Piedmont Office Realty Trust, Inc. (PDM) Q4 2014 Earnings Report, Transcript and Summary

Greetings and welcome to the Piedmont Office Realty Trust fourth quarter 2014 earnings call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It's now my pleasure to introduce your host, Robert Bowers, Chief Financial Officer of Piedmont Office Realty Trust. Thank you, sir. You may begin.

Thank you, operator. Good morning and welcome to Piedmont's fourth quarter 2014 conference call. Last night, we filed our earnings release and a Form 8-K that includes our unaudited supplemental information. Both 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 Securities Litigation Reform Act of 1995. I will remind you that forward-looking statements address matters which are subject to risks and uncertainties that may cause actual results to differ from those we discuss today. Examples of forward-looking statements include those related to Piedmont Office Realty Trust's future revenues, operating income and financial guidance, as well as future leasing and investment activity. You should not place any undue reliance on any of these forward-looking statements and these statements speak only as of the date they 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. In addition, during this call, we will refer to non-GAAP financial measures such as FFO, Core FFO, AFFO and property NOI. The definitions and reconciliations of our non-GAAP measures are contained in the Supplemental Financial Information that's available on the company's website. I will review our financial results after Don Miller, our Chief Executive Officer, discusses some of the quarter's operational highlights. In addition, we are joined today by various members of our management team, all of whom can provide additional perspective during the question-and-answer portion of the call. I will now turn the call over to Don.

Good morning everyone and thank you for joining us this morning as we review our fourth quarter 2014 financial and operational results. Our comments today will also include our expectations for 2015 and some of the key assumptions to arrive at our estimates. Looking first at the past quarter and specifically at leasing, the activity for the fourth quarter totaled 321,000 square feet and resulted in total square footage leased for the year of 2.2 million square feet. Activity for both the quarter and the year was fairly evenly distributed between renewals and new leases with 55% being leases with new tenants in 2014. Given our modest lease expiration schedule for the year, this activity resulted in positive annual net absorption for the portfolio and we ended the year just under 88% leased. The largest leases executed during the quarter included a 107,000 square feet, five plus year renewal with Advanced Micro Devices at our 90 Central Street building in suburban Boston and two new leases at 500 West Monroe in downtown Chicago. The first being for approximately 52,000 feet with locked-in companies for 11 years and the second 27,000 feet expansion by GE Capital Corporation for 12 years. This expansion combined with GE's existing leased space in 500 West Monroe totals almost 400,000 square feet. In fact, these leases highlight the success we have had recently with our value-added portfolio. In addition, the moving the one million square feet at 500 West Monroe property up to 73% leased, we have in fact made significant progress recently on all of our value-added properties. First the 156,000 square-foot Medici building in Atlanta has been leased up to 88% with the large lease of 76,000 square feet to Preferred Apartment advisors. Second, the 176,000 square feet, 400 TownPark asset in Lake Mary, Florida has been leased up to 98% as of year-end with the execution of 75,000 square feet with Mitsubishi. And finally, we have had substantial leasing interest during the fourth quarter at our 142,000 square feet Suwanee Gateway property. We anticipate reporting good progress on this asset at the end of the first quarter of 2015. We have also begun chipping away at our Washington DC available space during the quarter. In addition to signing almost 60,000 square feet of leases in the fourth quarter, we have also signed, post year-end, an approximately 85,000 square-foot new lease with The Corporation for National and Community Service for 15 years at our One Independence Square building. We continue to see better leasing momentum in the Washington DC market than previously. Similar to 2014, our lease expiration for 2015 is very modest with approximately 3.5% of our total square footage expiring. Therefore we will continue to focus on leasing currently vacant space and driving net absorption in the portfolio. We are optimistic that we will achieve over 90% reported lease percentage by the end of 2015 for our in-service portfolio. On the development front, Enclave Place was topped out in December 2014. We are now working on the completion of the curtain-wall in order to dry-in the building and complete interior improvements. The overall project remains on budget and on schedule for an early third quarter completion. While vacancy rates remain very low for Class A products in Houston, leasing velocity has declined as a result of the substantial drop in oil prices. However, the direct impact to the Houston market and specifically to the energy corridor remain unclear at this time. Keep in mind the company's exposure to Houston is fairly limited with available space to lease representing less than 1.5% of the total square footage of the portfolio. Our redevelopment at 3100 Clarendon in Washington DC is also on budget and on schedule with the office tower projected to be substantially complete by the end of the first quarter of 2015. We continue to be optimistic about 3100's potential, given the building's premier location and nearby transportation and amenities. We are actively pursuing several leasing prospects at this time. As reported last quarter, we have moved to place a number of properties in the market for sale. We announced earlier this week a successful sale of the first of these assets and believe that we are being rewarded for our patience in disposing of non-core assets in the form of higher sale prices. The low interest rate environment and improved economic confidence in U.S. provides a backdrop to achieve very favorable pricing compared to that of just 12 to 18 months ago. We closed one acquisition in the quarter, acquiring approximately 25 acres of land adjacent to our 400 TownPark property in Lake Mary, Florida. As I mentioned earlier, we have had great leasing success with that property and Lake Mary submarket continues to be one of Orlando's strongest. It's rich in amenities and well located at the junction of I-4 and Orlando's Ring Road. The new site is currently entitled for approximately 160,000 square feet of office space but could accommodate over 650,000 square feet. We are pleased to add this site to our holdings of developable land and at the same time control parcels that's adjacent to our existing 400 TownPark building. We are also pleased to see a substantial number of inquiries for possible build to suit opportunities on the property and we will keep you posted on further development from that front. Subsequent to quarter-end, we completed an investment round trip in Dallas by redeploying proceeds from the sales of a suburban asset into a high quality urban infill properties with higher yields and better growth potential. Specifically, we disposed of 3900 Dallas Parkway in Plano, Texas, a 120,000 square feet five-story building that was sold to its primary tenant, Cinemark. A few days prior to that, we acquired Park Place on Turtle Creek, a 177,000 square feet, 14-story Class A building located in Dallas' prestigious uptown Turtle Creek submarket, with a host of nearby amenities including many upscale shops and restaurants and adjacent to the Katy Trail. Park Place, which is 88% leased complements our acquisition a year earlier of One Lincoln Park and furthers our in-town Dallas strategy. If you haven't already, I would encourage you to reference the presentation regarding the Dallas transactions on our website. On the dispositions front, we have identified up to $260 million to $270 million of assets we anticipate moving out of the portfolio this year. This does not count Aon Center on which will be testing the waters of a sale or a joint venture in the first half of 2015. Obviously a sale of all or part of Aon Center will cause us to adjust our 2015 guidance. But the remainder of the dispositions are already in our numbers. Turning to a different topic, in January we have had several governance changes take place at Piedmont. As previously announced, our Board of Directors introduced a Director tenure limitation in 2014, which is designed to provide an orderly planned change in our board membership. We have previously announced that this January. Ms. Barbara Lang had joined the board. For those of you who don't know Barbara, she is probably best known for a decade of service as the president of Washington DC's Chamber of Commerce, which followed stints at Fannie Mae and IBM. We have intended for Barbara to replace our Board member Don Moss, who was rolling off the board due to tenure limitations. However, given the unexpected death in January of our Chairman Wayne Woody and the fact that Mr. Moss was a member of the same Board Committees as Wayne, Mr. Moss has graciously agreed to serve the remainder of Wayne's through May of this year, which will allow the Board time to thoughtfully consider replacements and recruit additional talents to the Board. In the meantime, Frank McDowell, who has served as Vice Chairman of the Board, will carry out the duties of Chairman until a successor is appointed. I will now ask Bobby to briefly review our 2014 year-end results and outlook for 2015. Bobby?

