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Piedmont Office Realty Trust (NYSE:PDM)

Q3 2012 Earnings Call

November 01, 2012 10:00 am ET

Executives

Robert E. Bowers - Chief Financial Officer, Executive Vice President and Treasurer

Donald A. Miller - Chief Executive Officer, President and Director

Raymond L. Owens - Executive Vice President of Capital Markets

Eddie Guilbert

Analysts

Anthony Paolone - JP Morgan Chase & Co, Research Division

Chris Caton - Morgan Stanley, Research Division

John W. Guinee - Stifel, Nicolaus & Co., Inc., Research Division

Michael Knott - Green Street Advisors, Inc., Research Division

Brendan Maiorana - Wells Fargo Securities, LLC, Research Division

Michael Carroll - RBC Capital Markets, LLC, Research Division

Operator

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Piedmont Office Realty Trust Third Quarter 2012 Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to Mr. Robert Bowers, Chief Financial Officer. Please go ahead, sir.

[Technical Difficulty]

Ladies and gentlemen, the Piedmont Office Realty Trust Third Quarter 2012 Earnings Call will begin momentarily. [Operator Instructions]

[Technical Difficulty]

Robert E. Bowers

Yes, I apologize to everyone. We're having some difficulties. Obviously we all understand everything that's happened with Sandy and some of the circuits today, but thank you for joining us this morning, and welcome to Piedmont's third quarter 2012 conference call.

Last night, in addition to posting our earnings release, we also filed our quarterly Form 10-Q and Form 8-K, which includes our unaudited supplemental information. All this information is available on our website at piedmontreit.com, under the Investor Relations section.

On today's call, the company's prepared remarks and answers to your questions will contain forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements address matters which are subject to risk and uncertainties that may cause our actual results to differ from those we currently anticipate and discuss today. Examples of forward-looking statements include those related to Piedmont's future revenues, operating income, financial guidance, as well as future leasing and investment activity. You should not place any undue reliance on any of these forward-looking statements, and these statements speak only as of the date they are made.

We encourage all of our listeners to review the more detailed discussion related to risks associated with forward-looking statements contained in the company's filings with the SEC, including our most recent Form 10-Q.

All right, during the call today, we may refer to non-GAAP financial measures such as FFO, NOI and same-store NOI. The definitions and reconciliations of our non-GAAP measures are contained in the supplemental financial information available in the company's website.

Today for the call, we have several members of management here. Don Miller, our CEO; Ray Owens, our EVP of Capital Markets; Laura Moon, our Chief Accounting Officer; Bo Reddic, our EVP of Real Estate Operations; Eddie Guilbert, our VP of Finance and Strategic Planning; and Brent Smith, our Senior Vice President in Capital Markets. All of them can provide additional perspective during the question-and-answer portion of the call. I'll review our financial results after Don discusses a few of this quarter's highlights and some events that have occurred subsequent to quarter-end. Don?

Donald A. Miller

Thanks, Bobby. Good morning, everyone. We have a busy call scheduled, and given that we're going live, we'll try to keep this moving along as best we can. Thanks for taking the time to join us this morning as we review the third quarter results and share our perspectives on the current leasing and transactional environment.

During the quarter, we executed over 1 million square feet of leasing. The 2 largest transactions were in the Chicago market. A new 300,000 square-foot 12-year lease with Catamaran was signed for an entire property vacated a year ago at Windy Point II in Shaumburg and a 396,000 square-foot 15-year new lease with Aon Corporation at Aon Center in downtown Chicago was completed in September.

I say new lease as it relates to Aon because as you may recall, although Aon had obviously been a major tenant in that building for some time, they were subleasing space from BP. Signing a credit-worthy tenant such as Aon to a lengthy direct lease of this magnitude with no downtime was a significant win as we now have accounted for 88% of BP's expiring space in December 2013 with blue-chip tenant lineup including the Federal Home Loan Bank of Chicago, Integrys, Thoughtworks and now Aon.

Other leases of note during the quarter were an approximately 87,000 square-foot, 11-year new lease with Guidance Software at our 1055 East Colorado asset in Pasadena, California and a total of 113,000 square feet of leasing with General Electric, BGC Brokers and Starr Indemnity at 500 West Monroe in downtown Chicago.

In addition, I'm pleased to report that subsequent to quarter end, we also executed on almost 400,000 square-foot, 10-year renewal with U.S. Bancorp in Minneapolis. Clearly, these transactions a consummation of significant efforts by our leasing teams over the last several quarters, and we applaud their hard work.

Details of other significant leases executed during the quarter are outlined in our supplemental package available on the website. Obviously, we're delighted about the leasing activity for the quarter and the uptick in our occupancy. Our stabilized portfolio is now back over 90% of leased, and our average remaining lease term has grown to 7 years, which is in line with the office CBD peer group.

Also bear in mind, some of the economic benefits from the large leases signed over the past few quarters may have not -- may not have commenced even if the leases have begun. Many leases are in abatement periods for 12 months or so. For this reason, and remembering the upcoming OCC expiration, I would not expect our same-store cash basis NOI to begin showing meaningful improvement until later in 2013.

To help you develop your own financial models, we've added disclosures in our supplemental financial information this quarter for some of the larger leases that have not yet commenced, which a total of 700,000 square feet of which is currently vacant space and for 1.6 million square feet of leases that are is in some form of abatement. This added information includes when the abatement periods will expire.

