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Executives

Don Miller – Chief Executive Officer

Robert Bowers – Chief Financial Officer

Ray Owens – Executive Vice President

Laura Moon – Chief Accounting Officer

Bo Reddic – EVP of Real Estate Operations

Eddie Guilbert – VP of Finance and Strategic Planning

Analysts

Tony Paolone- JPMorgan

Dave Rodgers - RBC Capital

Michael Knott – Green Street Advisors

Chris Caton – Morgan Stanley Smith Barney

Brendan Maiorana – Wells Fargo

John Guinee – Stifel Nicolaus

Piedmont Office Realty Trust (PDM) Q1 2012 Earnings Conference Call May 4, 2012 10:00 AM ET

Operator

Greetings and welcome to the Piedmont Office Reality Trust First Quarter 2012 Earnings Conference Call. At this time, all participants are in a listen-only-mode. A brief question-and-answer session will follow the formal presentation. (Operator instructions). As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Robert Bowers, Chief Financial Officer for Piedmont Office Reality Trust. Thank you, Mr. Bowers. You may begin.

Robert E. Bowers

Thank you, operator. Good morning. Welcome to Piedmont’s first quarter 2012 conference call. Last night in addition to posting our earnings release, we also filed our quarterly Form 10-Q and a Form 8-K, which includes our unaudited supplemental information. All of which are available on our website piedmontreit.com, under the investor relations’ section.

On today’s call, the company’s prepared remarks and answers to your questions will contain forward-looking statements as defined in the Private Security Litigation Reform Act of 1995. Forward-looking statements address matters which are subject to risks and uncertainties that may cause the actual results to differ from those we discuss today. Examples of forward-looking statements include those related to Piedmont Office Realty Trust, future revenues, operating income and financial guidance, as well as future leasing and acquisition activity. You should not place any undue reliance on any of these forward-looking statements. And these statements speak only as of the date they are made. We encourage all of our listeners to review the more detailed discussion related to risks associated with forward-looking statements contained in the company’s filings with the SEC, including our most recent Form 10-Q.

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

I will review our financial results after Don Miller; our CEO discusses some of the quarter’s highlights. In addition, we are also joined today by Ray Owens, our EVP of Capital Markets; Laura Moon, our Chief Accounting Officer; Bo Reddic, our EVP of Real Estate Operations, and Eddie Guilbert, our VP of Finance and Strategic Planning, all of whom can provide additional perspective during the question-and-answer portion of the call.

I’ll now turn the call over to Don.

Donald A. Miller

Good morning everyone. Thank you for taking time to join us this morning as we review our first quarter 2012 results and as we comment on the leasing and transactional environment in which we face. As we reflect on our results for the quarter which were in line with our expectations, it is appropriate to put our current performance into context and give our constituents further insight into our expectations.

Going into 2011, we had identified our biggest challenge as the large lease expiration schedule that we face in the coming years. In fact at that point 37% of our portfolio revenues were tied to leases expiring in the next three years. As we were coming upon the half-way point in that process, it is important to highlight both our accomplishments as well as the remaining challenges.

Let’s start with occupancy. During the first quarter our occupancy rates fell between 1.5% to 2% depending on the measurement. Our stabilized portfolio dropped from 89.1% at year end to 87.5%, and overall occupancy fell from 84.4% from 86.5%. To those of you who follow us closely, this does not come as much of a surprise since we have been communicating for several quarters, the move outs of Kirkland & Ellis at Aon center, Marsh at 500 West Monroe, and Santa Fe Aventis at Bridgewater during the first quarter. The net rentable square feet of these three expirations account for more than our drop in occupancy.

Our economic occupancy measures are even lower as a result of downtime between leases and free rent period for new leases that have recently commenced. For these reasons we had added new schedules to our quarterly supplemental information, which all illustrates commencement dates for new leases on page seven of the supplemental, and building-by-building occupancy levels on page 42 to help with analysis of your financial projections for Piedmont.

The better news is that as a result of the record leasing year in 2011, the 4 million square feet, our expectations of a strong second half of 2012, confidence in renewal of our large lease rollovers still yet to expire, and especially the lower lease expirations that we have in years 2014 to 2017, we expect the first of 2012 to be the trial for this cycle for Piedmont’s operating metrics. As a result of all the leasing activity and associated downtimes and free rent periods, we have added substantial same-store and NOY decline of 8% to 9% in the first quarter of 2012 relative to the first three months of 2011.

