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Executives

Timothy A. Bonang - Vice President of Investor Relations

Adam David Portnoy - Principal Executive Officer, President and Managing Trustee

John Christopher Popeo - Chief Financial Officer, Principal Accounting Officer, Assistant Secretary and Treasurer

Analysts

Joshua Attie - Citigroup Inc, Research Division

Michael Bilerman - Citigroup Inc, Research Division

Richard C. Moore - RBC Capital Markets, LLC, Research Division

CommonWealth REIT (CWH) Q4 2013 Earnings Call February 27, 2014 1:00 PM ET

Operator

Good day, and welcome to the CommonWealth REIT Fourth Quarter Financial Results Conference Call. This call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to the Vice President of Investor Relations, Mr. Tim Bonang. Please go ahead, sir.

Timothy A. Bonang

Thank you, and good afternoon. Joining me on today's call are Adam Portnoy, President and Managing Trustee; and John Popeo, Treasurer and Chief Financial Officer.

Before we begin today's call, I would like to read our Safe Harbor statement. Today's conference call contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and other securities laws. These forward-looking statements are based on CommonWealth's present beliefs and expectations as of today, February 27, 2014. Actual results may differ materially from those projected or implied by any forward-looking statements. Information concerning factors that could cause those differences is contained in our 2012 annual report on Form 10-K; our 2013 quarterly reports on Form 10-Q; and our current reports on Form 8-K, filed with the Securities and Exchange Commission, or SEC, and will also be in our 2013 annual report on Form 10-K, which we expect to file with the SEC later this week, and is also in our Q4 supplemental operating and financial data package, which can be found in the Investor Relations section of our website at www.cwhreit.com.

Forward-looking statements are not guaranteed to occur. The company undertakes no obligation to revise or publicly release the results of any revision to the forward-looking statements made in today's conference call as a result of new information, future events or otherwise. Investors are cautioned not to place undue reliance upon any forward-looking statements.

In addition, this call may contain non-GAAP numbers including property net operating income, or NOI; cash basis NOI; earnings before interest, taxes, depreciation and amortization, or EBITDA; EBITDA as adjusted or adjusted EBITDA; funds from operations, or FFO; Normalized FFO; Normalized FFO available for common shareholders; and cash available for distribution, or CAD. A definition of each of these non-GAAP measures and a reconciliation of each of them to net income, is available in our Q4 supplemental operating and financial data package, which is available at our website.

I would also note that the transcription, recording and retransmission of today's conference call is strictly prohibited without the prior written consent of the company.

Now, I would like to turn the call over to Adam Portnoy.

Adam David Portnoy

Thank you, Tim. Before beginning, I want to remind everyone that the purpose of today's call is to discuss fourth quarter and year-end 2013 results, and we will not be answering any questions regarding litigation or the current efforts by the related companies in Corvex Management to remove the entire CommonWealth Board of Trustees by written consent and without cause. I also want to state that I am incredibly proud of the commitment demonstrated by RMR and its employees in continuing to manage CommonWealth for the benefit of all shareholders in the face of many distractions during the last year. It has not been easy for RMR staff to lease and operate CommonWealth's buildings during the last year. RMR staff has had to work extra hard to convince tenants to renew and lease space in CommonWealth's buildings, including assuring tenants that any landlord commitments will be honored and that buildings will continue to be maintained to high standards going forward. Competitors, brokers, tenants and vendors have often tried to take advantage of the disruption and uncertainty at CommonWealth over the last year. Our strong results this quarter underscore the fact that RMR and its 850 real estate professionals located throughout the U.S. provide CommonWealth with excellent service at low costs, and that the management fees paid to RMR result in real value for CommonWealth and its shareholders.

Turning now to our results of operations. I am pleased to report that the portfolio repositioning, which commenced several years ago, to focus on high-quality, CBD office properties, has begun to create real value for shareholders in the fourth quarter of 2013. On most financial and operating metrics, the fourth quarter produced strong results.

