributions. I would say I think we prefer the former to the latter.

And curious as to -- as you look at disposition or potential disposition candidates. How is pricing in your own underwriting than, say, year-over-year for those types of assets you guys have been looking to dispose of?

Danny, you're just asking me of the portfolio of noncore, how does it value today versus, say, 12 months ago?

Yes. Have you guys noticed -- either one of you guys are underwriting these or going out looking at the markets yourself, have you guys noticed any of these assets perform better or worse than your expectations? And just how pricing has been to your point?

Got you. I guess I'd bifurcate it into 2 areas. The noncore that we have in Philly and Houston are single-tenant long-term lease deals. So that's not really probably something that we're generally looking to acquire. The -- and I'd say pricing in that type of environment still is highly credit focused and is somewhat interest rate independent. So it's been good. The rates have kind of come back in over the last 6 months. And I'd say it's probably -- pricing would continue to affirm our view of NAV for those assets, whether it was 12 months ago or today. So I wouldn't say there's any deterioration there. In terms of multi-tenant deals, which is generally what we're chasing, I would say bidding pools have thinned depending on the market and depending on whether or not the asset is "down the fairway or a little bit off." And so I think those that are down fairway are smaller bidding pools, but pricing has generally held. Things we'd hear on and I think we've seen maybe back up on pricing not dramatic, but I'd have to say in 2% to 5% range unless there's really something problematic that it can't get financed. But with the -- the market is awashed with capital and debt financing being very readily, I think, our own values have been affirmed overall for our view. If you look at 800 North Brand and One Inde as being the most recent, I'd say, that's right in line with where we expect a transaction to occur.

Our next question comes from Anthony Paolone with JP Morgan.

Just a couple of detailed ones here, maybe for Bobby. Can you give a sense as to CapEx budget for 2019 given you're potentially doing something with State of New York and you've talked about Orlando CapEx in the past?

Tony, I'll try to start. Bobby's looking through some papers while -- to see if we can give you more specificity. But I think the easiest way to try to project the capital budget is to suggest that is we expect a similar amount of CapEx per square foot per year of lease term on the leases we're doing today. And what I mean by that is, say, some renewal activity, et cetera, on a blended basis that we would have seen over the last several years. So obviously, we range from upper 4s to mid 6s on a total leasing commission and TI per square foot per year lease term. If you add all that up, I think, we're going to be in that same range. So a lot of the question becomes how much leasing do you get done? The simple answer is, okay, we know it is New York State -- or we strongly believe it's going to be New York State and then how much more do you get done. And once you factor that in, that gets you pretty close to what you should expect our CapEx spend to be for the year.

Okay. And so just where the year-end occupancy guidance is for that 93% to 94% range? That's pretty consistent, so, effectively, the roughly 1.7 million square feet that expires in 2019, that should be roughly about the level of activity you're kind of expecting for this year to keep occupancy pretty flat. Is that fair?

That's a good way of looking at it. Yes, that's pretty much it, yes.

Okay. And then just to understand the economics on the One Independence sale. You mentioned $10 million of GAAP NOI in calendar year, I guess, 2018. Just trying to get a sense, so I -- what the run rate or stabilized cash looks like on that because I think in the back of it, it sounds like the actual economic NOI at the moment is a bit lower than where the lease rate is?

That's right, Tony. We've done a couple leases of the asset. So there is a little bit of free rent still within the asset itself, at One Independence. We haven't disclosed what the cap rate or implied cap rate would be for the year. But if I were to say it'd be a mid to low 5%, similar to what an 800 North Brand was. Very stable asset. We're approaching over 95% leased on that. And it was a unique situation where given the government and GSA tenants, there's not a lot of cash flow growth from an NOI perspective. So given all those factors and the weight of lease term of over 8 years you said, now we've created much value as we probably could, and it is time to push that one out the door. And we feel like we've got -- are getting great execution.