Thanks, Don. Now while I will discuss some of the financial highlights for the fourth quarter of 2014, I encourage you to please review the earnings release and supplemental financial information with were filed last night, as these items contain more complete details. For the fourth quarter of 2014, we reported FFO of $62 million or $0.40 per diluted share. Core FFO which removes the $2 million impact of the insurance recoveries and acquisition costs reported in the fourth quarter, was approximately $60 million, or $0.39 per diluted share, AFFO for the fourth quarter of 2014 was $0.27 per diluted share and reflects the decreased non-incremental capital expenditures during the fourth quarter as several significant tenant build-outs have been completed earlier in the year. As Don mentioned, our total lease percentage was approximately 88% as of December 31. That's up compared to the third quarter of 2014 as well as at the end of the prior year. In addition, the stabilized portfolio was almost 89% leased as of year-end and our weighted average remaining lease term was 7.1 years. As has been the trend over the last two quarters, cash NOI continued to improve on a sequential quarter basis, reflecting continued improvement in our economic occupancy as abatement periods for certain significant leases continued to expire during the second half of 2014. As of December 31, 2014, the company had 1.3 million square feet of leases that were still in some form of abatement and another 400,000 square feet of executed leases for currently vacant space that is yet to commence. From a balance sheet perspective, we ended 2014 with $2.3 billion in outstanding debt and approximately 38% total debt to gross assets ratio. During the fourth quarter, we obtained a $50 million term loan at a rate of LIBOR plus 115, the proceeds of which were used to fund the acquisition of Park Place on Turtle Creek, which occurred a few days before the disposition of 3900 Dallas Parkway asset, as well as to pay down on the balance of our debt outstanding on our $500 million line of credit. Looking ahead, we have $105 million in a mortgage that is maturing in May of 2015 and currently anticipate issuing unsecured debt to repay that mortgage and the term loan and pay down on the revolver. To that end, during the fourth quarter we entered into $250 million of forward starting interest rate swaps to lock a portion of the interest rate for the potential issuance of debt in 2015. At this time, I would like to introduce annual guidance for 2015 in the range of $1.54 to $1.64 per diluted share for Core FFO. Additionally, we expect 2015's cash basis NOI and same-store NOI to increase 8% to 10% over 2014 results. Don mentioned earlier, we anticipate the existing in-service portfolio occupancy to increase over 300 basis points. And we are confident the overall lease percentage will be over 90% by the end of 2015. Similarly, we project our economic lease percentage will vary during the year as abatements commence and burn off by the end of the year in the low 80% range. AFFO will improve dramatically in 2015 to $1.05 to $1.15 per share, as total non-incremental capital expenditures decline. I will now turn the call back over to Don for some closing calls before we take your questions.

