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Parkway Properties (NYSE:PKY)

Q4 2012 Earnings Call

February 12, 2013 11:00 am ET

Executives

Jeremy R. Dorsett - Executive Vice President and General Counsel

James R. Heistand - Chief Executive Officer, President and Director

David R. O'Reilly - Chief Financial Officer, Chief Investment Officer and Executive Vice President

M. Jayson Lipsey - Chief Operating Officer and Executive Vice President

Analysts

Brendan Maiorana - Wells Fargo Securities, LLC, Research Division

Craig Mailman - KeyBanc Capital Markets Inc., Research Division

Jordan Sadler - KeyBanc Capital Markets Inc., Research Division

Joshua Attie - Citigroup Inc, Research Division

James C. Feldman - BofA Merrill Lynch, Research Division

Erin T. Aslakson - Stifel, Nicolaus & Co., Inc., Research Division

Alexander David Goldfarb - Sandler O'Neill + Partners, L.P., Research Division

David B. Rodgers - Robert W. Baird & Co. Incorporated, Research Division

Mitchell B. Germain - JMP Securities LLC, Research Division

Operator

Good morning, ladies and gentlemen, and thank you for standing by and welcome to the Parkway Properties, Inc. Fourth Quarter 2012 Earnings Conference Call. [Operator Instructions] And as a reminder, this call is being recorded today, February 12, 2013. I would now like to turn the call over to Jeremy Dorsett, Executive Vice President and General Counsel. Please go ahead.

Jeremy R. Dorsett

Good morning, and welcome to Parkway's Fourth Quarter 2012 Earnings Call. With us today are Jim Heistand, President and Chief Executive Officer; David O'Reilly, Chief Financial Officer and Chief Investment Officer; and Jayson Lipsey, Chief Operating Officer.

Before we begin, I would like to direct you to our website at pky.com, where you can download our fourth quarter earnings press release and the supplemental information package for the fourth quarter. The earnings release and supplemental package both include a reconciliation of non-GAAP measures that will be discussed today to the most directly comparable GAAP financial measures.

Certain statements made today that are not in the present tense or that discuss the company's expectations, are forward-looking statements within the meaning of the federal securities laws. Although the company believes that the expectations reflected in such forward-looking statements are based upon reasonable assumptions, we can give no assurance that these expectations will be achieved. Please see the forward-looking statements disclaimer in Parkway's fourth quarter earnings press release for factors that could cause material differences between forward-looking statements and actual results.

I will now turn the call over to Jim.

James R. Heistand

Good morning. This past year has been a period of transformation for Parkway. This transformation has resulted in a company with a new strategy, a new management team and a new portfolio. And we believe now we have a clear path to generate long-term value growth for our shareholders.

The transformation of our company can be seen not only in the quality of our recent acquisitions, but also in the operational and financial results we achieved over the past year. In total, we sold $660 million in gross assets throughout the year, including the Fund I properties, which were closed at year-end 2011. We also completed, or are under contract to complete, $947 million in new acquisitions during that same period, for a total of $1.6 billion in investment activity in just the past 12 months. Including the impact of this investment activity, our occupancy increased 410 basis points from a year ago, our average in-place rent increased by nearly $2 per square foot and our NOI margins improved to 58.7% in 2011 to 61% in 2012.

Additionally, while our same-store pool was smaller compared to a year ago, we also saw improvement in our occupancy and NOI margins in our same-store properties throughout the year. During the fourth quarter, our share of recurring same-store GAAP NOI increased 3.1% and cash NOI increased 1.4% compared to last year. And finally, our net debt-to-EBITDA ratio has remained below or within our stated range of 5.5x to 6.5x, and we have improved all of our coverage metrics compared to a year ago.

We now have a much more concentrated geographic footprint with critical mass in a number of our targeted submarkets, and we have some of the highest quality, best located assets within these submarkets. While the portfolio transformation is already showing its merit, we view our position today as a starting point of value creation.

We have added several value-added investments to our portfolio that we each acquired at an attractive basis, and we are also pursuing ways to add value through leasing in our existing properties, which we discussed in detail at our Investor Day last month. We believe there is significant value to be created within our existing portfolio, and our focus this year will be on unlocking that value and continuing to improve our cash flows.

In summary, we are pleased with the progress we've made this year. We still believe that now is the right time to acquire assets in our market, and we expect to continue to execute our investment strategy to gain critical mass with high-quality and well-located assets at our targeted submarkets throughout the Sunbelt. We will also continue to recycle assets as we upgrade our portfolio. However, given the progress we have made in a short amount of time, we are comfortable shifting our focus away from transforming the portfolio and instead spending the majority of our time focused on unlocking the value within our existing portfolio.

I'll now turn the call over to David to give an update on our investment activity during the quarter.

David R. O'Reilly

Thank you, Jim. We have already covered the majority of the details related to our recent investment activity during past presentations and conference calls. So I will just provide a brief summary for you this morning.

We have one disposition early in the quarter, which was the sale of Sugar Grove in Houston, Texas. This was part of our ongoing asset recycling program, and the sale price of $11.4 million resulted in approximately $10 million of net proceeds to Parkway and a recorded gain on the sale of approximately $3.2 million.

During the fourth quarter, we completed the purchases of Westshore Corporate Center in Tampa, 525 North Tryon and NASCAR Plaza in Charlotte, Phoenix Tower in Houston and Tempe Gateway in Phoenix. Subsequent to quarter end, we also completed the purchase of Tower Place 200 in Atlanta. These 6 acquisitions were acquired for a total of approximately $416 million. We have also entered into a purchase and sale agreement to acquire a portfolio of 8 office properties in Jacksonville, Florida, which we refer to as the Deerwood portfolio.

The Deerwood portfolio consists of just over 1 million square feet, all located in the Deerwood submarket in Jacksonville. Parkway's purchase price of $130 million equates to $128 per square foot and is expected to achieve an initial full year cash net operating income yield of approximately 9%.

The assets were constructed in phases from 1996 through 2005 by Blackwood Development, and they have a current combined occupancy of approximately 94%. The assets are anchored by a number of high-credit tenants, such as JPMorgan Chase, Fidelity, Comcast, Adecco, MainStreet America, Fortegra, Carolina Casualty and Arizona Chemical. The properties have limited near-term rollover, with none of the anchor tenants expiring before 2015 and only 7% of the portfolio expiring in the next 24 months.

