Piedmont Office Realty Trust, Inc. (PDM) Q2 2013 Earnings Report, Transcript and Summary

Good day, and welcome to the Piedmont Office Realty Trust Second Quarter 2013 Earnings Conference Call. [Operator Instructions] At this time, I'd like to turn the conference over to Chief Financial Officer, Robert Bowers. Please go ahead, sir.

Thank you, operator. Good morning, and welcome to Piedmont's second quarter 2013 conference call. Last night, in addition to posting our earnings release, we also filed a quarterly Form 10-Q and a Form 8-K, which includes our unaudited supplemental information. All of which is 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. Forward-looking statements address matters which are subject to risk and uncertainties that may cause the actual results to differ from those we discussed today. Examples of forward-looking statements include those related to Piedmont Office Realty Trust future revenues, operating income and financial guidance, as well as future leasing and 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 risk associated with forward-looking statements contained in the company's filings with the SEC. In addition, during this call, we'll refer to non-GAAP financial measures such as FFO, Core FFO, AFFO and same-store NOI. The definitions and reconciliations of our non-GAAP measures are contained in the supplemental financial information available on the company's website. I'll review our financial results after Don Miller, our Chief Executive Officer, discusses some of the quarter's operational highlights. In addition, we're also 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'll now turn the call over to Don.

Good morning, everyone, and thank you for taking time to join us this morning as we review our quarterly results and offer our perspectives on the current leasing and transactional environment. Let's begin with leasing. Our overall leasing activity for the quarter totaled approximately 738,000 square feet, including approximately 67%, which was related to lease renewals. Our 2 largest renewals are with Avnet at our South Price Road asset in Phoenix, Arizona for approximately 130,000 square feet for about 9 years, and with a large global conglomerate at our Crescent Ridge II asset in Minneapolis, Minnesota for approximately 115,000 square feet through 2019. Our new tenant activity was comprised of several leases in the 25,000- to 60,000-square-foot range in several markets across the portfolio. Notably, we executed a 58,000-square-foot lease with TMW Systems at Eastpoint I in Cleveland for 11 years; a 45,000-square-foot lease with Conexant Systems at 1901 Main Street in Irvine, California, for 7.5 years; a 28,000-square-foot lease with Epsilon Data Management at 6031 Connection Drive in Irving, Texas, for 5 years; and Aon Corporation expanded into an additional 32,000 square feet in conjunction with its recent direct lease for almost 400,000 square feet at Aon Center in Chicago that will be coterminous with their 2028 expiration. Starting cash rents for the newly signed leases are down approximately 2.4%, but we expect straight-line gap rents will increase almost 3% once the leases commence. Leasing capital costs have been lower thus far in 2013 with a year-to-date average commitment being approximately $3.59 per square foot per year of lease term. The average lease term remaining for all outstanding leases continues to be over 7 years. Looking across all markets, we are generally seeing more activity, but there is still a great deal of disparity in the level of leasing interest between locations. The markets involved with significant energy and high-tech industries, along with some healthcare businesses, are leading the recovery. These include our Boston and Texas markets. Other markets are still lagging, including Chicago and Washington, D.C., where we collectively have 5 large blocks of space available. Obviously, we're actively marketing all of these spaces. In particular, 2 of these spaces have minor updates. First, our negotiations with National Park Service at 1201 Eye Street continue, and our previous guidance on this tenant has not changed. Separately, we are very excited about the prospects for the 3100 Clarendon asset after the DIA vacates the 221,000 square feet they occupy in the building at the end of this year. While the plans are not finalized, the asset has strong value-creation potential through redevelopment. It is located on a metro stop in what we believe is one of the most desirable D.C. submarkets, the Rosslyn-Ballston Corridor. The momentum we see in this market in residential, entertainment, retail and commercial activity is outstanding. As 2004 begins a multi-year period of low lease expirations for Piedmont, we expect any improvement in the general economic environment and business confidence over the next few years will aid our organic growth and income. Incremental leasing combined with 435,000 square feet of already executed leases for vacant space that are yet to commence, plus 1.6 million square feet of leases currently in abatement should fuel cash NOI and FFO growth. Based on the commencement of currently signed leases and then the burn-off of the related abatements, the gap between our reported 86.4% occupancy and our current economic occupancy of 77.8% should narrow substantially over the next couple of years. We continued our leasing momentum into the third quarter with last week's announcement of the 800,000 square-foot lease renewal with Independence Blue Cross at our 1901 Market Street property in downtown Philadelphia. The amended lease, which now extends to 2033, provides an immediate 8% increase in cash rents and a 15% increase in straight-line rents and also eliminates a sought-to-release payment structure that is replaced with annual 2.25% base rent steps. Turning to the acquisition and disposition activity during the quarter. We completed the integration of 2 acquisitions announced in the first quarter totaling about $250 million for 5 and 15 Wayside in Boston and Arlington Gateway in Washington, D.C. During the second quarter, we also completed a round-trip execution under our value-added strategy through the sale of 1200 Enclave project in Houston. We acquired the property in foreclosure for $18.5 million in the spring of 2011 when it was only 18% leased, and sold a 100% leased asset 2 years later for $49 million in May of 2013. Our second quarter results include the $16 million or $0.10 per share gain that we recognized on that sale. I want to congratulate our asset and property management teams for a great demonstration of our capital allocation and leasing abilities. We are currently reviewing other properties in our portfolio, considering relevant market and asset fundamentals for appropriate recycling. Based upon the success we have had in obtaining new leases and renewing existing tenants, we anticipate ratcheting up our disposition activity of nonstrategic assets, bringing us closer to achieving our long-stated goals of holding assets only in our target markets. Subsequent to quarter end, we entered into agreements to acquire 3 of our remaining JV assets for $14.7 million. These acquisitions will simplify the ownership structure of these assets, which will then, coupled with some completed leasing, should help us further achieve our recycling goals. Despite the disparity and activity I referred to previously in our various leasing markets, the competition and pressure in cap rates for desirable Class A office properties in all of our target markets remain intense. Therefore, we found the best use of our capital during the recent quarter to be the continued repurchase of our own stock at a substantial discount to what we believe to be our net asset value. During the quarter, we repurchased over 1 million shares of our common stock, bringing the total shares repurchased under the program since its inception in November 2011 to 6.5 million shares for $110 million at an average price of $16.93 per share. With that, I will turn it over to Bobby to review the quarterly financials and our expectations for the remainder of the year. Bobby?