For the fourth quarter of 2013, we are reporting Normalized FFO of $0.63 per share. This compares to $0.82 per share for the fourth quarter of last year, but is a substantial improvement from the $0.57 per share we reported last quarter.

During the fourth quarter, we executed 100 leases for almost 1.1 million square feet, which more than offset the just over 1 million square feet that expired during the quarter. 82% of the square feet leased during the fourth quarter were renewals and 18% were new leases. For the full year 2013, we completed more than 370 leases for 5.2 million square feet, with about 74% of this leasing activity being renewals.

Leases entered into during the fourth quarter had weighted average GAAP rental rates that were approximately 8.5% higher than prior rents for the same space. On a cash basis, the weighted average rental rates during the fourth quarter were 3.1% higher than prior rents for the same space. The weighted average lease term for leases entered into during the quarter was 7.3 years and the capital cost equipments associated with leasing activity during the quarter were $17.84 per square foot, or about $2.44 per square foot per lease year.

Generally, we continue to see stronger leasing activity in our CBD properties compared to our suburban properties. Specifically, the consolidated increases in rental rates for leases signed during the fourth quarter was largely driven by the leasing activity in our CBD properties, which have weighted average increases in GAAP and cash rental rates of positive 19.7% and positive 12.6%, respectively. This compares to our suburban properties, which had leasing activity during the quarter that resulted in weighted average decreases in GAAP and cash rental rates of negative 1.9% and negative 6%, respectively.

For the year ended 2013, we leased 2.4 [ph] million square feet at our CBD properties, which have weighted average GAAP and cash rental rate increases of positive 8.7% and positive 4.1%, respectively. This compares to 2.7 million square feet of leasing activities at our suburban properties during the full year, which had weighted average decreases in GAAP and cash rental rates of negative 2.5% and negative 6.6%, respectively.

Consolidated occupancy of 89.6% at December 31 was unchanged compared to occupancy at September 30. Although occupancy declined 10 basis points to 88.3% in our CBD properties, sequentially between September 30 and December 31, occupancy increased 30 basis points to 91.4% in our suburban properties during the same period. The small decrease in occupancy at our CBD properties was the result of a temporary decline in occupancy during the quarter at our North Point Office Complex in Downtown Cleveland. The increase in occupancy in our suburban properties was driven by better-than-expected leasing activity at some of our smaller suburban properties located throughout the U.S.

On a same-property basis, consolidated occupancy declined 30 basis points to 89.6%, with an 80 basis point decrease in occupancy to 91.4% at our suburban properties, offset by a 10 basis point increase in occupancy to 88.1% at our CBD properties.

Same-property GAAP NOI increased 3.6%, with a 3.1% increase at our CBD properties and a 4.4% increase at our suburban properties. Same-property cash NOI increased 8.4%, with a 6% increase at our CBD properties and a 13.4% increase at our suburban properties. The increase in same-property cash NOI in our CBD properties was driven by higher ancillary revenues, as well as lower real estate taxes and operating costs. The increase in same-property cash NOI at our suburban properties was primarily the result of free-rent-period expirations and increased tenant reimbursements.

Through year-end 2014, we have 2.2 million square feet of leases scheduled to expire, which represents about 5.8% of our annualized rental income as of December 31. The square feet scheduled to expire in 2014 is roughly split 50-50 between CBD and suburban properties. And the average rental rate for leases expiring in 2014 is estimated to be in excess of 10% below market, implying expected roll ups in rents in 2014.

For fiscal year 2014, we currently estimate that we will do between 3.5 million and 4.5 million square feet of leasing activity. This leasing activity is expected to be roughly split 50-50 between CBD and suburban properties, and about 2/3 of this activity is expected to be renewal activity and about 1/3 is expected to be new lease activity.

Our current estimate is that year-end 2014 occupancy will remain flat and modestly increase to around 89.5% to 90%. We also estimate that, on average, our leasing activity will generate increases in rental rates of between 5% and 10% during the year. As a result, we currently estimate that same-property cash NOI will continue to generate positive year-over-year comparisons in 2014.