Sequentially, we are forecasting an improvement in same-store performance during the second half of the year, and we expect the full year to be done in the 68% range on a cash basis, and down approximately 3% on a GAAP basis. These numbers should improve depending on our Washington DC government lease exposure in 2013 and start to grow substantially in 2014 and beyond.

Our biggest challenge for future leasing remains in the changing political budgetary environment and its impact on the Washington DC leasing market. We believe that the outcomes of two or three large government tenant leases expirations through 2014 will determine how rapidly we grow FFO and NOY. Our lease expirations for the years to follow 2013 drops significantly, while our anticipated leases commence and begin to generate additional cash flow.

On the acquisition front as we had communicated to the street, we are value players and discipline underwrites on the capital transaction side of the business. We pay close attention to the relationship between acquisition cost and replacement cost. Unfortunately in our targeted acquisition markets and gateway locations, cap rates have continued to drop as competition for yield and quality assets increases. Even our opportunities to acquire value added properties which were so successful in 2011, have declined with competition now turning to this product type.

We had budgeted to be a modest $100 million net buyer in 2012, but current market conditions lead me to believe we may be a net seller in 2012. During the last quarter we did sell four buildings and 18.2 acres of adjacent land in the Portland, Oregon, market to Nike for $44 million and recorded a $17.8 million gain on sale during the quarter. This transaction marks our exit from the Portland market and continues our recycling strategy which is focused primarily upon investments in 10 targeted office markets in the United States.

As we disclosed previously, we also have a $300 million stock repurchase program which was approved last November by our board. We did not purchase any shares during the current quarter and have repurchased approximately 200,000 shares since the program’s inception. We remain committed to this program and ready to transact as conditions warrant.

On the operational side of the business, I want to recognize the excellence of our local property management teams. Today, almost three-fourths of our annual leasing revenues come from buildings with an energy star label. Also Piedmont has the second highest number of building among all office REITs with a BOMA 360 designation, which is becoming the industry standard for superior building quality, management practices and tenant services.

On the litigation front, I’d like to touch on one additional area before I turn it over to Bobby. Last quarter we disclosed that nearing a trial date for litigation related disclosures and a proxy we filed five years ago. In late February of this year, the judge made rulings during pre-trial motions, which we believe will strengthen our ability to defend ourselves and a judge also allowed for us to file a motion for summary judgment on the one remaining claim associated with litigation. The trial date has been postponed indefinitely pending a ruling on our motion for summary judgment and any appeal.

I will now turn the call over to Bobby to review some of our major financial variances and trends.

Robert E. Bowers

Thanks Don. We’ll I’ll briefly discuss our financial results for the quarter, I encourage you to please review the earnings release for supplemental financial information and its financial results which were filed last night for further details.

During the quarter, we reported net income of $0.22 per diluted share, an FFO of $0.35 per diluted share, which were in line with consensus estimates. Operating revenues, property operating costs, depreciation and amortization expenses were all up during the quarter reflecting the revenue contributions and costs associated with the seven acquisitions made in 2011, including value add properties at 1200 Enclave in Houston, 500 West, Monroe in Chicago, the Medici Building in Atlanta and 400 TownPark in Orlando. All value-add property acquisitions are detailed on page 33 of our supplemental financial information.

Also, we did not record any significant termination fee income or expense during the quarter as compared to the first quarter a year ago.

Our general and administrative expenses had fluctuated over the past year, with changes to our transfer agent and associated with timing of legal expense reimbursements. Our estimated G&A expenses for the year should be between $25 million and $26 million.

Interest income in the current quarter compared to the first quarter of 2011 declined $3.4 million due to a mezzanine loan receivable on the 500 West. Monroe building, that was converted on March 30 of 2011 into our equity ownership of the building. We also recorded a $1.9 million gain on this conversion which is reflected in last year’s first quarter results.

The results in discontinued operations in 2012 as compared to 2011 reflect a loss of earnings contributions from properties sold in 2011, and during the first quarter of 2012. The largest transaction being the sale of the 35 West Wacker building in Chicago which was sold for a $96.1 million gain in the fourth quarter of last year, and contributed prior to its sale more than $0.03 per share in quarterly FFO.

Now looking at our balance sheet, most of the variances between our financial position today and a year ago are due to our acquisition and disposition activity. During the last two quarters, we have used proceeds from dispositions to fund our acquisitions and to reduce the amount of secured debt on our books by $305 million. After the end of the first quarter, we paid off an additional $45 million mortgage and we have no other maturities until 2014, except for our $500 million credit facility which we are currently in the process of renewing. Only $20 million was outstanding on the line at quarter end. On page 19 of our supplemental financial information, we disclosed that we easily meet all of our debt covenant requirements.