Thanks, Don. While I'll briefly discuss our financial results for the quarter, I encourage you to please review the 10-Q, earnings release and the supplemental financial information, which were filed last night for more details. For the quarter, we reported net income of $0.21 per diluted share, which includes the $0.10 gain on the 1200 Enclave sale that Don just mentioned. FFO was $0.37 per share versus $0.35 a year ago. Core FFO, which backs out the insurance recoveries and acquisition costs, was $0.35 per diluted share for the quarter, the same as a year ago. AFFO was $0.20 per diluted share, in line with our expectations. Total occupancy was 86.4% as of the end of the quarter, up approximately 140 basis points compared to the second quarter of 2012. This increase in occupancy, combined with 2 new properties we acquired earlier this year, were the primary drivers for the increase in rental revenue and in property operating cost for the quarter. The 3% quarterly increase in property net operating income was somewhat muted due to a $3 million reduction in quarterly property level income at One Independence Square due to the OCC lease expiration in March of this year. This expiration is also the primary driver in the 1% decrease in same-store cash NOI for the year. Based upon our recent leasing, we anticipate same-store cash NOI for the year will improve from our previous quarter's guidance from down 2% to 3% to be flat or down just 2% when compared to 2012. G&A expenses returned to a more normalized run rate of $6 million to $6.5 million in the second quarter of 2013 without any significant nonrecurring items. Given the 2 sizable acquisitions that Don mentioned in the first quarter, which totaled about $250 million and were funded off of our working capital line, our treasury efforts during the second quarter focused on a debut bond issuance. As previously announced, we were able to issue $350 million in senior unsecured 10-year notes at 3.4% in May, an opportune time before interest rates began to rise. This rate included a credit spread of 1.68%, which was among the best in our sector and underscores the strength of our balance sheet. We're obviously pleased with the pricing of this particular long-term debt and also with the fact that the offering was 7x oversubscribed, which allowed us to upsize the trade from $250 million to $350 million. The proceeds from the bonds were used to pay down outstanding draws under our $500 million line of credit. Further, we filed a shelf registration during the quarter to allow us to readily access both debt and equity capital in the future. As a result of acquisitions and related debt, our total debt was $1.7 billion at quarter end with a weighted average interest rate of 4.2%. The debt-to-gross assets ratio was up slightly from year end at 31%. I'd also like to note that ahead of approximately $575 million of mortgage debt maturing in the first half of 2014, we've executed several forward swaps in anticipation of replacing this debt with additional unsecured debt. The notional amount of the swaps totals $280 million, which effectively locks the treasury component at approximately 2% for this portion of a future unsecured debt offering. On a combined basis, all of these activities position us well from an access to capital and balance sheet perspective. Looking forward to the remainder of 2013, please remember, we commit a significant portion of our leasing efforts towards very large, high creditworthy corporate users. And our financial results, therefore, can vary based upon the specific timing of these large leasing transactions. I ask that you please refer to Pages 6 through Pages 8 of our quarterly supplemental information for details of significant leases, which expire, which commence or are in abatement over the next couple of quarters. At this time, I'd like to narrow our previously issued annual guidance for 2013 Core FFO to the upper half of that range, that's $1.40 to $1.45 per share. That concludes our prepared remarks today. Operator, will you provide our listeners with instructions on how they can submit their questions. We'll attempt to answer all of your questions now, or we'll make appropriate later public disclosure, if necessary. [Operator Instructions] Operator?