The investment represents an opportunity for Parkway to acquire a stable cash flow generator, with arguably the best suburban assets in Jacksonville. The Deerwood submarket consists of 3.5 million square feet, which Parkway would own approximately 29% of the submarket. Having this critical mass in our higher growth submarket should give Parkway the ability to officially manage expenses and have more control over market rents in the area.

The assets in this portfolio are currently unencumbered with debt, allowing Parkway the opportunity to take advantage of a very favorable lending environment. Also, our attractive cost basis of $128 per square foot represents a significant discount to our estimated replacement cost and should provide the opportunity for strong rent growth in a submarket that already has single-digit vacancies before any potential threat of new development in the area.

I'll now turn the call over to Jayson to give an update on operations.

M. Jayson Lipsey

Thanks, David. Since we just provided a detailed update of our core markets at our Investor Day last month, I'll also keep my comments brief and cover a few highlights.

We finished the fourth quarter at 88% occupied and 89.3% leased. While the addition of the value-add investments we completed during the fourth quarter contributed to a decline in our year-end occupancy, we continued to have solid leasing activity during the quarter within our existing portfolio.

As you recall, we reaffirmed our 2012 year-end occupancy outlook range of 88% to 88.5% during our third quarter earnings call. This outlook included the acquisitions of Westshore Corporate Center and NASCAR Plaza, but did not contemplate the purchases of Tempe Gateway, 525 North Tryon and Phoenix Tower. If you exclude these 3 acquisitions from our year-end occupancy, our occupancy would've been 89.1% at year-end, above the high end of our provided outlook range.

During the quarter, we signed 155,000 square feet of new and expansion leases and completed 258,000 square feet of renewals. Our customer retention for the quarter was 68.9%. While capital costs related to this leasing activity were slightly higher than in recent quarters, our average revenue was over $3.50 per square foot higher than the prior fourth quarter weighted average. I'd also like to point out that the average rent for our renewal leasing activity during the quarter represented only a 0.2% decline in expiring rents as we continue to bridge the gap in a negative embedded growth of our portfolio.

We're estimating that the remaining mark-to-market of our in-place leases is now only a negative 1.5% compared to a mark-to-market estimate of negative 3.9% at the end of 2011. Please note that our fourth quarter leasing specifics, as well as our expiration schedules as of year end, do not include the impact of our recently signed renewal at Southwestern Energy in Houston. As we announced on our Investor Day in mid-January, we signed a 5-year renewal of 118,000 square feet with Southwestern Energy with no pre-rent and no required tenant improvement allowance. We are still discussing renewal options with Nabors, a large 2014 expiration in Houston, and we'll provide an update of this discussions as appropriate.

In total, our leasing activity led to a lease percentage of 89.3% at the end of the quarter. I'd like to point out that nearly 30% of our uncommenced leases are at our recently acquired properties, including 24,000 square feet at Phoenix Tower, 5,000 square feet at Tempe Gateway and 17,000 square feet at Westshore Corporate Center. We provided an ending occupancy outlook range for 2013 of 87.5% to 88.5%.

While we've maintained a conservative approach to our speculative leasing assumption, the main factor that is contributing to minimal projected occupancy gain is the proactive value-added leasing strategy we're implementing at our properties. We provided 2 specific examples of this strategy at our Investor Day last month. The first example we shared was the Helix Energy Solutions lease at 400 North Belt in Houston, where we've executed an early termination of 94,000 square feet, effective the end of July 2013, which unlocked space that was being leased at $9 per square foot below current market rent.

The second example we provided was at Hearst Tower in Charlotte, where we recently completed an early renewal with K&L Gates that extended their lease through 2027, while unlocking approximately 50,000 square feet of space on the 41st and 42nd floors of the building. We believe that both of these examples show ways we can take advantage of our minimal near-term expirations and pursue proactive leasing strategies.

While these specific examples will create short-term pressure on occupancy, we're less concerned about the quarter-over-quarter impact of our investments and operational decisions and remain focused on decisions that can create long-term value growth for our shareholders. Market fundamentals continue to improve in our targeted submarkets, and we're confident in our ability to execute the business plans and leasing strategies we've set in place at our properties within these submarkets.

I'd also like to mention that we were recently awarded the management contract at Bank of America Plaza in Atlanta. Bank of America Plaza is a 1.3 million square foot, trophy office tower located in the Midtown submarket of Atlanta. This building is the tallest office property outside of New York and Chicago and is a landmark icon in the Atlanta skyline. The property has underperformed recently and the current owner, CW Capital, is interested in rehabilitating the property and returning it to prominence in Atlanta.

While we are no longer actively pursuing the expansion of our third-party management business, we were given this opportunity due to our relationship with the owner through the acquisition of Tower Place 200 and our proven success and expertise in the Atlanta market. We're also not interested in owning this asset at this time given its size and risk dynamics. But the expansion of our management business in Atlanta gives us even more critical mass in the market, continuing a beneficial relationship and provides an opportunity to have greater insight into a submarket that we are targeting for future growth.

And with that, I'll turn the call back over to David.

David R. O'Reilly

Thank you, Jayson. As we indicated in our updated 2012 outlook press release we issued last month, our reported FFO during the fourth quarter includes a noncash impairment loss related to the company's investment in its management contracts and associated goodwill.

Our strategy related to the third-party management business has changed since the acquisition of these contracts. When they were acquired, the company's strategy was to grow the third-party business of the company and continue to add management contracts in the various markets. While we still view the cash flows from this business as a positive, and the additional management contract gives us scale and critical mass in some of our key markets, we are no longer actively seeking to grow this business for the company.

Given this change in strategy, it was appropriate for us to adjust how these contracts and related goodwill reflected on our balance sheet. Excluding this impairment charge and other nonrecurring items, our recurring FFO for the fourth quarter was $0.27 per share, and we finished the year with recurring FFO of $1.39 per share. Our FAD was $0.20 per share during the fourth quarter and $0.77 per share for the full year. We have provided the reconciliation of FFO, recurring FFO and FAD to net income on Page 9 of the supplemental report.

As of the end of the fourth quarter, Parkway had an outstanding balance of $137 million on its revolving credit facility and held approximately $82 million in cash and cash equivalents, of which, $56 million was Parkway's share. Please note that these balances do not include the impact of the purchase of Tower Place 200, which closed subsequent to year end, nor the placement of secured debt on Phoenix Tower, which is expected to occur by the end of the first quarter of 2013. Tower Place 200 closed on January 17 at a purchase price of $56 million with no secure debt, and we plan to place secured financing on Phoenix Tower totaling approximately 65% of the purchase price or up to $80.5 million.