Now that we've taken Aon and U.S. Bank off the table, our expirations in 2013 and 2014 are below 10% of the portfolio on both years. And over 30% of our leases have over 10 years of lease term. The 2 major remaining near-term lease expirations are with government tenants in our Washington portfolio. The National Park Service at 1201 Eye Street is currently in holdover, and our best guess is this tenant will sign an intermediate-term extension, and the Comptroller of the Currency at One Independence Square who, as we've said many times, we anticipate will vacate the property during the first quarter of next year. Looking forward, our annual lease expirations are only expected to average approximately 7.3% for the years 2014 to 2017.

Moving on to the capital markets side of the business, we did dispose the last 2 industrial assets in our portfolio during the quarter, 110 and 112 Hidden Lake Circle in -- near Greenville, South Carolina. The transaction marked our exit from the South Carolina market, which brings us to 7 remaining markets that we have targeted exit over the next 5 years -- I'm sorry, next few years.

On the capital deployment front, we continue to believe that the best investment we can make is to invest in our own stock at levels that are below our internal estimates of NAV. As such, we are able to acquire additional 2.2 million shares at an average price of $16.95 per share during the quarter, bringing our program to date totals to approximately 5 million shares for an average price of $16.77 per share. This program has met its objectives of both FFO and NAV accretion for the shareholders.

We also continued to focus on executing upon the capital allocation plan outlined at the time of the 2010 IPO, consolidating into our select core and opportunistic markets and focusing on CBD opportunities. We have been actively pursuing a number of class A acquisitions in our concentration markets, particularly in New York and Boston. For the most part, we continue to find it difficult to see value in the transactions occurring in those marketplaces.

We are also continuing to seek value-added transactions in our opportunistic markets, namely Minneapolis, Texas, Florida and Atlanta. On the litigation front, we have positive news to report. You may recall that in the 2 suits filed by the same plaintiff, that we had filed a motion for summary judgment in one case and a motion for dismissal in the second case. During quarter 3, the judge ruled in our favor in both of those motions. However, as you might expect, the plaintiff subsequently filed motions to appeal. While we are very optimistic that we will ultimately prevail in these cases, we were able to capitalize in the positive momentum from those rulings and negotiate what we consider to be very favorable settlements in order to put the matter behind us and avoid further legal cost and distractions that come along with matters like this. So bearing in mind that it's an agreement in principle at this point, and still have to be approved by the judge, we agreed to pay $4.9 million to settle the first case and $2.6 million to settle the second case.

You'll notice in accordance with accounting rules, we've recorded the expense associated with these 2 settlements in our September financials. The 2 settlements are within the applicable limits of our D&O insurance policies, and we intend to seek full recovery of the amounts. We are working with our insurance carriers, and any recoveries we do achieve will be recognized in future periods when received.

In addition to our October leasing discussed in our press release, there are 2 events subsequent to quarter end that I would like to address this morning. We are always looking to add value to the organization in terms of the quality of our assets, the strength of the balance sheet and in the depth of our organizational team. We are pleased to announce last week that Bob Wiberg has joined our team as Head of our Mid-Atlantic Region and Head of Development for the company. Many of you already know Bob and the extent of his real estate knowledge and experience in the Washington, D.C. market. His contacts and profile in the region will greatly assist us as we face some lease maturities in the coming year.

Over the past decade, Piedmont has also developed build-to-suit projects across our portfolio, and we own a handful of attractive development parcels. We are not signaling any major change in our focus, but we believe bringing on someone with Bob's development capabilities will give us additional bandwidth to create values for these parcels.

Finally, I'm thankful to report that in the wake of Hurricane Sandy, our Piedmont staff in New York, New Jersey, Washington and Boston are all safe and out of harm's way. Unfortunately, we had 2 of our buildings that sustained some measurable damage from the storm. 60 Broad located and adjacent to the New York Stock Exchange in lower Manhattan took on a lot of water in the basement from the storm surge and remains without power. We are currently assessing damage, but it's too early to report when the building will be fully operational again. 400 Bridgewater had a portion of its roofing membrane torn off in the high winds and some water damage results in the top floor of this building in Bridgewater, New Jersey. Repairs are underway, and all damages expected to be largely covered by our insurance programs. As we observe the extent of the damage from the storm, we are thankful for the limited problems that we've observed. I want to thank our teams in the East Coast that were at our properties throughout the storm and continue to give us great effort.

With that, I'll ask Bobby now to review our major financial results and trends. Bobby?

Robert E. Bowers

Thanks, Don. While I'll briefly discuss our financial results for the quarter, I encourage you to review the earnings release, the supplemental financial information and the financial results, which were filed last night for further details. During the quarter, we reported net income of $0.06 per diluted share, FFO of $0.33 per diluted share, a core FFO of $0.37 per diluted share, which includes the add-back of the accrued litigation settlement expense that Don just mentioned.

Operating revenues, operating costs, depreciation, amortization expense were all up during the quarter, reflecting the revenue contributions and costs associated with 3 assets acquired since the second quarter last year and the commencement of several significant leases earlier in 2012. G&A expenses for the quarter reflect a more normalized run rate of approximately $6 million per quarter without any significant onetime expense or recovery items.