[Operator Instructions] We'll now move to Anthony Paolone with JPMorgan. Anthony Paolone - JP Morgan Chase & Co, Research Division: On your commentary about dispositions and potentially getting rid of some more noncore, do you think there's a shot that you exceed the guidance that you provided on that front thus far, or is that baked in already?

No, that is baked in, Tony. I would say that in most of what we would anticipate getting done more rapidly will get done towards the latter part of the year until the impact is pretty de minimus for '13. But yes, the guidance that we upped in Bobby's part of the call does reflect disposition activity for this year. Anthony Paolone - JP Morgan Chase & Co, Research Division: But strategically thinking, should we expect, as we go into the next year or so, a bit more on the disposition front?

Yes, that's the goal. We have a number of properties that we've had some leasing activity on, including some we've announced already and some other activity that we feel like we're optimistic on that's going to get done that is going to allow us to get some more of those nonstrategic properties out, frankly, a little sooner than we had anticipated. We thought a lot of those were going to fall into next year, and now we hope we'll be able to move them out earlier than that. Anthony Paolone - JP Morgan Chase & Co, Research Division: Got you. And then just my second question. Can you give us a little bit of color or updated thoughts on fundamentals in D.C.? It seems like there are some companies that's starting to feel a bit more of the impact from sequestration, and just wondering if you think we've seen the worst or if there's potentially another step-down to come here?

Well, I'll throw it to Bob Wiberg. Just a second. Bob, I assume, is on the phone. The -- Tony, the -- I think that with what we've seen with concessions growing to the point that they have, they've really grown to the levels that we've seen in a lot of other markets now. So I'm not sure that you could see concessions go any lower or go and get any worse. We could potentially see rental rates decline over time if the downturn continues, and that's where I'll just turn it over to Bob and see where he thinks it goes from here.