Thanks, Bobby. I would like to conclude this portion of the call by simply stating that this is the most excited we have felt as a management team since our IPO five years ago. We feel considerable momentum from recent anticipated leasing, which should lead to substantial growth this year and next. We have been messaging this anticipated growth in NOI and cash flow for some time and we believe that we are now in the midst of that growth. It's nice to feel like the winds are at our back at this point in the cycle. With that, I will now ask the operator to provide our listeners with instructions on how they can submit their questions. We will attempt to answer your questions now or we will make appropriate later public disclosure, if necessary. Please try to limit yourself to one follow-on question, so we can address as many of you as possible. Operator?

[Operator Instructions]. Our first question today is coming from Jed Reagan from Green Street Advisors. Please proceed with your question.

Good morning guys. Just wondering how we should think about the trajectory of cash, same-store NOI growth over the course of the year? And do you think we will see any noticeable changes quarter-to-quarter as we go through?

Hi, Jed. Yes. We do have actually kind of an interesting trajectory, if you will, just as we did last year where we had the big decline in the first quarter. That low denominator will produce a big uptick in the first quarter, followed by some very solid upside after that, but more steadily in the mid to upper single-digit range in the last three quarters, but well into the double digits in the first quarter.

Okay. Thanks. That's helpful. And just wondering, there was some guidance introduced on a potential contraction in Austin. And just wondering, if you can give a little color on that and what the potential exposure there might be, needing to backfill? And then just a quick tag onto that, if you could give an update on leasing activity for that KeyBank space in New Jersey?

So, yes. Let's start with Austin building. The Austin building is 195,000 square feet. About half of it or so is currently sub-leased to a variety of tenants and the lease expires in 2016, I think, as we indicated in there. We are in negotiations to renew the tenant, Whether it will be successful or not, we don't know yet. But we are also working with a handful of the sub-tenants to convert some of them as well. Obviously, Austin is a whole lot healthier than Houston, probably more like Dallas is behaving today where there is still good activity and things like that. So we still feel reasonably positive about that. The second question was on the KeyBanc space in New Jersey?

Yes.

Yes. So the KeyBanc space, that thing has been sitting vacant for a long time now, although the lease didn't expire until early 2016. We are working on some plans to reposition the asset as we speak and probably later this year we will be looking into spending some money on that. If we choose not to do that, we could sell the asset as well. And a lot of that will depend on what kind of activity level we see. The asset is very well located, but it's really the mid-80s, one of the few buildings we have in our portfolio, I would say, is current state-of-the-art. So that will be a little bit more of a challenge. So we are thinking about all of our available options right now on that, Jed.

Okay. Thank you.

Keep in mind, Jed, the other aspect to that is the other half of that building is 400,000 feet. The other half is leased to a very good credit tenant who is using it as a data center and they have got a lot of infrastructure in there, all the way down to solar canopies out in the parking lot. So you have gat a very strong income stream coming out of the other half of the project for a number of years as well.

Have they expressed any interest in maybe expanding, say, next door?

Not that I am aware of. No.

Okay. All right. Thanks a lot, Don.

Okay. Sure thing.

Thank you. Our next question today is come from Dave Rogers from Robert W Baird. Please proceed with your question.

Yes. Good morning guys. I wanted to talk about the leasing. Don, you seem to have pretty good confidence with regard to your ability to begin or continue to lease up in 2015, but as you look at the track for 2014, I think, the new leasing activity peaked in the second quarter, dropped in the third, dropped in the fourth, economics on leases kind of got weaker into the end of the year. And you have had this 2 million square foot, plus or minus, vacancy level in the portfolio going back, I think, to 2011. So I guess my question is, what's giving you the confidence that you are really going to see that ramp in 2015 in terms of the lease up? And do you have the stubborn vacancy that's just not leasing that we could see move out of the portfolio faster this year?