One item that is important to point out is the quarterly AFFO amount of $0.12 per share for the third quarter. As we've mentioned in these calls previously, we do not expect to earn -- we do expect to earn annually an average cash flow or AFFO that covers our current annual $0.80 per share dividend payout, subject however, to the timing of certain large tenant capital commitments.

As an example, this quarter, we were fortunate to commence large long-term leases with KPMG and with UnitedHealthcare at Aon Center in Chicago, but along with large block leases come major capital commitments. This quarter, we spent over $30 million at Aon Center alone. As we move beyond the commencement of newly signed large leases, we expect the cash flow should improve materially as our lease expiration schedule moderates during 2014 through 2017. Our total 9 incremental TI commitments were approximately $122 million at the end of the third quarter.

The results in discontinued operations in 2012 and '11 reflect the contributions from properties sold during 2011 and year-to-date in 2012. The largest transaction being the sale of 35 West Wacker in Chicago, which was sold in the fourth quarter of 2011 and contributed prior to the sale more than $0.03 per share quarterly in FFO. The small capital loss reflected in discontinued operations during the current quarter is associated with the sale of 2 industrial assets that Don mentioned.

I do want to draw your attention to our same-store cash NOI analysis included in our supplemental financial information. As we've discussed in the past and during the call today, we've been through a period of high lease expiration over the past 3 years coupled with a profound economic downturn. Consequently, we've experienced significant pressure on our property level cash NOI from vacancies and rental lapse. As we've indicated last quarter, we believe the second quarter of 2012 was the trough for our occupancy levels and that FFO and GAAP and cash NOI income will follow suit by bottoming out and beginning to improve in subsequent quarters through 2014 as leases commence and as rental abatements burn off.

The third quarter same-store cash NOI, which is shown on Page 14 of our quarterly supplemental information, reflects this improvement as the same-store cash was almost flat compared to the third quarter a year ago. And we anticipate our 2012 same-store NOI will continue to improve, maybe down approximately 5% for the year, better than we forecasted, though, last quarter. Overall, our balance sheet remains very stable. As previously announced during the quarter, we did complete the replacement of our $500 million line of credit that matured in August with a comparable-sized 4-year facility with 2 6-month extension options. As a BBB rated entity, the spread on this new line is 117.5 basis points over LIBOR.

With completion of the new line, we currently have no debt maturities until 2014. Our weighted average interest rate is 4.26% today, and our total debt-to-gross asset ratio is about 27.5%. Ignoring capital investments that's available from disposition proceeds, we could up acquire to $1.1 billion in additional assets and remain only 40% leverage on a gross asset basis.

At this time, I'd like to narrow our previously issued guidance to the upper half of our annual Core FFO guidance, that's to the range of $1.40 to $1.45 per share. We'll provide 2013 annual guidance on our fourth quarter earnings call that we'll conduct in February after we've completed our annual budget process. The preliminary models, before, consideration of any new acquisition activity, suggest that 2013 will be flat to down slightly from 2012 levels, which reflects 7 dispositions thus far in 2012.

That concludes our prepared remarks today. I will now ask the operator to provide our listeners with instructions on how they can submit questions. We'll attempt to answer all of your questions now or we'll make appropriate later public disclosure if necessary. [Operator Instructions] Thank you again. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Mr. Anthony Paolone with JPMorgan.

Anthony Paolone - JP Morgan Chase & Co, Research Division

Bobby, if we just take the $74 million, a little under $74 million of cash NOI in the quarter, like just to kind of simplify what the cash coming in through 2014 will be from the leased but not yet commenced or still in abatement sort of leases that are out there. If we just divide that by the 78% that's sort of the economic occupancy of the portfolio and then multiply it by 87%, which is sort of the leased amount, does that get us to the rough run rate of where we'll be on a cash basis once everything is up and running?

Robert E. Bowers

Tony, I appreciate the question, and I apologize that we had that pause when we started today, but answering your question I want to go back and reflect on 2 components I think you're getting at. We have 7 million -- or 700,000 square feet of leases that -- on vacant space that haven't commenced yet and we also have 1.6 million square feet, which I think is to your point, that are in some form of abatement today. If we try to calculate what is that on the full abatement, we have 1.2 million square feet that are like fully abated at today's rate. So if you look at those 2 components, the 1.2 million in full abatement, 700,000 square feet, you almost have 2 million square feet that we know that's booked. That's going to be coming into income over the next 1.5 years, 2 years. If you take some sort of reasonable gross ref rate and you take anywhere from $30 to $25 and use a conservative margin, you can see there's easily $0.16, $0.18 of AFFO cash contribution coming in. That's -- obviously, that's ignoring the benefit that you're going to pick up from straight-line rent. So on a cash basis, you have about $0.18 there of additional benefit. Does that answer your question?

Anthony Paolone - JP Morgan Chase & Co, Research Division

Yes, I guess yes. I was coming out with something in the $30 million to $35 million of annualized pickup in cash off of that, just under $74 million. So it sounds like that's about right.

Robert E. Bowers

Yes, I've got right about $30 million and that gives you that $0.18 AFFO contribution.