Yes. I think my overall sense of things is that we're near the bottom of the vacancy issue, in that we're pretty much stabilizing this year. However, leasing activity is low relative to history and even relative to last year. So there is -- between the government's policy of really not expanding, the private sector really not responding in the growth boat, things are pretty flat. But I think it shouldn't get really any worse than this, and that we should be on a fairly slow, but positive path toward recovery.

And we'll now move to Brendan Maiorana with Wells Fargo Securities.

Maybe this is for Bob Wiberg again. 3100 Clarendon, Don, you talked about that in your prepared remarks. So what's the scope of the redevelopment that you're considering? Because I think there were a couple of different paths that you could take. And kind of can you give us an update on sort of the timing, and then when you'd be marketing that space for release for tenants?

Sure. There are several components. One is really the mechanical aspects of the building, and we want to upgrade the systems. They've been in there 25 years. The building is coming vacant, it's the perfect time to do it. So we're going to do a mechanical upgrade. And then we're going to do, of course, the lobbies, common areas, those kind of factors that you have to. And then really beyond that, we're looking at what architectural treatment we want to do with that property. It has so much potential that you have to really try to find what gives you the most boost in your office rents and fits within the kind of community of retail that's out there. So we're really working through that part at the moment. And the timing is we get the space back really end of this year, and we expect to have it back online between September and November of '14.

And when you say back online, that means available for tenants to take occupancy. But you'll be marketing it between now and then?

Yes, absolutely. It's a little tough to market at the moment simply because DIA is still in the building. That's heavily secured, but we're making small inroads to having access to the space, and we'll continue to do that. We also have a lot of boards for our presentation at the moment. But as soon as we can get in there, we're going to demolish the existing improvement on the typical office floors, which are 25 years old.

Sure. And then just the second question -- last question. I just wanted to ask about tenants a little bit. Can you give us an update on the Qwest? And I think there was language in there that you're talking about a renewal, about a contraction. And I think there's a second tenant in that 4250 North Fairfax building that also may -- that has an expiration next year, and whether or not there's likelihood they would renew. And then can you also talk about U.S. Bank and the 120,000 square feet next year? Is there a tenant that is likely to backfill that space, which I think U.S. Bank is giving back?

So Brendan, on the 4250, we do have a fair amount of space coming back to us there, that's the bad news. The good news is there's also -- of all the buildings in our portfolio in D.C., that's the one that has the most activity. We indicated that we're working through a downsizing and renewal with Qwest. We also expect that the agent tenancy to largely go away at the end of this year, but we also have some really good activity to, we hope, backfill a good part of that building. So we'll have to wait and see where that goes. On U.S. Bank, there's actually a fair amount of activity in that building as well. But on the lower bank space that U.S. Bank is giving back middle of next year, it's a little bit slower than it is in top half of the building where we're seeing a lot of activity. So we'll have to wait and see, but we're holding out for a little bit larger tenants there just because the floor plates are larger. And so it'll be a little lumpier down the bottom of the building than it is at the top.

We'll now move to Dave Rodgers with Baird. David B. Rodgers - Robert W. Baird & Co. Incorporated, Research Division: Don, maybe you and Ray could talk a little bit more about the acquisition pipeline. You mentioned pricing was still pretty challenging out there, and you chose to buy back some stock. But I wanted to, I guess, maybe talk about the locations that you're looking at, what the pipeline looks like, sizing, et cetera and where you might get comfortable with some pricing.

Yes. Dave, it's an interesting environment out there right now because a number of the individual buildings we've chased, we've seen very aggressive activity going on, on the building. So some of which you guys are familiar with, some of which are other public competitors have bought. And as a result, we've been a little careful not to overreach. We continue to try to buy product in what I would call clusters like the RB Corridor, like Cambridge 128 in Boston, places that we think are great long-term ownership positions. We're going to continue to focus our attention and efforts in those areas. Obviously, it's not easy to buy in those areas for what we might consider fair or value pricing, but we are going to continue to move towards our long-term strategic goals as much as we possibly can. That doesn't mean we're going to go crazy and start spending every penny we have to do that, but we are going to continue to try to find opportunities we think are good value. And then we're going to continue to look at larger portfolio deals where there's less competition and see if there's anything we can put together on that front as well.