Our total market capitalization has increased by 57% since the end of the last year, but we have continued to maintain a conservative balance sheet with additional flexibility for growth. Our net debt to EBITDA, including adjustments for completed investment activity during the quarter, was 5.3x at the end of the fourth quarter compared to 6.2x at the end of 2011. We've also seen significant improvement in all of our coverage metrics. Our interest coverage ratio improved from 2.4x at the end of 2011 to 4.2x at the end of 2012, and our fixed charge coverage ratio increased from 1.6x to 2.2x over the same period.

The steps we have taken this past year, including the placement of secured debt, the renewal of our credit facility and the placement of our unsecured term loan, all resulted in the reduction of our weighted average interest rate from 5.5% at the end of last year to 4.3% at the end of 2012. We have also improved the quality of our unencumbered pool, created more financial flexibility through the addition of our unsecured term loan and have no outstanding debt maturities until 2015. Our ultimate goal is to achieve a credit rating at some point in the future, and we are taking steps today to make that process easier when the time comes.

I do want to point out that our pending acquisition of the Deerwood portfolio will increase our leverage at closing. But including this purchase, we still expect to stay within our stated net debt-to-EBITDA target range of 5.5x to 6.5x. We expect that this increase in leverage will also be partially offset throughout the year through our continued asset recycling program and the sale of our remaining noncore assets.

We're providing in 2013 FFO outlook range of $1.17 to $1.27 per share. This includes the impact of all of the previously announced investments. As is our common practice, we have not assumed in our outlook any additional investments or dispositions other than those announced nor any potential capital market activity, and we will provide updates to our outlook should a material event occur that will change our stated ranges.

In addition to the announced investment activity, our outlook also includes an estimate of additional G&A related to our new compensation plan, which is expected to be completed by the Compensation Committee of our Board of Directors during the first quarter of 2013. A detailed assumptions underlying our FFO range can be found in yesterday's press release.

That concludes our prepared comments, and we are now happy to open the call up for questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] And our first question does come from the line of Brendan Maiorana with Wells Fargo.

Brendan Maiorana - Wells Fargo Securities, LLC, Research Division

David, I had a question for you with respect to the recent acquisitions. Excluding Hearst Tower, there's about $550 million. If I look in guidance, or if I look at where the yield is on those acquisitions, with Deerwood in there, I think it's probably around 6 7 or 6 8 on kind of a cap rate. And if I sort of think about where your guidance comes out, I guess, is it fair to assume that there is limited lease up in 2013 expected or limited NOI growth expected from those assets? And if that's the case, when might we expect to see that NOI growth start to materialize?

David R. O'Reilly

I think that your comment is accurate and as we are, with all of our acquisitions, try to be as accurate as possible to make sure that we are not overpromising and under delivering on the value-add acquisitions, I do think that our ending range in terms of ending occupancy highlights not only that, but also the kind of value-add leasing that Jayson has referenced on a couple of occasions throughout the portfolio. It's our goal to fill those up as fast as we possibly can at the highest net effective rent as possible. But I wouldn't guide anybody that we're thinking that we'll get those buildings stabilized over the next quarter or even this year. With that said, we do hope to reach stabilized yields on most of our acquisitions within the first 24 or 36 months.

James R. Heistand

Brendan, this is Jim. One thing to note too. When we model, especially the value add, and the value add that we're taking additional risks, so we expect to get additional returns. And so we look to a double digit recurring on those value-added acquisitions that we make. In looking at that from a modeling standpoint, we want to make sure that we're taking a conservative approach. So we don't show much leasing in that first year. I mean, it's easy to kind of engineer a higher unlevered return if you get aggressive in some of those. So as we look at it, there's a risk element, and we kind of -- we try to model it up appropriately going forward.

Brendan Maiorana - Wells Fargo Securities, LLC, Research Division

Yes, no, that's helpful. So I mean, I guess, what are you guys -- so what are the touch points that give you the confidence? If it's sort of a 24- to 36-month target to restabilize yields, that would suggest that you'd have a big kind of 2014 and '15. And if memory serves, I think the stabilized yield that you're looking for is roughly 200 basis points higher than kind of where the going-in yield is. So as you're sort of looking out there, what gives you that confidence that '14 and '15 are going to be pretty big years to move the NOI up in these assets as opposed to '13, which is maybe more of a transition year?

M. Jayson Lipsey

Brendan, this is Jayson. I wouldn't say that '13 doesn't have a potential for us to create value in these assets. In fact, if you look at our leasing status report, which is on Page 24 of the supplemental, you'll see that we already have some leasing showing off at some of our recently acquired buildings. But I think that the thing that gives us confidence in our ability to create value through leasing at these properties is that we continue to see positive fundamentals, especially in the submarkets that we targeted for all our recent acquisitions. And so I think that we wanted to give ourselves sufficient time to be able to develop our operation strategy for the buildings. But I think that recent history has shown through the value we've created that International Plaza Four in Tampa and through Hayden Ferry Lakeside I that we're able to execute quickly on our leasing strategy at these buildings.

James R. Heistand

I mean, I think Brendan, I just like to highlight, we like to think we do our homework in advance. We pretty much know what we think the market rents are on those properties. We know what the velocity of leasing is prior to us making the investment. And so we think that those are the right quality asset in that submarket and we should, as a minimum, be able to market perform and hopefully outperform the market.

Brendan Maiorana - Wells Fargo Securities, LLC, Research Division

Okay. That's helpful. And then just my second question was for David. We have talked in the fall about your preferred as a potential -- it's something that you could consider maybe looking at redeeming that preferred. And I think back in the fall, you had indicated that it might be a little bit expensive to take a look at the Series D. In light of your comments about, one, thinking about a rating for the company over the long term and then two, where the balance sheet sits today and then third, with where the share price is, which has improved nicely since the fall, what's your outlook on the Series D preferred as it stands and where your long-term view of how that fits in your capital stack?

David R. O'Reilly

Brendan, I think it's a great question and spot on with a lot of the debate in thinking that we have in our office here almost on a daily basis. We look at every opportunity to reduce our cost of capital every day, and that preferred is a very expensive piece of capital right now. We're continuing to evaluate it. We're looking at, given that this is callable, whether it's a new preferred in a combination of debt or equity or any other sort of lean delta here that could reduce our overall cost of capital, we're evaluating it. And we don't have any immediate plans right now to announce, but it's something that we do continually look at.

James R. Heistand

And Brendan, from my perspective, I'm kind of a cash flow guy. I hate seeing that cash flow go out the door. I think it's a very high piece right now, so we evaluate it everyday.