Anthony Paolone - JP Morgan Chase & Co, Research Division

Okay, great. And then just in terms of a follow-up maybe for Don. We've heard some other office companies talk about, just over the last 30, 45 days, some pause on the tenants' behalf in terms of making decisions. Can you just talk bigger picture to what conversations with tenants look like, and what the last few months have entailed?

Donald A. Miller

Yes, be glad to, Tony. We've commented multiple times I think, since really middle of the year that we've seen a slowdown in new sort of forward activity. And at risk of repeating myself, I think everybody knows that our lead time given the size of our average tenant base being 35,000 feet, our lead times tend to be fairly long. And so we have a fairly good look into our pipeline going forward. It clearly has slowed down coming into the election. I think the -- particularly the larger tenants seem to have taken a bit of a respite here in the third, fourth -- second, third quarters and are slowing down a little bit. So we don't see as many big deals out there as we were seeing. We are seeing a fair amount of steady activity in the 5,000 to 15,000-foot range. And so places where we have smaller vacancies, we're actually seeing a fair amount of activity, particularly in places like Texas and downtown Chicago. I mean, I'm not sure what the correlation is between the 2 of those, but those are the places we've seen the best activity. So I guess I would say yes, I agree broadly with the marketplace, that things have [indiscernible] and will have some impact on that, and we'll have to wait and see what that is.

Operator

Our next question comes from the line of Chris Caton with Morgan Stanley.

Chris Caton - Morgan Stanley, Research Division

So now as we look at lease expirations, it's certainly lower. And I guess now it's comprised of smaller tenants. I wonder, could you talk to us a little bit about some of the expirations you have over the next year or 2 that aren't at the beginning of the supplemental. So I'm looking back at Page 26 where you kind of disclose your lease expirations by market. I guess Chicago is a bigger market for you next year. Is that -- looks like maybe a little over 200,000 square feet. Can you talk about some of the smaller lease exposures that you have over the next year or 2 that might affect the financials?

Robert E. Bowers

Yes, in -- so for example, in Chicago, the 226,000 square feet, a lot of that is the remaining BP exposure that we have that is not leased. So the 12% that's not taken cared of, which is roughly 100,000 feet or so that would be sort of half of that. There is a tenant up in the upper bank that's expiring early next year that we've known about for a number of years, that's got about a floor. So that's another 30,000 there. So I would say that accounts for 60% to 70% of the Chicago exposure. Obviously the D.C. exposure, over half of that is OCC, and then we have a handful of leases that expire particularly late in the year. In fact, most of the activity we have in '13 is late in the year, and so part of the reason we've been commenting on the fact that OCC is a big impact to us. But other than OCC, at least early in '13 through the first 3 quarters anyway, we have very little other exposure in the portfolio, and then we have a fair number of sort of 20s to 50s that are all expiring at year end '13. And several of those are at 4250 North Fairfax, and the RCB quarter of Washington. So those were where the big exposures would be.

Chris Caton - Morgan Stanley, Research Division

And just a follow-up on BP, can you remind us when that lease expires, and what the downtime is between a handful of the major tenants like Aon, if any, between Aon and Integrys and a few of the other names that you mentioned earlier.

Donald A. Miller

The lease expires on December 15 of 2013 and other than Integrys, so Thoughtworks, Federal Home Loan Bank and Aon, all will have -- take the space effectively December 16. And then Integrys' space will lease middle of 2014. So obviously, we have to rebuild the space when they're not currently in there.

Chris Caton - Morgan Stanley, Research Division

And these are standard abatements like you've been doing?

Donald A. Miller

Correct.

Operator

Our next question comes from the line of John Guinee with Stifel, Nicolaus.

John W. Guinee - Stifel, Nicolaus & Co., Inc., Research Division

Great. Okay, 2 questions: one, Bobby, you're the best CFO in the industry. So why a $0.05 swing in guidance for the fourth quarter?

Robert E. Bowers

John, I don't know. We're falling within the range that we had projected. So I don't look at it as being a swing at all.

John W. Guinee - Stifel, Nicolaus & Co., Inc., Research Division

Okay, second: Don, the issue is I think, as we all know, there's no doubt in anybody's mind that you can generate solid and really strong FFO growth through occupancy gains and also using as I think as Bobby said, about $1 billion of dry powder of very cheap debt right now because you have a great balance sheet. The offset that everyone struggles with is when do you hit bottom on rental rate roll downs on a constant occupancy basis? The TI and leasing commission numbers for the year are I think $55 and maybe $75 a square foot for the last quarter, and those kind of numbers result in overpaying the dividend. And or a -- when you still have rent roll downs given those kind of dollar spent for TIs and for leasing commissions it makes people sort of concerned about where the bottom is. Can you drill down a little bit on the U.S. Bank lease and the Aon lease to give people a real sense to what the net effect of this after TIs and leasing commissions?

Donald A. Miller

John, I'm not sure I'd have -- fair question. Let me see if I can -- it sounds like there's 3 or 4 questions in there. Let me try to do my best and then follow-up if you don't think I've done what you're looking for.

The roll downs by quarter get to be -- because we're so lumpy, get to be very misleading, and we've talked about this before, I think -- was it 2011, we actually had a rollup for the year. When we had a portfolio wide -- we had commented multiple times that we thought we had a 5% to 7% rolled down across the portfolio, but 2011 actually was a rollup. 2012 is going to be a relatively material roll down but that's primarily because of 2 or 3 relatively large leases, Aon being one of them, that we've commented on for a number of years now that when those hit, there'll be relatively large negative roll downs in those particular quarters.