During the last several years, CommonWealth's Board and management have been focused on creating long-term value for all shareholders by executing the company's business plan, which includes repositioning the portfolio into high-value office properties located in CBD locations and away from properties located in weaker suburban markets. During the downturn in the commercial real estate market between 2008 and 2012, CommonWealth took advantage of its strong balance sheet to upgrade its portfolio into high-quality CBD properties. Today, 33 individual properties collectively generate 76.4% of our fourth quarter cash NOI. A large majority of these 33 properties were acquired after 2008 in our CBD locations of major metropolitan markets such as Chicago, Philadelphia, Denver and Austin.

Since mid-2012, CommonWealth has shifted its focus from buying CBD properties to selling non-core suburban office and industrial properties. In early 2013, CommonWealth announced that it will offer for sale 40 primarily suburban office and industrial properties with a combined 6.7 million square feet. All of these properties were sold during 2013 for an aggregate gross sale price of $158.3 million.

In total during 2013, we sold 43 properties with a combined 8.3 million square feet, as well as excess land, for an aggregate gross sale price of $249.1 million. And the majority of these sales activities took place in the fourth quarter.

During the fourth quarter, we sold 31 of the 40 properties identified for sale at the beginning of the year, which had a combined 4.3 million square feet, for an aggregate gross sale price of $113.4 million. Also during the fourth quarter, we sold a 3-property portfolio in Lenexa, Kansas, with a combined 1.7 million square feet of suburban office and industrial buildings, for a gross sale price of $89 million. The Lenexa, Kansas, portfolio was not listed as held for sale at the end of the third quarter but we decided to sell the portfolio during the fourth quarter because of the strong bids we received for it and our view that continuing to own the portfolio and investing in it would generate very low returns on invested capital. We were also motivated to pursue this sale in order to take advantage of certain tax laws, which were scheduled to expire at year-end 2013.

As of today, we have 45 properties with a combined 8.4 million square feet located throughout the U.S. listed for sale with third-party brokers and classified as held for sale. We currently expect to sell these properties during 2014. On the sale of these 45 non-core properties, the portfolio repositioning that began several years ago will be complete. At year-end 2014, our CBD properties will be about 70% of our revenues and a growing percentage of our NOI in the future.

Although the focus of our business plan is to reduce overall exposure to suburban properties, we are keeping some of our best-performing suburban properties throughout the U.S.

Today, about 2/3 of CommonWealth's cash NOI from continuing operations comes from 38 high-quality CBD office properties with about 21 million square feet. The remaining 87 properties, which have about 16.3 million square feet, generate the other 1/3 of cash NOI and are well-leased and well-located suburban properties.

Six years ago, the breakdown of NOI contribution was almost exactly opposite, about 1/3 coming from CBD properties and 2/3 coming from suburban office and industrial properties. As a result of the successful portfolio repositioning executed during the last several years, we believe CommonWealth's portfolio has increased in value and the company is better-positioned than many of its peers to benefit from improvement in the economy and the office market in 2014 and 2015.

Before turning the call over to John Popeo, I want to briefly review some changes we've recently announced in management compensation and corporate governance, which was in response to shareholder feedback.

Starting January 1, 2014, the CommonWealth business management agreement with RMR was changed to further align management's financial incentives with the returns realized by shareholders. Fees payable under the business management agreement are now tied to stock price performance and a significant portion of the fee is now payable in CommonWealth common shares. Also in January, CommonWealth added 2 highly-qualified new independent trustees to its Board, and the Board's Nominating and Governance Committee continues to work with the executive search firm Korn/Ferry International to identify additional independent trustee candidates to join the Board prior to the June 13, 2014, Annual Meeting. The Board has also made several changes to its bylaws to make it easier for shareholders to participate in its annual meetings and is recommended to shareholders that the company's Declaration of Trust be amended at the June 2014 Annual Meeting to allow for the annual election of all trustees and for plurality voting in contested elections. The independent trustees also intend to designate a lead independent trustee after an additional independent trustee has been added to the Board, which is anticipated to occur on or before the June 2014 Annual Meeting.