Also during the first quarter, we did adjust our quarterly dividend to $0.20 per share, which will free up annually an additional $80 million of capital for corporate purposes.

Regarding guidance, I am not going to make any changes to our annual guidance at this time. I will note that the variances and FFO and NOY between quarters, this year will be greater than in the past with the sale of 35 West Wacker, with the operating downtime at certain properties between the expiration of large leases in the first quarter and the commencement of replacement leases in the third and fourth quarter, particularly at the Aon center and the Bridgewater properties.

As now and indicated, we believe that the first half of 2012 is the trial for Piedmont, and we expect to see our occupancy and financial results begin to improve in the second half of the year given that we have approximately 1.7 million square feet of leases currently in some form of abatement that we have several large leases commencing later this year and a low level of lease expiration exposure began in 2013, we are very optimistic about the future.

Our portfolio of properties have embedded earnings growth potential as leases commerce, as we lease up our blocks of vacant space which we believe will well position competitively in their respective markets.

That concludes our prepared remarks today. I will now ask the operator to provide our listeners with instructions on how they can ask questions management. We’ll attempt to answer all of your questions now, or we’ll make appropriate later public disclosure if necessary. We do ask that you try to limit your questions to one follow on question, so that we can address as many of you as possible. Operator?

Question-And-Answer Session

Operator

Thank you. We will now be conducting a question-and-answer session. (Operator instructions). One moment please while we poll for questions. Thank you. Our first question comes from Tony Paolone with JPMorgan. Please proceed with your question.

Tony Paolone- JPMorgan

Thanks, good morning everyone. Bobby, recognizing the variances in quarterly earnings this year as you mentioned. Can you help us maybe with any NOI adjustments we should make to the first quarter as we roll in to Q2?

Robert E. Bowers

Well, the one thing you need to remember, Tony is that the Santa Fe lease is the one that rolled off right at the end of this quarter. So you will have the full impact of that lease in the second quarter. But then as you move into the third and fourth quarter, you start picking up those replacement leases that we’ve talked about on page seven. You get the commencement of the KPMG lease, you get the United Healthcare lease beginning, you get Savitt and a couple of the other leases at Bridgewater.

Tony Paolone- JPMorgan

Okay. No other though large things we should think about in NOI as we roll into Q2?

Robert E. Bowers

No, I don’t think so.

Tony Paolone- JPMorgan

Okay. And then just another question is on National Park services. Can you give us a sense as to how Hold Over process work, like how long you think they can stick around just from a practical point view?

Donald A. Miller

Tony. This is Don. Am not sure there’s a great answer to that. The Federal government actually in their leases through the GSA typically have a fair amount of – I’ll call it leverage for lack of a better term in their ability to stay in the space if they need to. However, they have to stay in the entire space if they want to continue to hold over. So given that we don’t formally have an FFO in front of us, and we don’t know other than what’s been issued through – what’s been approved by Congress which is a 15 year, 160,000 foot lease. Beyond that, we don’t know what their goals are going to be. It could range anywhere from them holding over for a short period of time, six month to a year and a half and doing something else to holding or asking to come back for a two or three year lease from us, to give them more flexibly all the way to signing a 15 year renewal with us. And then of course, we’ve talked about other strategies in the past about how we’d love to encourage them to maybe move over to our OCC space. But any or all of those are still options. Frankly, they haven’t formally issued the FFO; they’ve only gotten it approved by Congress. So until they do that and start to engage with us, it will be hard to know.

Tony Paolone- JPMorgan

Got it. It sounds like more than a month or two or something like that.

Donald A. Miller

Yeah. I don’t know how they would even physical get out – I mean there’s a conventional wisdom, I don’t know if this is always true, but we’ve seen it in a number of times in the past that from the time they make a decision to move out of a building, quite often it’s a year to a year and half before they could actually physically get out, even if they were moving at fairly good pace.

Tony Paolone- JPMorgan

Okay. Thank you.

Operator

Our next question comes from the line of Dave Rodgers, with RBC Capital Markets. Please proceed with your question.