Brendan Maiorana - Wells Fargo Securities, LLC, Research Division

And if you guys were to take that out with some form, let's say if they were either with -- well, let's say if you were to issue new preferred, where do you think that would be from a coupon perspective versus an 8% Series D?

David R. O'Reilly

Well, it's hard to say on any given day where the market is. We've had a number of, call it on the investment banking side of the house quota anywhere from the high 6s to low 7s. And it's not just a coupon savings, but there's a cost issue and we're going to look at that cost issue over, I think, effectively, the 5-year non-call period, as well as what we give up in terms of restrictions and covenants that our older issue preferred doesn't have and any new issue would have. So all of those come into play in terms of what's the real net effect to savings that we'll refinance.

Brendan Maiorana - Wells Fargo Securities, LLC, Research Division

Okay. And would it be -- would it potentially be more attractive to just take that part of your capital stack and eliminate that from the capital stack and just have a clean common equity and debt?

James R. Heistand

We're looking at all that, Brendan. That's something we're looking at as well as other options.

David R. O'Reilly

To Jim's point, if we can save just under $11 million a year, that's a great thing.

Operator

And our next question does come from the line of Jordan Sadler with KeyBanc Capital Markets.

Craig Mailman - KeyBanc Capital Markets Inc., Research Division

It's Craig Mailman here with Jordan. Jim, maybe could you just -- I want to touch on your comment that you're comfortable shifting from the investment activity to unlocking the value. And it makes sense just given the amount you guys have done and want to digest. But is there anything else going on in terms of pricing becoming less attractive or just less product out there? And maybe give us an update on where the pipeline stands from a dollar volume relative to where it has been.

James R. Heistand

No, I don't think my remark suggests that we don't have a robust pipeline; we do, okay. I think though, if you look back at last year, besides the acquisitions, we were having -- we were negotiating an investment on TPG. We were completely -- we were selling out of the noncore market. So in terms of the amount of time our people spend in transforming the company, I think we now have more man hours to focus on both acquisitions, as well as improving the metrics in our existing portfolio. So I think we were doing probably 5 things at one time last year, and now we're kind of narrowed down to 2 or 3. So the pipeline remains robust. I think from a pricing standpoint, I think over time, over the next 2 years, it will continue to get more pricey, which is why we've been aggressive last year and why we'll continue to be aggressive this year.

Jordan Sadler - KeyBanc Capital Markets Inc., Research Division

Jim, David, it's Jordan. I just had a question circling to Charlotte. There were some reports that MetLife's looking to shopping for a 200,000, 300,000 square feet of space. It doesn't seem like you guys necessarily have the ability to accommodate that size of a tenant in your portfolio at this point. But any comments on sort of what their available options would look like and what the asking rents would be for that kind of block and space?

James R. Heistand

Well, I'll have Jayson speak on some of the details in that market, but there are very few large blocks of space in Charlotte, without a doubt. Which is one of the reasons we did the restructure at the K&L Gates because we think having the contiguous 50,000 square feet at the 41st and 42nd floor will give us some optimal pricing on that. But Jayson, why don't you speak on some of the options in that market?

M. Jayson Lipsey

Yes, I think part of the reason we chose to do what we did with K&L Gates, which was to free up those 2 floors, was because we believe that we can be very competitive leasing 2 floors of space, which is about 50,000 square feet, because that will be really the last large block of remaining space in CBD Charlotte. So if you look at uptown Charlotte, it's sort of, depending on what research firm you use, at 9% or lower and the class sort of AA stuff is even lower. So really for that size user, there are no options in uptown Charlotte, and they'd be looking at a suburban option. So we've been real pleased with how uptown Charlotte's performed. There's been 200,000 square feet of positive net absorption for the year in this submarket. I think in terms of gross absorption in that submarket, there's been almost 750,000 square feet of a total of 1 million for the market. So in general, we are very confident in that submarket to really perform.

Jordan Sadler - KeyBanc Capital Markets Inc., Research Division

What would be the asking rent on the K&L Gates space? Can you say that?

M. Jayson Lipsey

We're advertising the market $30, $32 a square foot for that space. So it depends on the time, it depends on the TI, but we're definitely in the low 30s on that space.

Jordan Sadler - KeyBanc Capital Markets Inc., Research Division

Okay. And then separate question on the impairment in the quarter, could you maybe just -- I know that you guys have obviously telegraphed the intention to be -- to sort of disespouse yourselves of the operator-owner strategy, and I was sort of curious though of the pieces of the impairment, where in the balance sheet or how those sort of came into existence, the $42 million impairment, to be on the balance sheet? Is that Eola as a function of -- or just maybe if you can give us the pieces of it.

David R. O'Reilly

Yes, absolutely. And to get to kind of the punch line first and then we'll back up and talk about all the adjustments, Jordan, is that the $19 million book value for the management company now reflects just the third-party legacy Eola business and does not reflect any valuations associated with the fee income we derived from Fund II or from the other Parkway legacy management leasing business that we earn fees on. In general, last quarter annualized pretax, the company generated on an annualized basis $8.9 million. As I think you know, we guided for 2013 from a tax effect basis $7 million to $8 million. So there's been a modest deterioration in fees. And some of that is actually a result of acquiring a managed asset unless you're a corporate center. We still feel really good about the cash flows of that business. But given that, as you mentioned, our strategy has shifted and as the result of that change in strategy, we needed to take a fresh look at how we value the company and therefore, recorded the impairment this quarter. In terms of the actual impacts to the balance sheet, there's kind of 3 line items that were impacted. The actual management contract net had an impairment of $27.1 million. There's goodwill within the intangibles line item that was impaired by $26.2 million, and then there was an offsetting deferred tax liability that was also impaired by $11.4 million. And the culmination of those 3 line items will get you to a net impact of $41.9 million, or approximately $42 million.

Jordan Sadler - KeyBanc Capital Markets Inc., Research Division

And the management contracts and goodwill, was that primarily a function of the Eola acquisition?

James R. Heistand

When Eola was acquired, the strategy of the company at that point in time was to grow the third-party fee business. And given that they looked at it as a going concern and a company that was going to continue to increase its business in terms of third-party management, they thought it was appropriate at that time to record a goodwill associated with that purchase price.

Jordan Sadler - KeyBanc Capital Markets Inc., Research Division

So just to be clear, the bulk of the write-down was the valuation of the management company of Eola by the legacy management team, by the previous management team?