In summary, CommonWealth has made significant progress in both executing its business plans and enhancing its corporate governance in 2013.

I will now turn call over to John Popeo, our CFO.

John Christopher Popeo

Thank you, Adam. Before getting into the details, I wanted to remind everyone that we no longer consolidate Select Income REITs, or SIR, with CommonWealth's financial statements, and we now account for the company's investment in SIR under the equity method because our ownership of SIR fell below 50%, to 44.2%, in July, 2013. Although this change may present a clearer financial profile of our core business of owning and operating office properties, a result of these changes is that parts of our financial statements for prior periods may not provide meaningful comparisons to the current period. For example, as a result of de-consolidating SIR, some income and expense line items, including rental income and NOI, appear to be decreasing compared to the prior year when, in fact, the majority of certain decreases simply reflect an accounting change required under GAAP. The better way to review year-over-year performance is on a same-property basis, which Adam covered earlier.

In addition, we now separately state tenant reimbursements and other income in the revenue section of our income statement as part of our ongoing effort to provide a more meaningful presentation of our financial performance. The reporting of Normalized FFO and net income available for CommonWealth common shareholders is more comparable on a year-over-year basis because the de-consolidation of SIR had no effect on the calculation of these numbers in prior periods.

Fully diluted Normalized FFO available for common shareholders was $0.63 per share in the fourth quarter of 2013, compared to $0.82 per share for the same period last year. The decline in year-over-year per share results primarily reflects the issuance of new common shares, the sale of non-core properties and the sale of our shares in Government Properties Income Trust, or GOV, during 2013, partially offset by reduced interest expense resulting from our purchase of senior notes pursuant to our debt tender offer during 2013.

Normalized FFO available for common shareholders was $74.8 million for the fourth quarter of 2013, compared to $67.3 million during the third quarter of 2013. This sequential increase in Normalized FFO primarily represents increased tenant reimbursement revenue, lower utility cost, real estate taxes and other operating expenses.

During the fourth quarter, we spent $50.5 million on recurring capital expenditures, which includes tenant improvements, leasing costs and recurring building improvements. We generated $18.6 million of cash available for distribution, or CAD, during the fourth quarter, reflecting an increase in tenant improvements during the fourth quarter due to timing. Our rolling, 4-quarter CAD payout ratio was 81.4% at the end of 2013.

Both the calculation of Normalized FFO and CAD does not include shareholder litigation costs and related expenses, which totaled $6.5 million or $0.05 per share for the fourth quarter of 2013.

With regard to 2014, assuming our dividend does not materially increase during this coming year, our current expectation is that our rolling, 4-quarter CAD payout ratio will remain about 100% for 2014.

Net loss available for common shareholders for the fourth quarter of 2013 was $16.5 million compared to $163.9 million for the fourth quarter of 2012. Income from discontinued operations primarily reflects results of operations related to properties sold during the year, plus 45 properties that were transferred to discontinued operations during the third quarter. NOI from properties classified in discontinued operations declined by $4.3 million from the prior year.

Prior-year loss on asset impairment from discontinued operations of $168.6 million reflects the write-down to estimated fair value of 31 of 40 properties transferred to discontinued operations during the fourth quarter of 2012.

Current year net loss on sale of properties from discontinued operations reflects losses recognized from the sale of 3 properties located in Lenexa, Kansas, during the fourth quarter of 2013. The current quarter loss on asset impairment and sales from discontinued operations reflects losses recognized on the sale of 34 properties sold during the fourth quarter of 2013.

Turning to the balance sheet. On December 31, 2013, we held $222.4 million of unrestricted cash. Rents receivable includes approximately $199.6 million of accumulated straight line rent accruals as of December 31. Other assets include approximately $140.6 million of capitalized leasing and financing costs. The $573.5 million worth of properties held for sale represents the net book value plus receive receivables and other assets related to the 45 properties held for sale as of December 31.