Dave Rodgers - RBC Capital

Hi Don. On the acquisition/disposition outlook for the year, sounds like as you’ve said in your comments you are expecting to maybe be in that seller of assets. Is there an ability to maybe start to accelerate some of these non-core dispositions? I know in the past there hasn’t been a lot of capital in those markets, but are we seeing a little bit of flow of capital into the secondary markets that would allow you to accelerate that? And how does that make you feel about kind of the guidance for this year if you were to be a bigger seller within the range?

Donald A. Miller

Good question Dave. I think – a couple of comments more broadly about the capital markets which I think will answer your question and if it doesn’t I will get more specific. But clearly in the concentration markets we are seeing improvement in pricing around the shop or even using the B word which I know nobody wants to hear. For those of you who do not know what I am talking about, I am talking about a bubble. And – but that’s typically sort of confined to the super core assets in those markets where there is just really strong rent rolls, good quality assets. Because what is happening is you are seeing a lot of people trolling for very cheap financing. I consistently hear people bragging about getting five year financing at 3.5 or 4 or less deals that you would think are long term hauls and so, my math reaction is to believe that they are mismatching assets and liabilities again which we’ve seen in previous cycles. But what it ends up doing is encouraging them to bid these cap rates down to levels that don’t make any sense from either an income yield standpoint or just a basis standpoint. You know how much we abhor paying too much for a piece of real estate.

So as a result, what we are seeing is more and more of those people who can’t find good deals in those markets are spinning out into super core deals in the secondary markets. And so some of the things that we are bringing to market right now are fairly longer term leased reasonable quality assets that we think can take advantage of that, and most of those were already on our 2012 list. So they don’t really change anything about our business plan for 2012.

In the event we got some more leasing done on a couple of other assets, it could encourage us to bring others to market, but I don’t think it will be a flood. It will be more of a trickle of the non-strategic assets to come to market beyond what we are currently planning. So if that was to happen, it would likely be later in the year and as a result, it probably wouldn’t have a big impact on 2012 guidance even if we would execute it.

The one thing I will say is notwithstanding sort of the strength in pricing in the super core assets, we are still seeing a deal here or a deal there that because of that little bit of dislocation, the rent roll has some interest to us and so there is still a deal or two out there that could be interesting to us from an acquisition standpoint right now, but by and large you’ll just still see us continue to air in the side of discipline versus not.

Dave Rodgers - RBC Capital

And to the follow up to that, maybe on the flipside, have you looked at other forms of investments maybe structured investments across the country that might make sense for Piedmont?

Donald A. Miller

Yeah. We may have talked about this in the last call as well Dave, but we are seeing better relative value in mesons today. Particularly on deals that either had some problems in the past and need to be recapitalized or somebody who’s buying something, leasing it up and you’ve got sort of a low going in basis and protection because they got to spend a lot of capital to go forward. And those are actually pricing – in some cases, I feel like we are getting a better return than the equity is getting on the same deal. So kind of fascinating given that you are lower in the capital structure and getting better returns. So that is encouraging us to look at a few of those kinds of deals, but those are always hard because you got to line up a lot of different things, you got to line up the right sponsorship, the right real estate. Obviously we wouldn’t do one on something that wasn’t a piece of real estate that we’d otherwise want to own. It’s got to be in markets that we’d want do etcetera. So those are even a little harder to do than just pure equity deals.

Dave Rodgers - RBC Capital

Great. Thanks.

Operator

Our next question comes from the line Michael Knott, Green Street Advisors. Please proceed with your question.

Michael Knott - Green Street Advisors

Don. Can you talk about leasing prospects going forward with some of these big holes that you have to fill are particularly -- I guess you touched on, do you see a little bit, but maybe Chicago and New Jersey?

Donald A. Miller

Yeah, we’d like to Michael. I think we talked a little bit before. It’s an oil and technology market at moment. So it’s Texas and the technology markets that are doing well and everybody else is not. And I’d like to tell you I have more of my portfolio in the Texas and the technology markets and I do, but unfortunately we are by and large concentrated in those markets that are not technology and oil. Where we are, for example Dallas we’re seeing a lot of good activity even though we don’t have a lot of big blocks there. We do have some opportunities to create value for those assets that we’re seeing good activity on. We are seeing good activity on the block of space. For example 400 Town Park, the Orlando asset we bought, we’ve got some good activity there.