David, as far as pipeline, it's probably slowed down some this summer, but the market participants, especially on the brokerage side that we've been talking to, a lot of them are doing a lot of BOBs [ph], have been asked to start valuing various properties. So we do anticipate seeing an uptick in the overall pipeline. But then it's just a matter of which ones of those fit the strategy that we want to take a harder look at, and probably focus more on places like Boston and possibly Southern California. David B. Rodgers - Robert W. Baird & Co. Incorporated, Research Division: Okay, great. And maybe a second question. I think, Don, it was in the release that you made the comment about leasing slower in the quarter, but picking up subsequent to the end of the quarter, and I guess, maybe taking out the Blue Cross lease. Can you give us some more color on the renewed leasing activity that you're seeing subsequent to the end of the second quarter?

Yes, it's interesting. We actually -- we anticipate a third quarter that will -- even without Independence Blue Cross Blue Shield, will certainly be as strong as we're seeing in the second quarter or stronger. Particularly in the new leasing side, we're seeing a lot more activity. A lot of that activity is in the 10 to 25 range. And we've got a fairly deep bench of deals that we're -- we think we're going to get down on that arena. It's interesting. We're getting to the point where we're having a fair amount of success getting things done in a lot of these vacancies that we have had for a little while in certain places. And so our vacancy is starting to get concentrated to downtown Chicago, Washington area and Atlanta. That seems to be the 3 areas that we have the vast majority of our vacancy with 1 or 2 exceptions. David B. Rodgers - Robert W. Baird & Co. Incorporated, Research Division: Okay. And then maybe final question for Bobby on the guidance increase. Can you maybe comment around the guidance increase with relation to the impact from the Blue Cross re-lease that you signed in the third quarter, as well as any impact from the dispositions and the timing in the year?

Well, certainly on a same-store basis, the Blue Cross deal with an 8% increase in rents immediately with no free rent has had a positive impact on our same-store projections. And you saw that that's increased from what we thought was a negative 2% to 3% down for the year to where we think it could possibly be flat. At worst case depending on which leases are signed, down 2%. David B. Rodgers - Robert W. Baird & Co. Incorporated, Research Division: And I guess, the impact to overall FFO from that lease getting done and any...

That one particular lease that we signed with them add about $0.01 per share for the Blue Cross Blue Shield in the current year. And on a longer-term basis, it would add about $0.02 into next year.

But I thought it was $0.02, closer to $0.03, wasn't it Bobby?

Well, with the roll-up, if you average it, yes, $0.02 to $0.03.

And we'll now move to Michael Knott with Green Street Advisors.

John Bejjani here. First question, do you see the recent rise in rates potentially hindering your efforts to exit your noncore markets?

John, we don't yet -- obviously, there's still fairly wide gaps between borrowing rates and cap rates in those markets. And the good news is most of our deals that we're bringing to market have pretty long term on the leases and pretty good credit. And those deals tend -- although they are interest rate sensitive, they -- because the gap in cap rate in those secondary market is reasonably wide to the primary markets for the same kind of deal, you don't have nearly -- it doesn't seem like we're going to have as much of an impact. So we're feeling still pretty optimistic that we're going to be able to execute pretty aggressively on those barring another major up-leg in interest rates or something like that.

That's helpful. Do you -- after this Blue Cross Blue Shield extension, do you -- are you still thinking of exiting the market? Or you guys have been a little back and forth on Philly.