Actually, no, I don't think we do. So let me see if I can try to, there's three or four questions in there. I am sure I will only answer one or two of them, but I will do my best. The stubborn vacancy, going back to 2011, is an obvious answer, that is, we have had so much rolling out of the portfolio that I would tell you, if you look back at 2011 and looked at our vacancy and in 2015 at our vacancy, there would be very little overlap of vacant space. In fact, maybe one block of space at the Aon Center would be the only common vacancy in our entire portfolio. So it's not as if there is bunch of stubborn vacancy that's been hanging around. It's been the fact that we have had a bunch of tenants rolling over in the 2011 to 2014 period. And now as we go from 2014 to 2015 to 2016 to 2017, we have a lot less rollover. In fact, virtually none. I think as of today, we have less than 2% of our portfolio rolling the rest of this year. We said 3.5% on the call, because that was the number at the end of 2014. But we have done some activity here in the first quarter already that sat us under 2% for 2014. So it doesn't take a whole lot of leasing to add a lot of occupancy to our portfolio the remainder of this year, because there is just nothing going out the back door. So that's the main big picture answer to your question, Dave.

That's helpful. And then just on the confidence in terms of the new leasing? In terms of what we saw, maybe the declining rate of new leasing in 2014, but you seem to have pretty good confidence in 2015 that that's picking up. A little color on that would be helpful.

That was the other aspect of my answer, sorry, I didn't get to, was sometimes we all get so caught up in what various corridors we are doing that you sort of got to look at bigger pictures. We did over a million square feet of new leasing last year. If I did a million square feet of new leasing this year with the little bit of lease rollover I have got, then I am well into the 90s occupancy. I think I am up 400 basis points of occupancy. We are only suggesting we might pick up 300 basis points of occupancy. So I am telling you that, it doesn't take much to get there and I wouldn't read anything into the third and fourth quarters being down. I think we are going to have a very solid first and second quarter based on what we are seeing at this point.

Great and thanks and a follow-up maybe on part of that was, last quarter you guided to upwards of $200 million on asset sales for 2015. I thought you maybe quoted a number that was just slightly above that on the call earlier, but I might have missed it. So just maybe what your plans are in terms of sales this year and timing for dispositions?

Yes. I know it's hard to follow the entire written script sometimes, when you guys are listening quickly, but we said that $260 million to $270 million of one-off dispositions are going to be in the market. In fact, most of those are already in the market and are out for sale as we speak. And we are pretty confident a lot of those will move. And then of course we also suggested that there could be something happen on Aon Center. That's the only thing that's not in our guidance at this point and obviously, given its size and impact on the portfolio, that would be a little bit more of a company changing event. But I don't think it's anything that if we were successful in executing at the pricing that we anticipate that I think anybody would be disappointed by that.

Okay. Great. Thank you.

Thank you. Our next question today is coming from Michael Lewis from SunTrust. Please proceed with your question.

Hi, thanks. So you gave some good detail on the occupancy ramp up. I was hoping maybe we could just drill a little more specifically into DC, which Don mentioned is doing a little bit better and there's some room to go in there. So maybe you could tell us what kind of industries are driving the improvement and what kind of opportunity is there?

I am glad to, Michael. I think DC is a little bit harder to give specific guidance on in terms of occupancy in that market by year-end, partly because we have a fair number of sizable leases that we are working on today and unless I can tell you which of those will hit and which of those won't, it's very hard to give you good guidance on that occupancy ramp-up. I would tell you that we are seeing a little stronger activity from the government but it's not anything that we hadn't anticipated for a while. It's just sort of, the pig is working its way through the python, if you will, from falling on sequestration and so we are starting to see some of those GSA requirements coming out now. Obviously we mentioned in the call that we have knocked out one of those. We knocked out an 85,000 foot lease at One Independence here in the first quarter already, which obviously I think is a very positive sign. And then we have some more activity coming there. And then we are starting to see a little bit more contractor activity. It's interesting, I saw a statistic the other day and I don't read too much into these kinds of one-off statistics but I thought this was very fascinating. The thing that correlates most highly with office leasing in Washington DC is the numbers of bills passed by Congress two to three years before that. And so if you think about that, it's happening again in the sense that we had almost a complete whiff by Congress for several years during the Harry Reid administration and now we are starting to see bills potentially getting passed. And so I think that gives us a little more optimism down the road that there may be more activity generated by that because it stimulates both GSA and contractor activity. So I don't want to read too much into that but I think better times are ahead for DC. It's just, we are bumping along the bottom right now.

Great. Thanks and then second, you acquired some land in Florida and you talked a little bit about the enclave opportunity. I wondered if there were additional opportunities to acquire land adjacent to any facilities? Or if there might be more of a focus on development, whether it's starting building on the Irving land or in Atlanta?