We’ve got fair activity at Piedmont Point up in Washington. We’ve got very good activity at Bridgewater obviously and then just recently we’ve started to see some interesting prospects at Windy Point. Rents will be terrible. Obviously the economics will be rough, but we’re actually seeing a couple of good credits out there looking for decent size space. So we have some more optimism on that than we’ve had in the past. We’ve been a little disappointed recently with – given that we’ve got the two best – probably the two best blocks and big space in downtown Chicago. There haven’t been any big block players out there lately and that’s been very disappointing to us because when you’re the only guy in town that’s the perfect time for somebody to come along and it’s just gotten really quiet again there for the last little while. And then of course just in general Washington is pretty quiet, particularly on the bigger block front. So right now we’re doing everything we can to hold on to what we got.

Michael Knott – Green Street Advisors

Okay. And then Bobby, did you say the full year cash same store NOI guidance is now minus eight or minus nine? I thought it was minus five on the last call.

Robert Bowers

No. For the full year it should improve from where the quarter was, minus nine. It will go up to probably…

Don Miller

I think we said six to eight in the call. My guess is a little better than that. But to be cautious we said six to eight.

Michael Knott – Green Street Advisors

Okay. But that’s worse than what you guys said last time, right?

Don Miller

A little worse than we said last time for the full year, yes.

Michael Knott – Green Street Advisors

Why is that? Because it sounds like the GAAP number, the FFO number didn’t change too much.

Don Miller

Well, I would guess it’s probably because we didn’t get as much leasing done in the first quarter as we would have liked is probably the largest answer.

Robert Bowers

One other thing…

Don Miller

We thought – I’m sorry, Bobby. We had some pretty good activity in the first quarter that reversed on us. A couple of deals that were getting pretty far down the road that we thought were going to take up some big blocks and then you had a merger – one was a merger that got knocked out. Another one was a tri-party agreement with an existing tenant already the existing tenant out of the way and they couldn’t move quickly enough. So we had a couple of deals that were really disappointing for us that we thought were going to be contributors earlier this year than it turned out to be.

Robert Bowers

The other thing I was going to point out Michael is that the cash NOI is the amount of the payments that we have gotten, as large as I’ve seen it with all the leasing that we’ve done. The good news there is that those leases are signed and as those leases commence there’ll be a period of time that you’re getting the GAAP basis and a lot with cash and a lot is going to start probably year after the commencement.

Don Miller

On the longer term deals.

Robert Bowers

Right.

Michael Knott – Green Street Advisors

Last question. Don, in light of what may be slow leasing overall it sounds like, can you grade yourself on leasing progress on the value add acquisitions that you guys have made, just thinking about what kind of investment strategy makes sense for you guys. Most people wouldn’t associate Piedmont with being a value add buyer just given the history and the background of the firm as a whole. I know it’s a little different for you guys individually, but can you just talk about that. Just how you grade yourself and the outlook for whether you guys would continue to look at those types of deals going forward.

Don Miller

Yes. I would say we’ll know a lot more in the next couple of quarters as we have a lot of activity on some of those buildings. Right now I would – if we were to grade ourselves I’d give ourselves a solid B. Things are going well. We got a nice basis on a lot of those assets and so overall I think we’re going to achieve our returns and more on that portfolio of assets. But until we fill up a couple of those I’m not going to be too self congratulatory.

Michael Knott – Green Street Advisors

Are you still looking at continuing to invest in some of those low area suburban markets or do your comment about tech and oil make you want to get more aggressive on those markets or what you’re seeing?

Don Miller

Yes, the best relative value we’re seeing Michael is in still some of these Sunbelt markets where most of these institutions are a little low to go because they’re still seeing fairly weak job growth and fairly high vacancy rates. And so there’s nowhere near the energy around trying to accumulate product and I will call it Atlanta and Florida and Phoenix and some of those kinds of places, Minneapolis even. And so you may still see us do a few of those deals, but they’ve gotten harder as I was commenting on in my earlier comments. They’ve gotten harder to do because I think along the lines of what we’ve done and people seeing the success that we and others have had doing those deals earlier in the cycle, I think more people are chasing into that space now given that they hope they were closer – hope they’re closer to improvement in the economic cycle than we were a year ago. So the returns on costs just aren’t as attractive as they were a year ago when we were doing those deals.

Michael Knott – Green Street Advisors

Okay.

Operator

Our next question comes from the line of Chris Caton with Morgan Stanley Smith Barney. Please proceed with your question.

Chris Caton – Morgan Stanley Smith Barney

Good morning. Want to follow up on Michael’s questions on Chicago. You talked about fewer big blocks in the market. Can you talk about how maybe you’ll change your leasing strategy? Are you going to wait for big blocks to come to market or are you going to do single floor deals? What’s the plan from here?