So we continue to believe that our roll down across the portfolio is 5% or less, and I would say the only caveat to that, John, is you've commented, I think accurately many times, is what's happening in Washington, D.C. and what will happen with rental rates in that market. So I'm not sure that the back-to-back quarters, the negative 16% is what you should expect to see going forward. But let's -- I'll try to continue and go on and answer the question further.

So now you go back and you look at a lot of the larger leases that we've done lately, and the per square-foot concessions are relatively high. But a lot of these deals are at least 10 and many of them are 15-year deals and so on a per square-foot per year basis, it's a little better. It's still not great, but we're in markets that are relatively expensive markets, as we've talked about before and in places like downtown Chicago, so net effective rents are all over the board as you can imagine. We have a sort of a minimum threshold we try to achieve or we won't do a deal. And we could've done a lot more leasing the last few years have we been more aggressive on the net effect of rents we would do. But we are big believers in maintaining long-term value in the assets, and so as a result, we've tried to do deals that we felt like would continue to at least maintain if not grow value of the portfolio.

So I don't quibble with any of your comments about the concern you have. I think if there's 2 concerns in the report this quarter it's the negative 16 number, and we just don't get caught up in quarterly roll down numbers because we're such a lumpy organization. But then secondly, is the overall capital cost. We've been saying for several years our overall capital costs are going to go up at the tail end of our re-leasing cycle because that capital tends to get deployed 6 to 12 to 18 months after the leases get signed. And we think we'll have a fair amount of capital going out the door over the next year or 2. And then as that lease expiration schedule starts to roll down to much lower numbers in '15, '16, '17, you're going to see just the opposite effect. And all of a sudden, you'll be, I think, standing on our shoulders and applauding for what little capital we have going on our portfolio. And so I think you have to sort of normalize over long periods to get to the right number.

By the way, I didn't answer your U.S. Bank question. I don't want to forecast what rollup or roll down will look like in the fourth quarter but the U.S. Bank lease, which, of course, would be huge part of the fourth quarter number will actually be a positive. And so that will, again from a lumpy standpoint, it will look better than it should be in the fourth quarter.

Robert E. Bowers

And, Don, if I want to piggyback on some of this lumpiness that's associated with leases and harking back to John's question of why the swing that you see in our earnings. We had 2 major leases that started in the current quarter, particularly at Aon. You had the UnitedHealthcare lease that started, as well the KPMG lease, 2 very large leases that came off of downtimes that we've had.

Donald A. Miller

Yes, and that was $30 million capital that came out this quarter of our numbers. So that was even lumpier than normal for us, John.

Operator

Our next question comes from the line of Mr. Michael Knott with Green Street Advisors.

Michael Knott - Green Street Advisors, Inc., Research Division

Hey Don, I was wondering if you can help me understand what the longer term read-through might be from the Bob Wiberg hire in terms of your centralized leasing asset management approach to the business?

Donald A. Miller

Mike, well, I thought you might ask that question. The readthrough is that if you'd ask us is our business model changing? I'd probably say yes, and no. Let me start with the no side because I think it's very important to reiterate this.

We don't feel like there's anything wrong with our business model. It is different than most of our peer group because of some of the things we've already mentioned today. The average tenant size being 35,000 square feet, so much of our activity in our portfolio is done on a relationship basis with the corporates and the governments that we have relationships with. I think you've met Kerry Hughes, for example, that does all of our new business development. She does a fantastic job of making those relationships work for us.

But so what's happened is over the last 11 quarters, we've done 10 million square feet of leasing so I think we feel like we know how to do some leasing, but almost 30% of that leasing has been done on a direct basis where we haven't used, so to speak outside landlord agency commissionable reps, if you will. We're doing those things on a direct basis ourselves. And so, like I said, our model's just a little bit different because of the nature of what we have. Having said that, we do believe substantially in the benefit of local presence in regional structure. Heck, that's what I came out. I ran a major region for lend lease for a number of years in Chicago when our headquarters were in Atlanta. I understand the benefit of that local presence and the capability of having those people in those offices. And so as we've been looking over time, rather than a revolutionary move to bring in a number of folks and potentially risk the culture and the team atmosphere that we have going here, we felt like it was really critical to address those needs individually. So Washington was a major focus for us.

I think you know I've known Bob for a number of years. We worked together at Prentice Properties. I think the world of him and are thrilled to have gotten him to be able to come over to join our organization. If we can find a couple of more guys like Bob, and that could be internal candidates or external candidates, we might add those roles in a place like a Chicago or Los Angeles or even a Texas over time and supplement their capabilities with other folks in those markets. But that isn't going to change, and we still have a fairly centralized process in terms of how we do some of our leasing. But it will give us a lot more, we think, capabilities in the value-added arena in the local level.

So we think that that's the story. Obviously, Bob brings us a sort of a second benefit, if you will, and that's just his strong development capability. And as we mentioned in the call, we have some land parcels that we could do some things with over time and having a guy of Bob's capabilities that could give us a steady hand and guide us through some of those processes will be helpful as well. So yes, we felt like we got a two for with Bob.