James R. Heistand

And Jordan, I would agree with that comment. I would just add at the end of it, as a result of our change in strategy. As we continue to work on the same strategy...

Jordan Sadler - KeyBanc Capital Markets Inc., Research Division

So you kind of didn't work here, at the time, I guess, not in the capacity you currently have.

M. Jayson Lipsey

No, we kind of didn't.

Jordan Sadler - KeyBanc Capital Markets Inc., Research Division

So the change in strategy, I guess, makes sense.

James R. Heistand

Yes.

Operator

And our next question does come from the line of Josh Attie with Citigroup.

Joshua Attie - Citigroup Inc, Research Division

David, you mentioned before in getting a credit rating. Can you talk about what the time frame is for that? Have you started to have conversations with the agencies? And what sort of work do you think needs to be done on the balance sheet to get a rating that you would want?

David R. O'Reilly

We did not have discussions with the agency yet, nor have we paid them to achieve the work at underwriting as for private or public REIT. We've done a lot of work on our side of the house in terms of comparing ourselves to those that are most comparable within the REIT space that has an investment grade rating. Our goal would be to try to, either by the end of this year or early the following year, achieve a very low investment grade rating. Where I think we need to work on to try to get there is continuing to increase the quality and quantity of our unencumbered asset base and free up -- and since that we've had more unencumbered NOI and also increase the size and diversity of the company to help get there. I think those currently today, as I look at it, are the 2 key areas that I think that we would fall short, and I think the way to get there is through time, through a prudent use of our balance sheet on acquisitions, continuing to use unsecured debt to the extent possible without creating short-term interest rate risks or otherwise. I think from a number of metrics, we feel really good about them. In interest coverage ratio, we feel very good about them. In overall leverage, we feel very good about them. I don't know that addressing the preferred or handling the preferred are -- is a key criteria to achieve that today but it's something that I think will be incremental -- incrementally helpful.

Joshua Attie - Citigroup Inc, Research Division

So it doesn't sound like you think that a lot more equity is needed to be brought into the company to achieve a low investment grade rating, it sounds like you're saying, increase the quality of the unencumbered base and replace some secured debt with unsecured debt.

David R. O'Reilly

I think growing the size of the unencumbered base and growing the size of the company should actually be key. I don't think we can grow the company with all of that and expect to get there. And I think that demonstrated over the past year, we'd like to grow, we've 2,000 ideas, time to grow so that we can create value. And we're going to have to be prudent in our access of the capital market to implement that growth plan.

Joshua Attie - Citigroup Inc, Research Division

And you mentioned with respect to the preferreds that you have more restrictive covenants on a new issue than you have on your legacy issue. Can you just -- can you talk about what some of those restrictions and covenants are? And do your existing preferreds had make-whole provisions around the change of our control, or restriction on how much leverage? I know some legacy preferred issues don't have that and the newer ones do.

David R. O'Reilly

That exactly is, Josh, you hit on the biggest portion of our new preferred, which is change in control covenants. And in some limited instances, I've seen overall leverage limitations, but that's very rare. But ours is call forward in time, ours does not have anything -- so our current preferred do not have a chain in control covenant.

Joshua Attie - Citigroup Inc, Research Division

So as you say, you think your preference is to refi the preferreds with new preferreds or to refi them with other capital?

David R. O'Reilly

I don't know that I have the answer to that yet, Josh. It's something that we constantly evaluate and that we're going to have a very thorough discussion on it at our upcoming board meeting with our directors to try and chart the absolute right course for us to reduce our cost of capital, maintain low leverage and financial flexibility.

James R. Heistand

Josh, that particular topic on the preferred is something that I would tell you, David and I, talk about everyday. Again, from my perspective, I just don't like seeing that kind of cash going out the door in this kind of interest rate environment.

Joshua Attie - Citigroup Inc, Research Division

That's helpful. If I could ask one separate question. Jacksonville, you bought at a 9% cap rate for assets that seem like they're pretty well leased and stabilized. You think is that indicative of where values are in that market and some of the other foreign markets or were there some element of that deal that we're not appreciating?

James R. Heistand

Well, first of all, I think in terms of the upside of that deal, do you mean?

Joshua Attie - Citigroup Inc, Research Division

No, just in terms of if you think market is -- if you think the market to 9% cap for stabilized assets in Jacksonville and some other Florida markets...

James R. Heistand

I'll tell you what we have seen, Josh. I think we've seen, as you get up to that certain size, over $100 million, I think we're -- and the other cycle of when it was at its peak, you were paying a premium for a larger transaction. I think today, it's somewhat of a discount board. I think if you will sell anything on an individual basis, we also had -- we've known the asset, we've had a relationship, we underwrote the asset, we think the in place rents are in the low 19s, were those assets were getting in the low 20s before, so there's room to run on the rental rate as well. And that market is pretty tight. So we liked the investment, I can't say that it's indicative of every particular asset in Florida. But I think given the size of the asset and -- I think we got the appropriate pricing for that.

David R. O'Reilly

Josh, the limited supplier for the limited, more limited. And given our knowledge and relationship with the seller, we could give them absolute security up close. I think for those 2 reasons -- I don't want to say that we got a sweetheart deal because I don't think that that's fair, but I think that we were given every advantage, given those 2 dynamics for -- you have at that market.

Joshua Attie - Citigroup Inc, Research Division

But it was a marketed deal and a competitive bidding process?

David R. O'Reilly

It was.

David R. O'Reilly

It was. And as you remember, that's something we have done all the underwriting on for the years beforehand.

Operator

And our next question does come from the line of Jamie Feldman with Merrill Lynch.

James C. Feldman - BofA Merrill Lynch, Research Division

Given a nice move up in the leasing spreads in this fourth quarter, can you talk a little bit about your expectations for next year and maybe what were the moving pieces that have created the improvement in the fourth quarter?

M. Jayson Lipsey

When you say spreads, you mean the leasing costs or the spreads in rent?

James C. Feldman - BofA Merrill Lynch, Research Division

Spreads in rents, if you look at your -- the last couple of quarters, it -- the negative change was pretty good.

M. Jayson Lipsey

I think there are a couple of factors at work. First, and I think the most important, is that we've significantly increased the quality of our portfolio. And as we've acquired better assets, those assets fetch higher rents. And so I think over the year, we've seen a lot of our leasing mix shift to our newer, nicer, better buildings. And so I think that that's probably the most important factor. I think a second trend that we've seen is while we're not seeing it at the market level, we are seeing it at specific buildings where we've been able to achieve good occupancies. We've been able to push rates in some of our nicest buildings. And so I think that that's contributed. Again, that's on a very selective basis for our best assets but I think that that's contributing to the trend. But in general, I'd say that our leasing mix is variable from quarter to quarter and so I think that in terms of what I would expect for the year, I think that the last 4 quarters is probably a decent range for what you should expect from us both in terms of what the capital cost was for leasing as well as the rent.