Don Miller

Well, obviously you want to try to find that right balance if you were to try to break up those blocks and make them a lot smaller. But let me give you, for example in Chicago there’s really three or four blocks of space over 250,000 feet in all of downtown Chicago they could be assembled right now. The other two other than ours are not the same quality of product that ours is, let’s put it that way. As a result, if you get a good quality tenant coming in to downtown that needs space really quickly, you would hate to go and take your block from 350 down to 225 and then have to compete with a bunch of people at 175,000 foot deal when a 350,000 deal may have only one or two competitors. So as a result you have to be really thoughtful about it. And so if you have a 50,000 or 100,000 foot tenant that’s out there it better be good credit, decent economics to give away that advantage you might have in the marketplace. So each deal is individually thought through. We’re working on a deal or two right now at AON that could take that block down to a slightly smaller size. But again they’re very strategic deals for us and we think we’re getting the right economics and the right tenancy to do that.

Chris Caton – Morgan Stanley Smith Barney

How are lease economics trending in Chicago mostly sideways?

Don Miller

Yes, I would say sideways slightly up and downtown and then sideways to probably slightly down in the suburbs just because you’ve always got another building who will do whatever it takes to get the deal.

Chris Caton – Morgan Stanley Smith Barney

And that would be on effective rent basis?

Don Miller

That’s right. Yes, we think of everything as effective rent because space rates are only as important as the overall economics.

Chris Caton – Morgan Stanley Smith Barney

Face rates are face rates. I want to follow up on I think Tony was asking about DC and the plan for parks. You mentioned it would be interesting nice to be able to move them over to those DC space. What’s the rate differential between high street and the southwest in your – I forget the exact address of that DC space.

Don Miller

Probably depends a little bit. But I’d say $5 to $10 a foot, somewhere in that fairly broad range.

Chris Caton – Morgan Stanley Smith Barney

Okay, great. Thanks very much.

Operator

(Operator instructions). Our next question comes from the line of Brendan Maiorana with Wells Fargo. Please proceed with your question.

Brendan Maiorana – Wells Fargo

Hey. Thanks. Good morning. Wanted to follow up on Chris’s question or just follow up on DC 3100 Clarendon. What’s the status with DIA which I think has their expiration next year and I think as we had talked about on prior calls or maybe in meetings that there were other GSA tenants that may find that space attractive and is that the case and what’s the outlook for that vacant or that pending expiration?

Don Miller

Well, actually when we said this we misspoke, but the expiration is not formally until 2018. However, in the latter half of the lease which is the 2013 to ’18 period they can terminate with 12 months notice. We believe that they will likely take that termination at some point during that period. We just don’t have any idea when yet because it’s part of a DOD BRAC reorganization. We believe that unit is going to be working its way out towards Reston over the course of time. We continue to get feedback that that’s not going to get taken any time soon just because they’ve got – it’s going to take time to get all their folks worked out into that. But right now if you were the budgeter say a ‘14 type of expiration that might a good guess. Having said that, there is a GSA user or two that would be good fits for that building size wise and otherwise that are out in the marketplace today and so we’re working to try to figure out whether that might be a way to swap in because in fact they could swap into a slightly below market rental deal in our building under GSA clause if you will and not actually have to go through the whole procurement process for a new building.

And so we’re trying to see if that is a way to take that expiration out till – all the way up to 2018 without any disruption. The other alternative obviously if it doesn’t turn out to be a GSA tenant is that’s a B plus building but in an A plus location right on the Metro right across from the new salt retail and office project there in Clarendon and given it’s literally a Metro stop comes up into the basement of the building it is a really attractive alternative in what is probably the best submarket in Washington DC. So we’ve got some pretty good confidence in that asset and its lease-ability if they are to leave. But we just don’t know when they’re going to yet. So it’s another typical GSA type situation.

Brendan Maiorana – Wells Fargo

And in the expiration schedule for 2013, I guess being in soft term, that you guys aren’t including that DIA lease in your 2013 lease roll for DC area.

Don Miller

No. it’s in our lease expiration schedule as of 2018 still because we just have no idea when they’re going to leave, if they’re going to leave at all.