Michael Knott - Green Street Advisors, Inc., Research Division

Second question, I might bend the rules a little bit if I can, I have kind of a couple of questions in one. It pertains to D.C. I'm guessing that the good news about National Park Service is that they're maybe going to sign an extension, but maybe the bad news is you're not going to be able to move them to the OCC space. So just curious sort of your best thoughts on refilling OCC today. Also just curious, generally your thoughts on D.C, did they change given if one candidate wins or not next week?

Donald A. Miller

Yes, as it relates to National Park and OCC, on an NPS basis -- yes, we've said that we were optimistic that we'll get an intermediate-term extension done with National Park. I think that the best reconnaissance we continue to have with them is they do want to move to the Department of Interior buildings over the period of time. Obviously, that takes time in a federal government environment, and so we think that, that -- and of course, a tenant like that probably doesn't want to move twice, the cost of movers so expensive in the federal government model. And so that's why we think that there'll likely to be an intermediate-term extension with us. That probably does also rule out them moving over to OCC, as we've talked about before, because they don't want to move twice. And so there's a sort of pros and cons of that from our perspective.

We actually had some activity at OCC. I say surprisingly because I've been relatively bearish as you know, on D.C. and what the expectations from federal government leasing perspective might be, but we've had a little bit of activity. Nothing that I would in term -- that would be near term but we have had some and that's encouraging.

And I think that's partly because we have one of the highest quality, if not the highest quality block of government space in the district, in a very nice quality building. And we'll be aggressive in chasing the right deal if it comes along. So nothing probably imminent to report, but we're at least going to remain optimistic and keep plugging away on that.

From an election standpoint, without getting into the personal views of it, I think that at least for as it relates to Washington is concerned I think it somewhat becomes a "which market are you talking about" phenomenon. If you said that a Romney victory would probably be good for national defense, that it would probably be better for northern Virginia, although there is obviously a lot of Lockheed presence up in the Maryland corridor as well. But an Obama victory would probably be better for Maryland. It may be more damaging to Virginia if defense continues to get cut. So I think a lot of it depends on sort of what sector you're looking at and what submarket.

Michael Knott - Green Street Advisors, Inc., Research Division

What about the District in either of those scenarios.

Donald A. Miller

Well, I guess just generally, I'm a little bearish on all of Washington D.C, just because I can't believe that we aren't going to continue to see further reduction of federal government use of space. Some of that will go into contractors and then spin-off in other office space. But private people, private entities tend to be a little more efficient than the government and as a result, I think there's just overall downward pressure on use of office space for Washington for the foreseeable future. I don't think that's good news for any of us from our end -- except as taxpayers.

Operator

[Operator Instructions] Our next question comes from the line of Mr. Brendan Maiorana with Wells Fargo.

Brendan Maiorana - Wells Fargo Securities, LLC, Research Division

Hey, Don, so I just -- I guess I was trying to understand your comments to the prior question about the CapEx levels and about rent. And if I look at kind of your rent levels relative to the amount of CapEx that you're spending: in 2009, it was around 12% or 13% CapEx as percent of rent; in 2010, it was 17%; last year it was 16%; in the past couple of quarters, it's averaged over 20%; and for the year, it's about 21%. I mean is the high level driven because you've got most of the large deals that were done in the quarter were in Chicago where the high CapEx market and a low rent market? Is that what you're suggesting and that going forward, if we get a more, let's say, overall mix of leases throughout your portfolio that, that should migrate back down to mid-teens or somewhere around there?

Donald A. Miller

That's a fair question, Brendan. I'm not sure I would -- I'm going to guess. I'm wouldn't say guess, I mean make an educated guess here because I'm not sure we have the exact facts in front of us. But generally, the more percentage of our leasing we do in downtown Chicago, the higher our capital costs are. Clearly that's an obvious issue, downtown Chicago has some of the higher capital cost in the country. Having said that, if you look in total gross rents in downtown Chicago, they're really not far off of rates you see in a lot of other markets. And so I'm not sure the relationship is as far off as it used to be, particularly given the capital costs have gone up in the number of the -- sort of the core or concentration markets in the last few years. In Chicago, they haven't gone up anymore, but they haven't come down yet. So I think that relationship's changing a little bit. Chicago was not quite as much of an outlier as it used to be. But having said that, you're absolutely right. The more we do in downtown Chicago in the quarter, the higher our percentage capital costs are going to be.

Having said that, when you go back to '08 and '09, before we had a lot of our rollover scheduled, you got to remember that those numbers may have been artificially low relative to our overall capital needs in a full cycle basis. And today we're at the peak of the market and doing a lot in downtown Chicago, so that's probably artificially high compared to what our long-term cycle would look like. And so I think your conclusion is probably accurate, that somewhere in the middle is probably more appropriate to the long-term expectation.

Brendan Maiorana - Wells Fargo Securities, LLC, Research Division

Sure. Okay. I mean is -- so do you think that has there been any change in dynamic of your large tenants with -- tenants that -- has there been any change in terms of tenants that have the upper hand versus -- now versus a few years ago? Has it moved more in landlord's favor or is it still that large tenants have significant negotiating leverage given availability and lack of other tenants that could fill a void?