During October 2013, we prepaid $99 million of our 5.75% senior notes, due in February 2014, at par plus accrued interest.

On December 31, 2013, our total debt was about $3 billion and included $735 million of unsecured floating rate debt, about $1.4 billion of unsecured fixed rate senior notes and $915 million of mortgage debt. The weighted average contractual interest rate on all of our debt was around 4.9% at the end of the quarter and the weighted average maturity was around 5 years. We also had preferred shares outstanding, with a total liquidation preference of $655 million as of December 31.

At the end of the fourth quarter, our ratio of debt to book capitalization was approximately 47%. Our adjusted EBITDA to interest and our fixed charge coverage ratios were 3.2x and 2.5x, respectively. Also, our debt to adjusted EBITDA ratio was 6x.

These strong credit metrics primarily reflect the repayment of approximately $670 million of unsecured senior notes, with proceeds from our equity offering and the sale of all of our common shares of GOV, both in March 2013.

In conclusion, we have made significant progress over the last few years in executing our business plan, which includes repositioning CommonWealth's portfolio into high-value office properties located in CBD locations and away from office and industrial properties located in less desirable suburban markets. Furthermore, when all the properties currently included in discontinued operations are sold, which we expect to happen during 2014, CommonWealth will be finished with the portfolio repositioning that began several years ago.

Before we turn to the Q&A portion of today's call, I want to reiterate that the purpose of today's call is to discuss fourth quarter and year-end financial and operating results. We will not be answering any questions related to pending litigation or the current consent solicitation being undertaken by Related and Corvex and I ask for and appreciate your corporation in this regard.

Operator, we are now ready for questions.

Operator

[Operator Instructions] Our first question comes from the line of Michael Bilerman with Citi.

Joshua Attie - Citigroup Inc, Research Division

It's Josh Attie and Michael. We just had a question on the same-store growth. It was very strong in the quarter and occupancy was flat year-over-year. I know you had a one-time, $3.5 million tax payment that you made last year that impacted the comparison but you also mentioned kind of higher ancillary revenues, free rent expirations, higher TI reimbursements, all of it helping that same-store number. And it'd just be helpful to get a handle on which of those items are recurring and are going to continue into next year and which of those items are maybe a one-time benefit?

Adam David Portnoy

Josh, I guess to just get right to your question, if you remove that one-time item in 2012 that you're referencing, the exceptionally high real estate taxes, instead of same-store cash NOI being about over 8%, it'd be about 5%. So everything else, the extra revenue, the operating cost savings and everything else, if you exclude that, what you might call a one-time item increase in the taxes in 2012, it would've been about a 5% increase versus an 8%.

Joshua Attie - Citigroup Inc, Research Division

Okay. And all of those -- there was no other one-time items besides the tax?

Adam David Portnoy

No.

Michael Bilerman - Citigroup Inc, Research Division

Adam, it's Michael speaking. It sounds like things are progressing ahead with the results and you certainly, in your openings, gave a very good overview about where things stand and how the portfolio's been restructured. I'm just curious sort of where you're headed at in terms of a permanent CEO? We talked last quarter about your multiple roles, in terms of CEO of RMR but also, de facto, the President and/or CEO of CommonWealth. It sounded like you had a pretty good grasp on what's going on. Have you thought about perhaps going into this role and letting someone else do RMR or vice versa?

Adam David Portnoy

Mike, thanks for that question. I think that's something that is on the mind of some shareholders. That's something that I think -- there'd be probably more resolution regarding that question later in 2014. Right now, there is no plan to -- for me to change my role. But as I've said on previous calls, I'm not wed to any 1 position. And if shareholders think that there is a benefit to be had by separating my role in CEO of RMR from CEO or President of CommonWealth, I'm very open to that conversation with shareholders and we're willing to have that conversation. I think we'll turn to that maybe a little bit more seriously later in 2014.