Brendan Maiorana – Wells Fargo

Sure. Okay, that’s helpful. And then Bobby, you mentioned that there was 1.7 million square feet of leases that hadn’t yet commenced. I guess if I look at the differential between the lease commencement and lease rate as you guys now have in the schedule on I think page 43 for the overall, take that 3.3% differential times your 20 million square feet it works out to be I think somewhere around 680,000 square feet which would be right in line with the known move ins that we expect. But you mentioned the 1.7 million square feet. What’s the differential between those two?

Robert Bowers

1.7 million doesn’t have anything to do with leases that haven’t commenced. It has to do with leases that have commenced but they’re still in some sort of concession or abatement period. So you’ve got the GAAP NOI contribution but you’re not getting the cash NOI contribution yet.

Brendan Maiorana – Wells Fargo

So the 680,000 square feet or so is in addition to the 1.7.

Robert Bowers

That’s correct. We’ve got leases such as the Chrysler building that’s been leased. You’ve got HM Jackson there at Piedmont Point. You’ve got Schlumberger there at Houston. They’re all still on abatement periods, half the gun.

Brendan Maiorana – Wells Fargo

Okay. So that’s just the abatement period? But your straight line rent number seemed to come down a lot during the quarter. So do you expect that that adjustment given that the leases have commenced but you don’t have – it’s commenced on a GAAP basis but on a cash basis, that that’s going to come down even more sharply as we get further into 2012 and into ’13?

Robert Bowers

Well, your GAAP basis certainly will slide down with now having all of those leases in the first quarter that have expired. You’ll get a full quarter’s worth in the second quarter. It will start to improve your GAAP NOIs once the new leases commence in the third and fourth quarter.

Don Miller

But I think there’s two other things you need to think about there, Brendan. One is obviously we’re going to have a lot of other new leasing happen here over the next six or 12 months we hope and if we do and they have free rent period as well which most of them likely will, then we’ll still be – whatever improvement we see as Bobby just laid out for you, we’re going to have 141 adjustments in the other direction for all the newer leases that are coming in. So I think that will offset some of that. And then secondly, if I’m not mistaken, if you remember Philadelphia, in the first quarter we had that anomaly in our 141 adjustment for the first quarter because Philadelphia pays all their rent in the first quarter of the year.

Robert Bowers

$4 million.

Don Miller

Big chunk, but anyway as a result our first quarter 141 adjustment is always more positive than the other three quarters of the year. In fact the other three quarters of the year offset it one third, one third, one third.

Brendan Maiorana – Wells Fargo

Okay. So you had a $4 million benefit that you’re calling a reduction to straight line to flash fast 141 in Q1 which will not be the case in the forward quarters.

Robert Bowers

Yes. By definition 1.3 of that will go the other direction in each of the next three quarters.

Brendan Maiorana – Wells Fargo

Okay. So sorry, just want to make sure I understand. So it’s a $4 million positive in Q1 and then the Delta would be you don’t get the $4 million positive and you get a $1.3 million negative in Q so the debt would be $5.3 million from Q2 to Q1?

Robert Bowers

I think that’s correct, yes.

Brendan Maiorana – Wells Fargo

Okay, great. Okay, thank you.

Operator

Our next question comes from the line of John Guinee with Stifel Nicolaus. Please proceed with your question.

John Guinee – Stifel Nicolaus

Hi guys. Nice quarter. Quick just housekeeping question, Bobby, is when you’re coming up with your current guidance, what are you assuming in terms of acquisitions and what are you assuming in terms of year-end occupancy?

Robert Bowers

A couple of things there, John. We had originally budgeted in acquisitions that were going to come in late in the year and we only have about $0.01 of FFO contribution included in our guidance associated with acquisitions. There was a second question. What was that?

John Guinee – Stifel Nicolaus

Year-end occupancy.

Robert Bowers

Yes. Year-end occupancy should improve up around 87%, 88%.

John Guinee – Stifel Nicolaus

Okay. But you can always really generate a lot of FFO by just acquiring and barring off your line at about 73 bps. So you can move it around a lot if you just decide to acquire in the second half, correct?

Don Miller

We could John and sometimes I think we may be our own worst enemies in terms of we’re not beating the drum on that. I think if we saw better value in the marketplace we’d probably be beating that drum in a big way. Keep in mind our 73 basis point line benefit goes away at the end of August and it will go to a market line of credit. But it will still be in today’s terms you upper 1% to 2% cost of borrowing rather than 73 basis points. But your point is still the same.

John Guinee – Stifel Nicolaus

Got it. Okay. And then on the National Park Service in DC, so the word on street I think what you implied is that the RFP is out there for 158,000 or 160,000 square feet and essentially it’s the continuing resolution and the Republicans are essentially asking for all GSA leases to be reduced by 30%. Is that a good assessment?