Actually, John, what we've tried to communicate for some time now is we had indicated that we were likely to sell the Philadelphia asset if we -- if nothing had come up with Blue Cross Blue Shield on this renewal. But when we started entering negotiations with them to put this deal together and move the term from 10 to 20 years and allow a fair amount of upgrading to the building, we felt like it's a very good use of our capital to keep that building in the portfolio, capture the income for a period of time, given how much term there is on the lease. As I think we've said on many calls, over the course of time, cap rates tend not to move a whole lot between 10 and 20 years of term. They tend to move a whole lot when you go below 10. And so part of the reason we were thinking about selling at the end of this year is we're going to be moving below 10 years on that lease term. Now that we've got 20 with a good credit and a great building and a great location, for us, at this point, that's not a priority sale.

Okay, that's fair. With respect to buying out your JV partners, what's the thought there?

It's a good question. I saw Michael's note this morning, and I think it was a fair point that we need to clarify. The joint venture -- there's 5 joint ventures, as you might remember, with the former sponsor of us when we were a nontraded REIT. And those -- they were all relatively smaller properties done early in this cycle. Three of those 5 properties, they have buy-sells agreements in them. There's a buyer to buy all 5 properties. We had, of course, individual buy-sells on each of the individual properties. So we chose to take 3 of the 5 out because we didn't feel like the pricing appropriately reflected what we thought the value was, particularly given we've done some recent leasing in one of the buildings and had some pretty optimistic forecasts for some leasing in a couple of the others. And so although it looks a little bit counter to our strategy of accumulating in -- in not accumulating secondary markets, those assets will probably move back out of our portfolio very quickly.

Okay, great. And last question for me. You mentioned you're thinking of -- or you see potential ramping up dispositions next year. Are there any -- can you shed any light on what markets you're thinking of?

Well, the markets that we've been saying for some time we intend to get out of the Denver/Colorado Springs buildings, Cleveland, Detroit, there's one little building in Kansas City, and then some in suburban New Jersey, suburban Chicago that we hope to move on. Those will be the major impacts that you see to the portfolio we hope over the next 1.5 years or so. And then Phoenix -- I'm sorry, Bo just reminded me, Phoenix would also be on that list.

[Operator Instructions] We'll now move to John Guinee with Stifel Bank. John W. Guinee - Stifel, Nicolaus & Co., Inc., Research Division: John Guinee, Stifel, Nicolaus here. Question for you, just kind of macro strategy. You guys are headquartered out there in suburban Atlanta, and I think you're investing in D.C., Boston, New York, L.A. If you look at the last 12 months per The Street's endorsement of the Cousins and the Parkway strategy, which was clearly urban Sunbelt, do you think those guys are smart in investing kind of in your backyard and in a market that you have explicitly avoided?

Geez, I don't know where to start on that one. Because I'm not sure I'm in the position to comment on other people's deal activity. That's not sort of what -- we're here to talk about Piedmont, not about other people's decisions. And then secondly, I'm not sure I agree with much of what you said about our avoiding these markets. We're actually looking at them actively, continue to look at deals in the Sunbelt markets and when we find good value, we'll pursue it. So I'm not suggesting that Cousins or Parkway are doing -- making great decisions or poor decisions. I'm just saying, we just didn't go or choose to go after some of the assets that they did. John W. Guinee - Stifel, Nicolaus & Co., Inc., Research Division: Okay, great. And then second, we've been pretty supportive of your value-add strategy. You knocked the cover off the ball in Houston. Can you talk about Suwanee, Georgia, 500 West Monroe, your little deal of Medici and Lake Mary?

Yes, John, I would say those buildings are going along okay, not as well as we'd like. We have a couple of bigger deals that could help us tremendously in the perception of how the value-added portfolio is coming along if we were fortunate enough to execute here in the coming months. We have some activity that could change our perspective on that. But I would say, overall, in particular, the -- probably the Gwinnett County asset, the Suwanee Gateway asset is probably the most disappointing. The good news is we bought it so cheaply that it's not like it's hurting us, or we're not going to make a positive return on it. It's just not one that's leased up as quickly as we like, although we finally started to see some activity up there for the first time. 500 West Monroe, as we've mentioned many times, downtown Chicago has been very disappointing over the last 12 months. It had a nice run up to that point, and just the last 12 months have been much quieter there. And so that's been a little disappointing recently. But the other assets, Medici and the Orlando asset both have pretty good activity working on them, and we'll have to wait and see if we're successful in executing on it.