Well, we, as you know, have tried to be strategic about picking up a handful of parcels that are adjacent to existing buildings that we own. I think we have got five today including the land that we have got down in Orlando. Two of those are in Atlanta, two are in Dallas and one in Orlando. And our regional heads in those areas are working hard to try to find opportunities. But I don't think you are going to see us do much in the way of additional speculative development. Might there be a partial spec component to a pre-leased deal? Yes. We are bidding a fair number of build to suit in those markets now. They are all fairly active energized markets, from a build to suit activity standpoint. So we are optimistic something like that may come down the pipe over the next year. But I don't think you are going to be seeing us buy a lot more land and/or going into the speculative development business in a big way. One last think I would add to that, though is, you will see us probably buy a handful small land parcel adjacent to buildings where we might want to try to expand our parking fields or build a parking deck or something like that where you can further strengthen the functionality of a building. And so there is a couple of places where we are in the process of doing that. But it's not to add product to the portfolio as much as it is to ensure they have more of a defensive more to ensure the functionality of assets longer-term.

Got it. Thank you.

Thank you. Our next question today is coming from Brendan Maiorana from Wells Fargo. Please proceed with your question.

Thanks. Good morning. Bobby, appreciate details on the same-store. It looks like if you guys are 9% growth at the midpoint, that's about an incremental $10 million of higher NOI relative to your Q4 run rate, I think, if your Q4 run rate is about $280 million on the same-store, I think they do 9% over your average for 2014 of $266 million would suggest that you have got the same store pool would be about $290 million of NOI. That seems like it's all contractual based on the leases that will commence and the burn off of abatements. So is your same-store outlook, the 9% growth, is that effectively all contractual from leases that are already signed that will come online during the year?

Roughly you are correct. Obviously, in all of our projections, there is an element of speculative leasing that's in there. But yes, you are pretty close.

Okay. And is there, I mean I understand kind of the response to Jed's question about the year-over-year same-store numbers from a comparison purpose standpoint, but just from just an actual NOI dollar standpoint, do the numbers move up meaningfully during the year? Or is it kind of just from an NOI progression standpoint as we move throughout the year, is that roughly sort of uniform during the year?

Yes. It does move up during the year, particularly in the second half of the year, but I will tell you, from a modeling standpoint, perhaps we can talk later and get in greater detail on this, what you have described in terms of growth in the same-store is correct. It will grow as much as maybe $5 million by the end of the year on a quarter basis, from where the run rate is this quarter. But I will remind you one thing. The population changes, when you start saying same-store and you have got dispositions baked in, what you are trying to do is fairly difficult.

Yes, I understood. Okay and then just second question, the 85,000 square foot lease at One Independence. Can you provide some color on economics? And then maybe just as we think about that building coming online, what are the economics like from an NOI perspective for a building that was, sort of I guess from an operating perspective, mothballed, but now will have a tenant that comes online for 25% of it, assuming that there aren't additional leases, but initially for 25% of that?

Yes. Good question, Brendan. The rents that we are achieving on the new lease are very much in line with where we were previously. The concessions, as can imagine, were elevated and the lease commences early next year. So sort of high level, if you are trying to model, that's sort of how you would go ahead about modeling it. Obviously, you have a fair amount of fixed cost in a place like DC, because property taxes are such a high component of your property expenses that you probably have a lower threshold to open a building in a place like DC than you do in places that have a little lower fixed costs. And so off the top of our head, I don't know if we have got a calculator anywhere nearby what our NOI would look like with just 25% tenant, but probably the best news of all with that particular tenant is they took the absolute worst space in the building, if you will. Not there is bad space in the building, but they took the lower floors and we kept the best part of the building to be able to lease. So we achieve the rental economics we wanted. We had to pay for it a little bit on the front end to get there, but we also leased the lower quality space in the building. So we feel really good about that.

Okay. All right. It's great. Thanks for the color.

[Operator Instructions]. Our next question today is coming from John Guinee from Stifel. Please proceed with your question.

Great. Thank you very much. A couple, just curiosity and then a numbers question. If you look at Lake Mary, you said you are going to buy something that's currently entitled for about 160,000 square feet, but you can, I guess, up zone it or put in structured parking and get up to about 650,000 square feet. What's the increase or decrease in development cost per square foot on your base case at 160,000 square foot building versus an up zoning or increased density of 650,000?

Well, John, it maybe a little confusing by the way we presented it. There is 25 acres. It is actually two parcels. The first is already entitled and ready to go parcel that we could do about 160,000 feet on, that if we are do a full 160,000, we would have to do some structured parking that's adjacent to an existing building we have that had some additional parking area associated with it. So that's made it strategic and helpful to us. And then the second piece is immediately the north of the first piece and that's unentitled today, but we have very strong signals from the jurisdictions there that office is a desirable element that would be put on that site and we have pretty good sense of what the density can be and so we are working on getting that fully entitled as we speak. That might also include, however, a retail pad or two, a hotel and some office. So the 650,000 probably includes some other uses in that project. If you know the TownPark project, it also fantastic full mixed-use project, one of the early ones done in this cycle by Colonial. They built a lot of the office product around it. And this is the last land associated with TownPark. And then of course the last part of the excitement on that land site for us is that the last piece of the Ring Road in Orlando, which is funded and going to be moving forward here shortly ties right in to the north end of our project. So we are right there on the Ring Road as it ties in. So it's something we are extremely excited about.