Don Miller

Yes and a slight no. I think John that their determination to go from 220 to 160 predated any sort of mandate of 30% down number that you’re hearing. We’re hearing different kinds of things coming out of GSA. But I think in general you’re right. The congress, especially the Republican Party is putting pressure on them to try to downsize their uses. So they’re looking at all kinds of ways of being creative and get their space needs down. In the National Park Service situation though, I think that actually predated that mandate and they were planning on getting downsized anyway.

John Guinee – Stifel Nicolaus

Okay. And then on the Defense Intelligence agency, the DIA, is that essentially the transition out to Patriot’s Park in Reston, the BXP project?

Don Miller

That’s what we’ve heard, John. That’s what we’ve been told that they’re likely to go to that park with most of their use out of this. But some may go to other places, but the majority would go there.

John Guinee – Stifel Nicolaus

Okay. And then Bobby, the 19 million notes receivable, does that have to do with Portland or a different deal?

Robert Bowers

That has to do with Portland. It will be paid off in August, September or October.

John Guinee – Stifel Nicolaus

Okay. And then a couple more questions. The issue in Chicago I think as much as lack of big block space it might be that everybody really wants to be on Wacker and doesn’t really want to be up in the Lakeshore submarket or west of the river. Is that an accurate assessment?

Don Miller

John, I don’t think so. There isn’t any activity in the marketplace right now, big activity that isn’t looking at us because we’re not so to speak on Wacker. There just isn’t any real big blocks out there. There’s a lot of 50s and 100s that are looking around that are just trading spaces. But our 500 West Monroe asset is considered a top 10 building in the marketplace. So just the fact that it’s a block or two west of Wacker and right over by the train stations doesn’t’ impact it at all. And AON Center, I know we beat this strong for a long time now, but the East Loop market, the perception in the city continues to be that East Loop is the less desirable market.

What we’re seeing among the brokers and tenants now is that more and more people are looking at the East Loop because for all the same reasons they’re looking at tax space and tool space is they want to be able to attract younger talent to their companies and East Loop is a much more attractive location for younger talent. It’s less attractive location for older talent that’s coming in from the suburbs and riding the train in. but over time we seem to be getting more and more market share over there, at least our building is from that experience. So that’s how we’re able to sign all those litany of tenants that we’ve done over the last few years.

John Guinee – Stifel Nicolaus

Okay. And then the last question is I’m sure you looked at the first tower BVA sale in uptown Charlotte. What do you think of that transaction?

Don Miller

You mean the one that was just announced yesterday from one of our competitors?

John Guinee – Stifel Nicolaus

Yes.

Don Miller

We didn’t spend a lot of time on it, John. I hate to not be able to answer your question, John, because Charlotte is not in our target market list. It’s a very nice quality building. I have questions about that entire BVA portfolio because it just appears to me that BVA signing 10 year leases to maximize value on the portfolio and I question whether they’re going to be in a lot of those spaces for the long term. And so we haven’t been as aggressive on any of those deals as we otherwise would have been because our sense is that they’re not committed to a lot of those locations and that’s why they’re selling the buildings.

John Guinee – Stifel Nicolaus

Great. Thank you very much. Wonderful.

Operator

Our last question is a follow up question from the line of Chris Caton with Morgan Stanley Smith Barney. Please proceed with your question.

Chris Caton – Morgan Stanley Smith Barney

Hi Bobby. Just a quick question on guidance. What kind of G&A do you have baked into the numbers?

Robert Bowers

In the conference call I think we have about $25 million to $26 million for G&A for the year.

Chris Caton – Morgan Stanley Smith Barney

Thanks. I’d missed that. I appreciate it.

Operator

Mr. Miller, we have no further questions at this time. I would now like to turn the floor back over to you for closing comments.

Don Miller

Well, as always we really appreciate everyone’s interest and participation. A lot of good questions today. If anybody has any interest in following up obviously our team will be available today and will be reaching out to some of you and I think Bobby has one administrative issue he wants to cover as well.

Robert Bowers

Yes. Thanks Don. We’ve received a number of calls regarding (inaudible) trying to schedule time. We’re going to start trying to book that next week, particularly paying attention to our institutional holders and to our analysts. But we’ll be trying to get in touch with you next week. Thank you.

Operator

Ladies and gentlemen, this does conclude today’s teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.

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