Okay. So sounds like low 5s once the cash is all up and running there. And on a GAAP basis, right, for modeling purposes, the $10 million divided by the $170 million, so I got 5.9% cap to take it out of our numbers?

That's generally in line, maybe a smidge high.

(Operator Instructions) Our next question comes from John Guinee with Stifel.

Talk through just where you think besides the City of New York -- where do you think you can get, say, a cash rent bump over 10% in the major markets in which you operate?

Obviously, that's a dramatic example of one. The problem, I think, John in giving you an easy answer on that is that it really depends on when the last round of leasing was done and what level of rents it was done at. There's a number of our leases in our portfolio that will see greater than 10% cash rollups, but that's more unique to the situation of that lease than it is to the market rents. I mean I think we would share -- I think the bigger question you're asking is, if you have 2% to 2.5% steps in your leases, unless rents grow by at least that amount or more plus something, you're not going to be getting a big step up in cash rents. I think guilty as charged. Yes, that's true in the office space business, fairly broadly. And so, typically, we're not getting 10% plus cash rollups on deals unless there's a unique situation that are coming to fore. And that's pretty universal across the office space industry with maybe the odd difference of opinion on a West Coast market or the occasional situation on Midtown South or something like that. So I don't think there's very many places where you tend to see that very often.

I would add John, though, across the portfolio, again, approximately rollups of 5% to 10% when you blend it through the whole portfolio. So we'll have some that are above that and a few that are below that. But net-net, we should be continuing that trend line.

The only thing I'd add to that, John -- sorry, you may -- you want to ask another question. The only thing I'd add to that is the 2 places we are seeing it right now, frankly, is in Boston and in Atlanta, I think we made comments on that in the prepared remarks where we're seeing very, very strong rollups in rents in the last few years in our Central Perimeter submarket in Atlanta and in Burlington in Boston. And so those 2 places we are seeing a number of leases get 10-plus percent cash rollups on deals. But I can't tell you if that's across the board, across the 60 million square foot portfolio.

Got you. And then your building in Philadelphia, is that Blue Cross Blue Shield? I can't remember. How many years left on that lease? And when does that go to market?

That lease expires in 2033, so we still have 14.5 years or so left of lease term. And as we sort of thrust and parried on that question for a number of years now, that's a building that we just feel like there's no reason to move it to market as long it has 10 years plus of lease term until and unless it makes sense for us strategically to do so. Because, frankly, as with 2-plus percent steps in net rent and a fantastic location and a long-term lease with a good credit, we're not exactly losing value on that asset at this point in time and so it's something that we'll continue to monitor and when we think the time is right, given it's got a humongous gain on it, we'll have to be thoughtful about when we bring it to market. But the answer is there's not immediate plans to do so.

I'd add, John, with that building a CBD location, the way Blue Cross Blue Shield has created a campus there -- an urban campus, that asset will be highly liquid and sought after, credit rated or credit-light entity. So we feel pretty good about the liquidity, and we'll monetize it at the right time and [reput] those proceeds.

Seeing no further questions, I would now like to turn the call back over to Don Miller for closing remarks.

Thank you, operator. Just to wrap up, I think, I mentioned something in the call that I'd like to reiterate, and that is that we're seeing a lot of really good leasing activity across our portfolio right now. Obviously, you never know whether those things will translate into confirmed and signed leases. But obviously, State, City of New York is a big chunk of square footage. But overall, we're working on 1.5 million, 2 million square feet of either letters of intent or active negotiations. Much of that could follow hard still, but the answer is we're really excited about how much has got going. And you combine that with the amount of vacant space leasing we did last year and I think that's why you're seeing some still embedded growth in the portfolio, despite the fact that we're net sellers. And so, we continue to remain very optimistic and very positive about the platform for the company going forward. And thank you for joining us today.

Thank you. This concludes today's conference call. We thank you for your participation. You may disconnect your lines at this time, and have a great day.