My recollection is Colonial is maybe the Southwest corner, Duke's the Southeast corner, not particularly well located. Somebody, a merchant builder built a very nice product on the Northeast corner as I recall, but I might get those corners wrong. Where specifically is your dirt?

Yes. So your memory is good, John. So the Northeast corner is the merchant developer you are talking about. A group of five or six buildings, not highly amenitized and remember, on the East side of I-4, is considered to be the fore side. The West side is the good side. So the Northeast corner was the spec-developer product. The Southeast corner with the Duke product that they now sold off and Blackstone now controls it. The Southwest corner was all Colonial Heathrow. They bought a lot of that. And they sold it off to DRA along with some of the TownPark that we are in and that's on the Northwest corner. So basically DRA controls a lot of the West side of the highway. We have the rest of it. And then the former Duke product and the former spec-development product is on the East side of the highway.

Great. Okay and then I guess for Bobby B. If you look at your mark-to-market on page 28, that's really solid, Brendan obviously hit the nail on the head on your same-store NOI numbers. That would imply to me a lot bigger increase in FFO than your guidance indicates. Is there some de-levering or have you included your dispositions, but not included any incremental acquisitions in that guidance? Or what's the rest of the story?

Yes. So the acquisitions are a little bit less than your disposition scenario and the timing of those acquisitions come into play, John. We have about $200 million in acquisitions on the books in these numbers.

But later in the year. So there is some de-levering elements and there is some, I call it dilutionary element, in our forward projections based on that. So I think you are interpreting that right, John. It's slightly more dispos than acquisitions. And the acquisitions tend to be later in the year.

Okay and is there any increase in cost of debt in your projections, Bobby, or not?

No. There is no increase in cost of debt. It's coming down.

Is it safe to say that you are pretty much guaranteed to exceed the high end of your guidance?

No. I mean we gave our guidance and there are lot of variables there. Don introduced one of them with what happens with the Aon Center. So we are comfortable with the guidance we have given.

Great. Thank you.

Thank you. Our next question today is coming from Michael Salinsky from RBC Capital. Please proceed with your question.

Good morning guys. Bobby or Don, quick first question. Just any preliminary thoughts on the Aon Center, taking it to market in terms of pricing expectations and how you would like to structure that? I think you mentioned a JV. I mean if pricing comes in better than expected, would you look to sell that asset outright?

Yes. Mike, I probably won't give anybody the idea of what we want to sell it for. do But as you can probably imagine. There is a lot of NAV calculations out there with people who have expectations on numbers that might be a relatively good guidance on that. But in terms of the outright sale, JLL has got the package out. They are going to be bringing it to market here soon. They will be quoting 100% sale asked. That doesn't mean that's what we are necessarily trying to accomplish. But if we did accomplish 100% sale offer that was attractive, we would seriously consider that. I think we would very seriously consider staying about on a 50/50 basis. So either is still optional for us and if somebody doesn't come in with the right structure and the right price, then we won't do anything but we think now is the right time to do it and we are very optimistic about the future of the building. So we think we can share some of that optimism with whoever that will be, whether it's a buyer or a partner.

Okay. That's helpful. Then just going back to John's question. You talked a little bit about the acquisition pipeline being a little bit more backend loaded. Just can you give us a sense of what you are looking at today in terms of acquisitions? Is it mostly infill in your existing markets? Or are you looking at expanding a little bit more? And are you seeing more core value add opportunities?

This is Ray Owens. What we are trying to focus on are really more urban infill asset in the submarkets where we have the presence. As you know, we have put regional people in the field, like Bob Wiberg, Tom Prescott, Joe Pangburn. And you will probably see us being more active in those markets that they are covering in addition to Austin and hopefully New York. So we are really focusing more on where we have on the ground presence in trying to build up those portfolios, really select sub-markets. And just like everybody else, it's going to be difficult to find the kind of deals at the pricing levels that make sense but we are trying to really refine our focus around those select sub-markets.

Okay. Thank you.

Thank you. Our next question today is coming from Vance Edelson from Morgan Stanley. Please proceed with your question.

Thanks. Good morning guys. So, on Park Place in Dallas, just wondering when negotiations started roughly and whether the fall in the price of oil and the impact on the Texas economy or the potential impact became a topic in the final months of negotiating, whether it factored into the price paid and so forth?