Michael Bilerman - Citigroup Inc, Research Division

And you talked in your opening remarks and you've spent a lot of time talking about the distractions that the RMR people have had over the course of the year. I'm just curious, how and what did you do to sort of overcome those challenges to be able to deliver the operating results that you've been able to deliver this quarter? Then sort of just walk us through in terms of did you allocate more of RMR's time to CWH versus the other companies that you externally manage and sort of how did you do it?

Adam David Portnoy

Sure. I think most of it -- it wasn't -- we didn't allocate more people or resources to CommonWealth than any other quarter. It was just simply a -- spending a lot -- senior management, including myself, John, others, spending a lot of time talking to front-line employees, getting them comfortable with the situation and reminding people to stay focused. I think it's a credit to the staff that they were able to remain incredibly focused. It was fair -- I think it was fair to say that it could be very easy to get distracted by a lot of the activities. And I think it's to their credit that they remained focused on the job at hand. And it had nothing to do with changing people's roles or reallocating resources. It was just -- it was basically just doing what we do everyday. I also think it had a lot to do with the portfolio repositioning. I mean, we've been saying for several quarters now, and it's been -- I know it's been hard for investors and shareholders. We keep saying, "It's coming, it's coming." What we're doing is going to make a lot of sense. It's going to result in better results, in better financial performance. I'm very pleased that, in this quarter, it finally started really showing some of those results that we've been talking about with regards to the portfolio repositioning that we started.

Michael Bilerman - Citigroup Inc, Research Division

And then just last question, just -- it's a clarification for the vote process. How will an absentee or a non-vote count in terms of when a tally is made? I just want to make sure that we understand. Obviously, a shareholder who votes yes or no, that's clearly -- I know how that's counted. But what happens if there's a non-vote or an absentee?

Adam David Portnoy

A non-vote or absentee vote is a no vote.

Operator

[Operator Instructions] Our next question comes from the line of Rich Moore with RBC.

Richard C. Moore - RBC Capital Markets, LLC, Research Division

On the stuff you have held for sale, what is the NOI at this point on that portfolio? Has it changed at all from, John, when you told us last time, I guess, or a couple of quarters ago, what exactly that was? I guess what is that NOI at this point?

John Christopher Popeo

Rich, it's about $45 million annually.

Richard C. Moore - RBC Capital Markets, LLC, Research Division

Great. Got you. And does that stay fairly stable, you think, as you wait for these assets to sell? Or are you actually doing some work on that and might see some uptick in that?

John Christopher Popeo

If there's any uptick, it'll be very slight. But I think you can assume flat.

Richard C. Moore - RBC Capital Markets, LLC, Research Division

Okay. And then can you give us some idea where you are in the process of the 110 buildings that are for sale? What -- like how many different kinds of categories you might have? Where you're at, I guess, in the whole process?

Adam David Portnoy

Sure. They've all been listed with -- this is Adam. They've all been listed with third-party brokers. They're at different -- with multiple brokers. And they've been grouped together in different pools, as well, and people can make bids either for portfolios, sub-portfolios or individual assets. We're at different stages of receiving bids for the whole portfolio. We still feel that we're on-track, though, that a large majority should be sold by midyear 2014. I'm hedging a little bit. There may be a few buildings or a few properties that take us a little longer than mid-2014 to get sold but I think we're still on track to have them, the large majority, sold in the summer.

Richard C. Moore - RBC Capital Markets, LLC, Research Division

Okay, good. And then the amount of debt you guys have on those assets specifically, as opposed to unsecured debt?

John Christopher Popeo

I think it's about $20 million.

Adam David Portnoy

$20 million.

Richard C. Moore - RBC Capital Markets, LLC, Research Division

Okay. So basically that would all be cash for the most part that you generate from the sale of these assets? And you'd use that to pay down the line of credit, I assume?