James C. Feldman - BofA Merrill Lynch, Research Division

Okay. And then similarly, what's the underlying same store NOI growth in your 2013 guidance?

David R. O'Reilly

Jim, we haven't provided that information given that the same store pool is close to $800 million of acquisitions and there's -- still for number of dispositions isn't all that meaningful. It Just doesn't represent a large enough portion of the portfolio that if I gave you that number, it would be helpful.

James C. Feldman - BofA Merrill Lynch, Research Division

Okay. And then, based on your guidance, what's your outlook for AFFO and dividend coverage?

David R. O'Reilly

We haven't provided those, specifically in terms of our FAD but what we have provided in our earnings release and our guidance is some of incremental cash flow metrics that will help you kind of get to the right number in terms of $17 million to $18 million of CapEx; $2 million to $2.2 million of low cost amortization non-cash; and $4.6 million in acquisition expenses as well as the non-cash component of G&A that was guided to.

James C. Feldman - BofA Merrill Lynch, Research Division

Okay. And then I guess, just taking a step back, you talked a lot about unlocking space and freeing it up. Is that -- I mean, I can understand in trying to make my statement before you, but what's the bigger picture here in terms of what tenants are doing? Are they -- have the tenants downsizing? Are you just try to be using space more efficiently? Just how could we -- how should we think about what's happening across your markets and tenant in terms of just tenant space usage?

M. Jayson Lipsey

Yes. I think we're starting to see a fair amount of expansions. I wouldn't say that that's necessarily filtering through the actual square footage amount, but I think in terms of just number of deals we're working on, a lot of our customers have been kind of sitting on the sidelines, waiting to grow back into their space. And I think we're at a point where some of them are actually outgrowing the existing space that they have. I would note that as it relates to both of the value add deals that we've referenced and I talked about in my prepared remarks, neither those -- I would interpolate any kind of macro economic message in that. One of them is a customer that's just decided to relocate to a build to suit and another one was a result of a merger that existed before we bought the building. And so their space needs just changed as a result of some M&A activity. And so both of those we viewed as good opportunities to get space back in 2 of our best-performing markets: Houston, Texas, which we've seen the greatest demand at any of our markets; and Uptown Charlotte, which I mentioned earlier, we're seeing very, very good absorption statistics and there are very few -- there are very few remaining vacancies left.

James C. Feldman - BofA Merrill Lynch, Research Division

Okay. And then I guess along the same lines, just, since the beginning of the year, can you talk a little bit about just tenant behavior? And are you seeing material job growth, and if so, in what markets? And then also what types of tenants seem to be expanding?

M. Jayson Lipsey

I think that's a great question. It's interesting, in the fourth quarter, we definitely observed a little bit of a slowdown, and I think that there are a few reasons for it. I think we had an election, we had fiscal cliff, it was -- there are holidays always in the fourth quarter, so it tends to be a little bit slower. And so there seems to be a little bit of malaise in the fourth quarter that I think we're watching very closely. The encouraging news is as through January, we definitely saw things normalize and pick back up, and so we're pretty comfortable with the level of activity that we have. I would say that in general, our leasing pipeline is where I want it to be right now in terms of the level of blossoming activity that we have. I think to your question on the industries where we're seeing growth and expansion, I would definitely say technology, energy and health care, really is the 3 industries where we're seeing the most growth over the past several months, and it actually continues in those sectors.

James R. Heistand

That all of our markets a bit positive [indiscernible], Jamie, either the job growth is all positive in it, I mean, somewhat more robust than others. But the trends are exactly what we had hoped they will be, going into '13.

James C. Feldman - BofA Merrill Lynch, Research Division

Okay. And then what are you guys seeing again from the fire sectors and housing-related?

James R. Heistand

Well, I'll make one comment on the housing related. One of the things that we believe is that as the housing recovery continues and it has gained a foothold across all of our markets, we have yet to see, in our view, the ancillary businesses, so that's the [indiscernible] the housing, really begin to expand again. We think that's coming, because from the engineers, the architects, the title companies, et cetera. When our markets turn, they said sell off a cliff and that is just beginning to now grow again. So I think what's been positive for us is we've seen good absorption in the rest of our markets without the component of the housing industry, which we think is going way up right now. And I think as it relates to your specific question about the fire industries, I think that that's a few of the submarket that we've targeted, specifically in the markets we're in. If you look at Jacksonville, we've seen a lot was in migration from other markets into Jacksonville, which is why we like Deerwood. If you look at Phoenix, we've seen a lot was in migration into Phoenix from other Midwestern or California markets. And so I think all of those industries are still looking for ways to reduce their costs while they're still accommodating their growth needs with an industry, if they have them. And so what they're doing is they are relocating the markets where they can offer their people a great quality of life and they can find affordable office space relative to where they are, and we think that that's sort of what the [indiscernible] offers to lot of these companies.

James C. Feldman - BofA Merrill Lynch, Research Division

Do you have a sense of a number of RFPs out there for those types of moves?

M. Jayson Lipsey

In terms of numbers, no. Because that's always closely held information. But I can say, as sort of anecdotal evidence we know of, at least 4 or 5 of our markets where there are very large users who would fall into that category, looking to relocate into those markets. I think the markets that better -- good example to that will be Phoenix, Atlanta, Jacksonville. In some of our markets you're talking about, 250,000 square feet to, even in some cases, reprogram was up 1 million square feet of use.

James C. Feldman - BofA Merrill Lynch, Research Division

Okay. And did they -- they're trying to decide do you stay in the Northeast or do you go down there?

M. Jayson Lipsey

I think it's a variety of factors. That's, as you know, consolidation of a variety of offices into fewer offices and they're using that as an opportunity to sort of be more thoughtful about where their locations are. I think there are some flight out of very expensive bid markets.

David R. O'Reilly

But that's just the Northeast. It's the Midwest as well as California.

M. Jayson Lipsey

Yes, Midwest and California, in addition to the Northwest -- Northeast.

Operator

And our next question does come from the line of John Guinee with Stifel, Nicolaus.