Donald A. Miller

It's very much a market -- submarket by submarket phenomena in the kind of space that you have. And so I'll give you an example. We did the Catamaran deal here recently. Wonderful tenant, 300,000 footer, and so even in a market that's one of the weakest in the country being suburban Chicago, there really wasn't a lot of places for them to go at 300,000 feet. Now if they had been a 100,000-foot tenant, they might have been able to drive even harder terms than they would be able to do at 300,000 feet. And so it really comes down to the submarket, the size of the unit you're talking about and the number of competitors in each of those submarkets that you're dealing with.

I'll give you a great example. In downtown Chicago right now, because we've got 2 blocks of space, particularly 2 really good quality blocks of space at the top of our buildings, anybody over 50,000 feet were getting a look at either one or both of those buildings, depending on their locational preferences. And there's some decent activity in downtown Chicago right now, but that's because there just aren't very many good sizable blocks of space, particularly above the 30th or 40th floor in buildings in downtown Chicago. So all of a sudden, you can be a little bit more -- you can hold the line a little bit more than you would otherwise been able to do a few years ago in downtown Chicago when there were more blocks available. It's like I said, if it's just so specific to the individual situation, it's hard to generalize.

Brendan Maiorana - Wells Fargo Securities, LLC, Research Division

Sure, and then I know you provided a little bit of disclosure on the U.S. Bank deal, positive on rent. If we look at that as, say, maybe a more typical renewal within your portfolio, is there -- was the CapEx level on that deal relatively moderate as well or is that a high CapEx kind of deal?

Donald A. Miller

That won't be Chicago kind of CapEx numbers and given the way we're able to structure it, we were able to do it without free rent as well. And so as a result, it's a nice set of economics for us. I think it was a good win for U.S. Bank as well because they were able to keep their headquarters in a fantastic building. But that's one we're really pleased with the execution on, but I think U.S. Bank would say the same thing from their perspective.

Operator

Our next question comes from the line of Mr. Michael Carroll with RBC Capital Markets.

Michael Carroll - RBC Capital Markets, LLC, Research Division

Hey, Don, how are you guys thinking about the acquisition market today? Are you starting to see more opportunities than you did earlier in the year?

Donald A. Miller

I'll start high level and see if Ray or Brent or anybody else wants to jump in, but I would say the activity level has been fairly stable but we are seeing a lot of deals being brought to market and not trade. And I think that's just a function of the fact that the debt markets are better but they're not there for a lot, particularly in your opportunistic markets, for a lot of things that don't have great credit and term quality to them. And so it's a bit of a unsettled market I thought -- think from that perspective. And more recently, particularly in Washington and New York, we're seeing a lot of the bigger deals that you thought would be relatively easy to execute getting a little bit tougher. They might be getting done, but they're getting done, taking a little longer to get done, there's little more agitab [ph] before it gets worked through the process, and so I think that's just a function of the fact that people are starting to realize that New York and Washington are both softer than they would have thought they were a year or so ago. So I'd say the overall market is active, lots of product out there, but not a lot great value still, at least from the markets that we like to be in. Ray or Brent, either one of you add anything to that.

Raymond L. Owens

I would echo what Don said. Michael, this is Ray. A lot of the deals that had been put out in the market in the, what we call opportunistic market, either did not trade because there's still a gap between buyer and seller expectations or there has been an increase in financing activity in some of the better secondary markets. So when folks aren't maybe getting the guidance or the activity that they'd like on a disposition, they have been going out and pulling those deals from the market and financing them. We are seeing that also in the concentration market, some of the larger deals that Don mentioned before. So I think the impact of still aggressive lending environment out there and low interest rate environment, has caused some sellers to say we could go ahead and refinance versus going in and executing a disposition.

Michael Carroll - RBC Capital Markets, LLC, Research Division

Okay, and then Bobby, could you walk through how you're thinking about your liquidity position currently? I believe you have about $150 million drawn on your line and I know you're still actively or you still have that repurchase program outstanding? At what level would you want to take that line down, and how would you do that?

Robert E. Bowers

Well, as we've said in the comments, we have key line that's in place for $500 million. So much of our capital is going to be controlled by events that you just talked about with Don and Ray. While acquisition opportunities that we have there, without any major acquisitions taking place, I'm projecting through the next year staying underneath $200 million drawn on that line.

Donald A. Miller

Yes, Michael, I think you probably know the answer to this, but in '14 where we have about $500 million of mortgage debt coming due, we -- our current anticipation, assuming the markets are open and available, that we would be refinancing that with unsecured, likely public debt. And so that's our most likely scenario in which we would execute on refinancing of the debt that's coming due in '14.

Operator

Our next question, which will be our last, comes from the line of Mr. Michael Knott with Green Street Advisors.

Michael Knott - Green Street Advisors, Inc., Research Division

Hey, Bobby, I guess this is going to be for you. I think the prior guidance on 2012 same-store NOI on a cash basis was minus 6% to minus 8% if I recall and obviously, that's improved. And just given that I'm curious what you attribute that to just given that on a cash basis most of your leases that you had signed would have free rent periods that may take those leases out past this year. So just curious how you sort of think about what -- that improvement.

Robert E. Bowers

Well, we originally had looked at the same-store cash NOI as you referred to as minus 6%. Probably this year, it’s going to wind up only down minus 5%. Eddie, you have something you want to comment on the stock?