Yes. I will start, Vance and Joe Pangburn is here with us, who runs the Southwest region, if you need more color or commentary. But I think we started negotiating the deal Joe?

In November.

In November. We were certainly aware of what was going on with oil at that point in time. We feel very comfortable that because we were not only selling an asset but buying an asset at the same time and moving in-town that we were making a really smart trade, given that we are selling at a much lower yield than we were buying at. And relative to replacement cost, we bought it at a much bigger discount than we sold at, even though those prices were slightly higher per quarter foot. Just a quick of fact. I think less than 10% of the tenants in Park Place are energy-related and I think we would suggest that there is just no comparison between Dallas and Houston in terms of the impact from the energy sector. It doesn't mean that a slowdown in the energy sector doesn't have an impact on Dallas, but it's nothing like Houston. They are just apples and oranges.

Okay. That's very fair. And then you mentioned the build to suit inquiries on Lake Mary and it sounds like you won't do a lot of spec-development. So given that, how does the Florida property rank relative to your other four parcels in terms of likely priorities? Is it pretty far up the list in terms of the likelihood of moving forward with development? And back on the price of oil, does that drop at all, move your Texas land further down the list at all?

No. I don't think so. I would tell you that, like anything else, there is probably a parcel in each market that is most prime for development. I think Joe, who is sitting here with me, would tell you that our Royal Lane land is probably such a in-fill site in Las Colinas that if there was the right build to suit property that came along, that could be a really good fit. Similarly, GH3, the Glenridge Highlands Third land parcel there and that project could be a very near-term opportunity for us in Atlanta. And then of course the Lake Mary. So I would say, that there is probably three that have more near-term opportunities and that we are actively working on things on each of those sites. But obviously nothing's easy in the build to suit world, as you know.

Okay. Perfect. Thanks, guys.

[Operator Instructions]. Our next question today is a follow-up from Jed Reagan from Green Street Advisors. Please proceed with your question.

Yes. Just keeping on the Dallas topic. Look like you sold that asset at a 5.3% cash cap rate. It seems like a pretty strong number for the market. I am just curious if you can talk a little bit about the dynamics that have gone on there, whether in-place rents that were well below market? Or just how the pricing came in for that sale, relative to expectations? Or whether you think you might have been able to sell that a year ago?

Jed, we sold that off-market to the user tenant who had built a building and sold it to us a number of years ago at lower price. And we have had a long-term relationship with them. They were evaluating all their options. And I think it just came back to them being a very strategic building them for a number reasons. And so we didn't actually bring out the market for sale. We did have a tenant that was departing the building on the second floor that factored into that below-market cash cap rate. But it was one of those binary decisions for us, we either sell it to this tenant or take it back through the redevelopment process because the tenant likely moves to another location. And then at the same time a second tenant was departing and so that would have required some more capital to be put in there. Having said that, obviously, I think we feel like we got user sale pricing all day long on it and felt really good about it because of that.

Okay. That's helpful. Thanks. And just curious if you could talk a little more about Houston? What you are seeing on the ground there? Maybe if you made any adjustments to your development underwriting at this point in terms of lease up timelines or stabilized yields?

The answer is yes, all of the above. But we are not quite sure how quantify it quite yet. Obviously there is still some activity there. In fact we have got a prospect or two. They are looking at sizeable chunks of space. I don't know whether -- they tend not to be oil related. They tend to be other types of tenants. So I don't know how to read into that., whether we should have some optimism around those kinds of prospects or not these days. But having said that, I think it would be foolish not to believe that your underwriting might be a little bit impaired. Certainly timing and probably concessions. My guess is you can try to achieve the rates that we have been all calling because we had performed at this below market, below new building market rent to begin with. So we feel comfortable that space rates might be a bit of a hold but we might have more concessions to achieve something. It's still a little early to tell because there is so little activity down the right now. It's hard to get your arms around what market is. So that's always sort of an interesting challenge when you are in this point in the cycle.

Yes. I mean if you were hazard a guess on the type of cap rate impact you have seen in Houston in the last three to six months, any guess? Or just too early to tell?

It would be a complete swag. We really just have no idea because we just haven't seen it. The only thing we have seen is people dropping deals. And so that would tell you that the market has moved a lot. We just don't know how much.

Right. It makes sense. And then a last one for me. Just in terms of re-leasing spread, you guys finished the last year around 3% but it bounced around quite a bit. Do you think 3% is a decent batting line for this year? Or do you think there's maybe some upside if you are able to push rents here and there?