Erin T. Aslakson - Stifel, Nicolaus & Co., Inc., Research Division

It's actually Erin Aslakson with John. Just a quick question. I mean at -- essentially the Sunbelt strategy is all about timing and your increased investment in those markets, and the eventual recovery of those markets. But where exactly, if any, is there development, competition, that's -- will -- assets under development they will pick a pinning directive to your assets today, and where do you foresee that competition coming in the next, say, a year or so?

James R. Heistand

Well, I would say right now, there is no development at this -- any meaningful on the submarkets that we're in. And I think one of the pieces behind just the submarkets that we put out there is we think we've got very high quality assets that while, it's not like this, it's been here. There's no way you could replicate, it would just be very expensive to replicate, much, much greater cost than what we have on our bases in these assets. So well we think there's still a pretty meaningful run in what rental rates would take to support new development. So as we sit here today, there is little to none -- there may be a couple of build to suit here and there -- but there is nothing that we're aware of that's meaningful, or that's underway.

M. Jayson Lipsey

Yes. I'll just add that at the market level, really, the only market that's seeing that any kind material development right now will be Houston, Texas and I think that a significant portion, I've heard, between 50% and 60% of that development is already pre-leased. Much of which is not relocating tenants from one building to another, it's true net absorption through expansion needs. And so I think that Houston is a market that can certainly accommodate their development in adds right now. Other than that, in our markets, there is very, very little new construction. And we don't foresee, certainly, over the next few quarters, any kind of breadth of new entrants at our market.

Operator

And our next question does come from the line of Alexander Goldfarb from Sandler O'Neill.

Alexander David Goldfarb - Sandler O'Neill + Partners, L.P., Research Division

David, just going back to the preferred. Can you talk a little bit about how you look at cost of capital? I mean obviously, if you take out a preferred with debt, that's probably not helpful from a credit rating perspective. So as you guys evaluate a preferred in the high 6 or low 7 versus issuing equity, how do you guys look at your cost of equity? Some companies look at dividend yield, some companies look at an FFO yield, other companies look at their stock price relative to NAV, some do sort of classic B school and come up with something around 9%, so just curious how you guys look at it.

David R. O'Reilly

Look, I don't think there's any one methodology that's dead-on right. I would say that our view is that if I just took a straight FFO yield as a cost of equity, that will be very shortsighted relative to growth that's inherent in our portfolio. And whether we are taking a traditional business school weighted average cost of capital modeling approach or if I'm staying, if I sold the share today and have to buy it back in 5 years based on where I think our earnings can go, we're thinking a more long-term approach to what our real cost of equity is. And I'd also say the secondary placement we'll focus on in not just -- what I've just reference but also where we are relative to NAV. And anytime, we're going to have any sort of dilution, whether it's earnings dilution, NAV dilution or ownership dilution amongst our shareholders, we're very cautious in that whatever we are doing, we're going to be able to put that capital to work to create value and more than offset. And that value creation component is in more difficult discussion around what's hiring preferred than it is acquiring assets, specially value add assets, but it's something that we need to be cautious of.

Alexander David Goldfarb - Sandler O'Neill + Partners, L.P., Research Division

Okay. Okay. And then going to the BofA Tower in Midtown, in Atlanta, you guys said that right now you're not looking to buy it. But just want to get a little more perspective around this. Presumably, perhaps you're doing this deal because CW has other assets that you guys maybe interested in, or there's just a lot of lease-ups here or turnarounds that where you don't want to take the burden of having to own it. But given that it is such a prominent asset in Atlanta and especially, if you guys work hard and do some improvements to it, I'm just sort of curious if this is a never say never, and that ultimately we, could not see you buy this, or if there's truly another motivation here?

James R. Heistand

Well, Alex, this is Jim. I'm not going to speak to whether or not we would buy the asset. I think the rationale behind it was, as you know, we just purchased the Tower Place 200 from CW Capital. We have a good relationship with them. I think I've pulled many of the investors and analysts that we worked within this CF -- the special servicer environment for years. And CW Capital does have an outsized office portfolio relative to its peers. So I think, keeping that relationship and see if we can do things to assist them in the turnaround and the perception of that property would be beneficial to us long-term for other acquisitions we may have. We also pull the market we'd like to be in Midtown, so that gives us a better opportunity to kind of beat on that market, understand what the leasing metrics are, et cetera. So it's -- the combination of kind of continuing the relationship, which will create other opportunities for us as well as getting more market knowledge. And I think the last one, we have such a big footprint in Atlanta, it was very easy for us to take that on without any incremental costs.

Operator

And our next question does come from the line of Dave Rodgers with Robert W. Baird.

David B. Rodgers - Robert W. Baird & Co. Incorporated, Research Division

I was wondering if you could provide a little clarity on the roughly 1 million square feet in the consolidated portfolio that are expiring this year in terms of rent. Any clarity on new or expected move-out throughout the course of the year that could meaningfully swing the occupancy number?

David R. O'Reilly

Yes, I could talk a little bit briefly about kind of the mark-to-market rent on -- from Page 23 of our supplemental, which show expirations by year and what the expiring rental rate is relative to market. And for 2013, on an at share basis, we're basically flat at $22.31 expiring versus $22.34 per market rate. In terms of any large expirations [indiscernible] Jayson.

M. Jayson Lipsey

Really the 2 material ones are the ones that we've been talking about a lot which are the K&L Gates and Helix, which will eventually come out of our occupancy towards the latter part of the year. Other than that, I think that we've been able to do a good job of mitigating our large lease expirations in the portfolio. And so I think in the past, we've had very volatile expirations that have really had an impact on this, and I think we've worked our way through the vast majority of those. I think going forward there, we were trying to minimize those and I would say that in the past that they were 90,000 square foot users today, any kind of move-outs we're looking at will be in the 20,000 to 30,000 square foot range, which, I think are just significantly less material in terms of their impact to the company.

David B. Rodgers - Robert W. Baird & Co. Incorporated, Research Division

And I guess with respect to the depositions you expect for the year as it relate to the year end '13 occupancy change for the end of 2012, what is the impact from the dispositions that you expect that you modeled in?

James R. Heistand

Well, all of our guidance does not assume any acquisitions, or dispositions or capital markets activities for that matter. So the occupancies that we provided is just based on the portfolio that we have today and our announced pending acquisition of Deerwood.

David B. Rodgers - Robert W. Baird & Co. Incorporated, Research Division

Okay, got that. And final question. I guess, going to the Atlanta/New York, broadly in that particular asset, I think you talked historically about wanting to do or willingness to do joint ventures on a one-off basis, that's a very -- was this not the right asset, not the right time for you guys? Is there a corporate or company size that you'd like to get to before introducing something like this? Maybe just a little more color on those types of thoughts, Jim, if you could.