Adam David Portnoy

There's been no decision at the Board level as to what to do with the proceeds. We're waiting to get the proceeds but I can tell you, the things that the Board's contemplating are, obviously, repayment of debt, as you talk about. There's also a discussion about reinvesting in additional CBD properties. There's also a discussion about whether a stock buyback would make sense. I think that all depends on where we are with the stock price, where the market is for commercial real estate when we get the proceeds. I mean, today, it's a pretty robust market and the commercial real estate market is fairly, I guess, you could say frothy. And it might be harder to reinvest those proceeds into new real estate acquisitions. So -- but that's not to say we wouldn't do it. It depends where we are, what the market looks like sort of mid to late 2014, as to what we do with it. But I think all 3 options are on the table: Repay debt, reinvest in other office buildings or do a stock buyback, or some combination of all 3. That's what's being contemplated.

Richard C. Moore - RBC Capital Markets, LLC, Research Division

Okay. So you sort of went to my next question, Adam, which is what do you do next when the disposition process is done? It sounds like you begin to heat up the acquisition -- at least the desire to go after acquisitions.

Adam David Portnoy

We would probably start looking at them again. I'm a little tepid in saying that we'd be buying a lot only because I just think the market is so -- it's tough for us to find value out there today. You have to look long and hard to find it. I mean, we're staying peripherally involved and just watching sort of from the sidelines in terms of what's going on in the market, in terms of the investment sales market. And the type of properties that we'd typically be interested in looking at buying, our observation is that they are going through fairly aggressive cap rates or very low cap rates. So we would look at it. I'm just -- I'm a little wary, based on where we are today, that we'd be able to find a lot of things to buy. But that's not to say we wouldn't do it. It just -- it depends where the market is.

Richard C. Moore - RBC Capital Markets, LLC, Research Division

Okay, good. And then I have a quick question for you on something in the supplemental. On Page 14, when you guys give your -- the table of historical income data, NOI, et cetera. Those numbers change each quarter. Is that because you had additional dispositions in the quarter, something that wasn't originally in the held-for-sale category but you ended up disposing of something that changed the back numbers?

John Christopher Popeo

That's correct, Rich. I mean, you're required under GAAP to reclassify discontinued operations. Reclass NOI [ph] are properties that you're planning on selling that you've reclassified to held for sale. And you do that retroactively. So that's why the numbers have changed.

Richard C. Moore - RBC Capital Markets, LLC, Research Division

Okay, good. And then on the G&A line, John, while we're still on this. The increase over last year is all legal fees. Are you seeing any reason, as we model going forward for G&A, that we'd have any significant increase in G&A? Or maybe a better way to put it is, what's your guidance or your thoughts for G&A in '14?

John Christopher Popeo

I think the fourth quarter is probably a decent run rate, of course, excluding the nonrecurring litigation costs. In fact, as we sell assets, the advisory or business management fee component of that number is going to go down. So I would say that the current quarter rate is probably going to go down.

Adam David Portnoy

Yes, and there's another factor going on, Rich, is debt, because the way we calculate the business management fee, which is a large component of that G&A expense, is now the lower of gross real estate assets or total market cap. Based on where gross real estate assets are and where total market cap is, I suspect it'll be lower than where it was in 2013, based on that calculation.

Richard C. Moore - RBC Capital Markets, LLC, Research Division

Okay. All right. Good. Got you, Adam. And then last thing for me, guys, is I'm actually in Solon, Ohio. So I see the assets that you're selling here. I'm a little curious about the North Point asset that you mentioned on the call, Adam, in your prepared remarks, and it not doing as well as you had thought. I mean, I thought we were seeing some reasonable pickup in Cleveland -- in Downtown Cleveland. I'm curious what your thoughts are for that asset going forward?

Adam David Portnoy

Yes, we lost about 55,000 square feet in the fourth quarter. There was 2 tenants there, Wells Fargo for about 20,000, and we lost the GSA for the balance. And we really think that's just a temporary blip. We think we'll get those spaces re-leased sometime in 2014. We don't see that as a permanent vacancy at that building.

Operator

Thank you. There are no additional questions at this time. I'd like to turn the call back over to Adam Portnoy.

Adam David Portnoy

That concludes our presentation. Thank you, everyone, for joining us today.

Operator

Thank you for your participation and for using AT&T Executive Teleconference service. You may now disconnect.

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