Yes. You probably heard us answer this one before, Jed. I have no idea. It has so much to do with, do we do a big early renewal on a deal in New Yorker or do we do -- it just depends on what the population set is. And so it's so hard to give you a good guidance on that. I think the only good advice I can ever give an analyst on this segment is, don't worry about what is quarter-to-quarter. It just is almost meaningless, especially for someone like us, who is sort of lumpy. And so to us, I think if you were to look at our overall portfolio, it's pretty flat. If you were to look at individuals years and were just to roll the market individual years, some are below and some are above. And so, just so hard to predict. But I would say, overall, we would say flat to getting better because rents are growing in more places than they are declining.

Okay. Great. Thanks so much.

Sure.

Thank you. Our final question today is a follow-up from Brendan Maiorana from Wells Fargo. Please proceed with your question.

Hi, thanks. So Don, I think you mentioned in your script that you thought the ending economical leases rate or the maybe it was the average economic occupy percentage would be low 80s doing 2015, but it seems like you are 81.3% in Q4, I guess that's low 80s, maybe low 80s has a lot of variability in it. I would have thought that number would move up given the abatements that are burning off and some of the known commencements that are going to happen. So maybe could you just provide a little clarity around that stat?

Yes. I think Bobby said that in the prepared script remarks. And so what I think he is getting at is, the number is low 80s today. It goes up over the course of the early part of the year because we have a number of free rent periods burning off and things like that. And then you have another chunk of free rent coming at Nestle in the fourth quarter of this year. This moves the economic occupancy back down in the fourth quarter. So it goes up over the course of the year and then moves back down in the fourth quarter. And then of course, any new leasing we are doing this year of any size, probably is going to have some free rent on the front end of it. So that's not contributing anything towards the end of the year. So it's sort of the little bit of a bell curve. It goes up, goes back down over the course of the year. But then should continue to go back up in 2016.

But Brendan, importantly for 2014, we averaged in the high 70s, in 2015 we will average in the low 80s. So you are seeing improvement in that overall number.

Yes. About a 5% improvement.

Sure, yes. And so if you are over 90% on a leased rate percentage and you are low 80s average on economic, where your big tenant landlord, so presumably those tenants take time to get in the door and then probably also carry, certainly while you are in lease-up phase, carry a fair amount of free rent, given the long lease terms. Where do you think normalized your leased percentage to economic occupy percentage should be for the portfolio, of course for the mid-cycle?

Brendan, let me see if I can take that, because I think it's probably hard to think about it in terms of our portfolio, because things are moving in and out all the time. But I think if you just do a math equation. I think you can come to as good an answer as any and that is, if you say we are doing, an average, most of our bigger deals are 10 to 15 year leases and at one point we were doing a month a year free in free rent and then you have your structural vacancy on top of that. You start doing the math, I would say, a month a year has come down to something less than that. It's not half-a-month, but it's probably somewhere between half-a-month and a month in most of our markets now. You can start do a math equation that gets you to what our loss-to-lease would be, if you want to use that terminology, in the office space sector. And then of course some of that depends on how strong certain markets are versus others. Somebody in Houston last year, there wasn't any free rent, would add lower number of loss than we would have with something in Washington DC. So you have to factor that altogether. But I would say we should run closer to 5% to 6% difference coming forward in the next few years as that free rent starts to burn off.

Okay. That's helpful. And then if I look at just your overall leased rate percentage, it's excluding DC which has got the chunky vacancy which we underwrite when that happens, it's close to 91%, I think I calculated it at 90.8%. If you look at your portfolio, ex-DC, where do you think you can get that leased percentage to?

Well, I am not sure I have it ex-DC at the moment, Brendan. I know, ex-DC and Chicago we are a little over 95% right now and we are pretty optimistic that the Chicago's numbers are going to be coming up pretty dramatically. Excluding DC today, I am sorry, Eddie has just put something in front of me.

Well, that's fine. If it's ex-DC and Chicago, so 95% ex-DC, Chicago?

And 91% excluding DC today, including Chicago.

Sure, yes. So let's say, do you think 95% ex-DC, that is a good number and the number that you guys can hold over cycle? Would that be accurate, because I think we can all figure out where we think Chicago and DC ought to get to during the next couple of years.

Well, keep in mind, as we lease up some of these buildings, we are probably going to be selling off 100% leased buildings and maybe buying things that have a little less occupancy to them. So it's a little bit of a hard number to peg. And then of course you know what will happen the minute I say yes, we can hold 95% in the other markets. The other markets will go to in to tank and DC will improve. And you will be worried about the other markets then. So I am not sure. I think 95%, anybody underwriting more than 95% consistent occupancy in the market is probably killing themselves.

Yes. Fair. Okay. All right. Thanks for the time.

Okay. Thanks, everyone and I think that was the final question. So we will just wrap up now and we just want to let everybody know how much we appreciate your attending the call and a lot of good questions today. We appreciate that. So thank you very much for your interest.

Thank you. That does conclude today's teleconference. You may disconnect your lines at this time. Have a wonderful day. We thank you for your participation today.