James R. Heistand

So I think we've always said that to the extent we found an opportunities that could create a lot of value for the company, but that was outsized relative to either risk or size for the company, then we would entertain a property level JV. And in my mind, it will be more something of a 50-50 JV than what the company has done in the past. But having said that, on this particular asset, CW Capital has no interest in selling it this time. Their goal is to kind of reposition the asset, so it's not even something -- it's not even a topic of discussion relative to that.

Operator

And our next question does come from the line of Mitch Germain with JMP Securities.

Mitchell B. Germain - JMP Securities LLC, Research Division

Maybe if I could ask Dave's question a different way. Recent acquisitions, obviously, it seems like a low 80's occupied. Are you assuming any upside in occupancy from those in your current guidance right now?

David R. O'Reilly

Extremely nominal in terms of our projected cycle of leasing on our recent acquisitions is what we've said and what I'll repeat for you today that we're not, by any stretch of imagination, we expect we could stabilize the business foundry here.

James R. Heistand

Mitch, let me tell you why we do that just a bit. when you take over an asset, especially some of these assets, one of which was held by a special servicer, another was held by a single [indiscernible] In many cases, there's things to be done operationally as well as just some improvements in the property that just take time, the day you buy the property. So it's very difficult to assume in day 1, you're going to put leasing in there. There's things you'd have to do and then the lease negotiations process takes its time. So we try to be prudent in that projections and take all those things into consideration, it's not just practical to assume that. Having said that, as Jayson pointed out, we've had some pretty quick success in some of the assets. So that's the way we look at it.

Mitchell B. Germain - JMP Securities LLC, Research Division

Great. And just one final question. Your thoughts on the dividend here?

James R. Heistand

I'm sure the dividend will be discussed at length at the upcoming board meeting. If anything changes, we'll let you guys know.

Operator

And our next question, there's a follow-up question from the line of Jordan Sadler from KeyBanc Capital Markets.

Craig Mailman - KeyBanc Capital Markets Inc., Research Division

It's Craig here with a quick follow-up. Jayson, on the neighbor's lease, I guess the rent right now is $21.57 at least in the south. So what's the market rent in Houston right now for that space?

M. Jayson Lipsey

I think that we're looking at market rents at that building, which are probably $1 or $2 higher than that. And so, in general, that's a market that's performed well, but I think that they're -- what I would consider to be at the very low end of market.

Craig Mailman - KeyBanc Capital Markets Inc., Research Division

Okay. And then just another quick one. Have you guys had any talks with Honeywell? I think they have a cancellation option in 2014 they'd have to let you know later this year?

M. Jayson Lipsey

We are working with them everyday on sort of trying to provide them good service and ensuring that the building works well for them. We generally don't bring up early termination options with our customers. But I think that right now, there's absolutely no indication that the space isn't working for them or that they have an alternative plan.

Jordan Sadler - KeyBanc Capital Markets Inc., Research Division

It's Jordan. And did you guys give us a mark on the K&L renewal?

M. Jayson Lipsey

I think we did. That lease was at about -- it struck essentially at $35. So they were just a little...

Jordan Sadler - KeyBanc Capital Markets Inc., Research Division

What was the olden place that expired?

M. Jayson Lipsey

The expiring rental, let's say, is under that by about maybe $0.50. So again, keep in mind, that that's just in 2014 sort of when that takes effect. And so -- and that also includes pass-throughs and other things. And that's sort of beginning at $35 with material bonds every year.

Jordan Sadler - KeyBanc Capital Markets Inc., Research Division

And that $35 is the initial starting cash rent?

M. Jayson Lipsey

Yes, that's correct.

David R. O'Reilly

Again I will make the comment, Jordan, when we bought the property, as -- like I said, we're modeling a new lease here but -- over $30 and we only model that going at $28 plus.

Jordan Sadler - KeyBanc Capital Markets Inc., Research Division

$28?

David R. O'Reilly

Yes, that was the kind of market in time when we acquired it first and what we expect it to be leasing. They executed $35 and then have the asking rents for the space they're making more than $30 and it's been a great pleasant surprise for us.

Jordan Sadler - KeyBanc Capital Markets Inc., Research Division

What's the difference between the $35 starting, which I know you said 2014, versus the $30, $32 asks for the 2 floors that are available?

M. Jayson Lipsey

Well, a couple of things. One is that they needed to contract and so we wanted to make sure that there was consideration for that. And so, I think there are a variety of factors that we negotiated. And the second thing is, is that $35, I think it's in '14 or earlier, it commences in 2017, so we'll try to imply what our view of rent growth was at the building during that period of time.

Jordan Sadler - KeyBanc Capital Markets Inc., Research Division

Okay. It's 2017 commencement, got it. Since $30, $32 is a better reflection of market today versus maybe $28, okay.

James R. Heistand

Correct.

M. Jayson Lipsey

Yes.

Jordan Sadler - KeyBanc Capital Markets Inc., Research Division

Okay. I'll come back to impairment real quick. I was just curious what's with the timing on this impairment? I mean, you guys certainly have known for quite some time that you're not going to be an operator/owner we've heard that from you guys for the better part of last year. Why the change in strategy as it relates to the financials today?

James R. Heistand

Well, I would say that our change in strategy was truly official and we've embarked on a complete change of way from that in fourth quarter. And then as such, we've set the mark in the fourth quarter.

Jordan Sadler - KeyBanc Capital Markets Inc., Research Division

Okay. So it's kind of year end, I think.

James R. Heistand

No. No. I would say that the timing is -- really, consistent with the shift in strategy of the company away from pursuing third-party management business on an active basis, clearly occurred in the fourth quarter.

Jordan Sadler - KeyBanc Capital Markets Inc., Research Division

Okay. So you were pursuing third-party management contracts up until then?

James R. Heistand

Correct.

Operator

And at this time, there are no further questions. I would like to turn the call back over to management for any closing comments.

James R. Heistand

We appreciate everybody on the call and all the meetings we've had over the last year and we've appreciated everybody's support. It's been a very long year, a difficult year, but I think we've put the company in the right position going forward, and we appreciate everybody's participation today. Thank you.

M. Jayson Lipsey

Thank you very much.

Operator

Ladies and gentlemen, I will conclude the conference for today. We do thank you for your participation. You may now disconnect your lines at this time.

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