Eddie Guilbert

Michael, I think you -- we're always try to be a little cautious when we give you forecast. I think what we're trying to a signal that we think it's going to be a little bit better, maybe minus 6% to minus 5%. If we err, we're trying to err on the side of being cautious. A lot of that improvement that you see in the last quarter has been OpEx-related. Utilities have been continuing to come in attractively, property tax appeals have been successful, and so a lot of that's driven, frankly, out of the OpEx side.

Michael Knott - Green Street Advisors, Inc., Research Division

Okay. That's helpful, and then going back to an earlier question about market specific expirations on Page 26, as you pointed out, the 2013 number for D.C. is mostly OCC. But it's also a big number in '14 and can you just help us understand what that is? Is that the DIA building in Rosslyn/Boston? What's in that number? And should we worry about that?

Donald A. Miller

Yes. No, I don't believe that's Rosslyn. I don't believe that DIA. That is -- that would be 2 leases for the -- the 2 Lockheed leases up in Shady Grove. We also -- the FDA lease up there is a 2014 expiration as well. So we have 3 buildings that would've earned a little over 100,000 feet each in Shady Grove that are all in '14, and then we have a big exposure to Quest at 4250 North Fairfax in '14 as well. So those would be -- that would be 450,000 to 500,000 of the 555,000.

Michael Knott - Green Street Advisors, Inc., Research Division

Okay, and anything you can say about any of those today?

Donald A. Miller

No comments on any of those, although we're actively working on all of them as you might imagine.

Michael Knott - Green Street Advisors, Inc., Research Division

Okay, and then I think my last question would just be you mentioned the number of markets to exit over the next few years from an investment standpoint. Can you just talk about -- just sort of remind us which ones are maybe the highest priorities? What we might see sooner? Will we see any in '13 just kind of talk about the challenge that you face there.

Donald A. Miller

Yes, I think you've seen a really steady process of us knocking those out one by one. We obviously got Seattle, Portland, Greenville in the last quarter, the last year or so. We anticipate that, I would guess Denver is probably the next most likely one that we think we've got some liquidity there. And then Philadelphia is one that we've been consistently thinking about as we move forward, depends on sort of what level of activity we might have with the tenant there. The tenant's got still 11-plus years left in their lease at this point, but it might be getting to a point where we consider doing something with that. And then if we get some leasing done in Cleveland that would probably be one that would be a '13 execution as well. So I guess we would hope to be down by 3 more, maybe a little more than that next year. And so we sort of continue to cut it in half, and originally we said by '15, we feel like we'd done with all of them. I still think we'll probably be done a little bit sooner than that but not -- we're not rushing it unless we feel like we're getting the fair value.

Michael Knott - Green Street Advisors, Inc., Research Division

Yes, but in general you expect your profile will be more of a net seller in the next, I don't know, 6 to 9 months, 12 months?

Donald A. Miller

I'm not sure we would say that. I think we continue to be very desirous of finding the right core concentration market opportunity, if you will, $100 million to $300 million in size that will ultimately get us to our strategic execution. I think if we weren't out there with the share repurchase program, rightfully so, shareholders might say what are you doing buying at full retail? But I think as long as we're a net seller at retail and -- sorry, I mean, a seller at retail and been a net seller of retail frankly, with our stock price where it is, I think we feel that we've been good stewards of capital from that standpoint. And but we want to continue to move towards the long-term strategic goal of getting up in that 60%, 70% range in our core and concentration market. So we hope we'll find something that will sort of offset the sales that we'll have in '13 from a core concentration market standpoint.

Operator

And now I'd like to turn the call back to Mr. Miller for any closing remarks. Please go ahead, sir.

Donald A. Miller

Well, thank you very much. Just one last comment I'd make before everybody disconnects. One of the things that we probably don't do a very good job of selling on of ourselves is our -- is the operating capability that we've been delivering. And I mentioned earlier, to answer one of the questions, we've done 10 million square feet of leasing in last 11 quarters. That's a heck of a lot of leasing in any environment, much less the environment we've been in. But we've also been sellers of a lot of product at 100% occupancy. And so we were doing some calculations the other day, we're 87% leased in our overall portfolio and a little over 90% on our stabilized portfolio. The difference being that we bought a number of properties that were underleased, if you will, in the last few years and with the idea that we'd lease them up and we hopefully create some value.

Interestingly, if you just took our existing stabilized portfolio today and added back the roughly 2 million square feet of property that we sold with 100% occupancy in the last 12 months, we'd be 91.2% occupied. So the only reason we're sitting at 87% today is we've been, we think really good capital recyclers, selling over 2 million square feet of 100% occupied product with lots of gains associated with them and a big buyer of very low basis product that is underleased. That's holding that -- back our occupancy level in the 87% range, but if you combined -- like I said you, if you combined the 2, if we hadn't sold 100% occupied and hadn't bought the underleased, we'd be 91.2% occupied today. So we feel like that's a testament to the capabilities this firm has, but I'm not sure we do a very good job of selling that as well as we should at times. So I just wanted to bring that up before everybody got off. And thank you very much for attending the call today.

Operator

Ladies and gentlemen, this concludes the Piedmont Office Realty Trust conference call. Thank you for your participation. You may now disconnect.

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