We'll now move to Michael Salinsky with RBC Capital Markets.

In your prepared remarks, you talked a little bit about the concessions being down year-over-year. Is that more a function of mix, or are you actually seeing a bit of -- are you seeing concessions abate a little bit?

Yes, good question. The -- I would say more the former than the latter, but we are seeing some small downward adjustment to concessions in certain markets, as -- particularly as larger spaces start to get taken off the market. Some of the markets that have strengthened -- I use the example of Buckhead and Central Perimeter, we're starting to see future deals looking a little bit more attractive on the concession side than we've seen in the past because some of the larger spaces are coming out of the market. We're certainly seeing that in places like Dallas and others where the markets are tightening up. But overall, it's not a huge trend yet in those markets. It's getting better. I think it's going to get better over the next 12 months, faster than it has over the last 12. But it's more the mix of deals that we've done that have changed that than anything else.

Okay. Second, as you ramp up the recycling here over the next 12 to 18 months. And is it dependent upon leasing up, or is it possibly you could sell properties with a decent amount of vacancy at this point, just as you're looking to reduce exposure to a number of markets?

I think there'll be the occasional opportunity to sell something with vacancy that we just either 1 of 2 things: Either we don't believe in the vacancy for some reason, and there aren't really very many of those opportunities or situations in our portfolio. Or more likely, we have a market where there's an asset that's very high quality that we want to move out because of the market selection or something like that, that still has a little bit of vacancy left in it. And as a result, we feel like we're going to get as good an overall risk adjusted sale price as we would if we held on and tried to lease it up to 100%. So there'll be a little bit of that. But the vast majority of what you see us sell will be very, very full.

Okay. This is, finally, I think to an earlier question regarding the acquisitions, I think you mentioned the portfolio. Are you seeing any portfolio opportunities in the market at this point that appear attractive?

They're limited, but there are a few out there, things we've been looking at for a long time or tracking. And it's hard when you're buying nothing but very high quality stuff because that limits the number of potential opportunities out there for you. But there are a few things we continue to track, and probably something will happen with them at some point, and we'll try to be involved in that.

[Operator Instructions] We'll now take a follow-up from Brendan Maiorana.

John, 1901 Market, just wanted to clarify a couple of the deal terms. So when you quoted the plus 8% cash rents plus 15% gap, is that inclusive of the 5% increase in square footage, or is that on a per-square-foot basis?

That was on a gross dollar basis. On a cash basis, it increases 8%, and on a GAAP basis, 15%.

Okay, great. And then, I apologize if I missed this, but did you talk about the capital costs that are associated with the lease?

Yes, we did. On the piece that we put on our website, the transaction summary we put out there, we mentioned a couple of things. We talked about -- there was about $22 dollars in TIs at the building. There were some additional base building capital that we put in of relatively modest nature. And then there was the ability for the tenant to call additional TIs down the road, but there's an amortization on that money that we would get paid, which is not in our rent numbers that you see. So if they were to draw down that capital, they would be paying us a return on that. But the $22 -- the sort of the pure TI number was a $22 number on a 10-year extension.

Okay, that's great. Bobby, I was surprised -- I guess pleasantly surprised to see that the straight-line rent adjustment, it didn't pick up that significantly in the second quarter as it typically does because of that IBC lease that has the big cash payment in the first quarter. Is that just a function of the 2 million square feet of tenants that were in abatement going down to 1.6 million, or is there something else that happened in the quarter that caused the straight-line number to be maybe a little less than what I was anticipating?

So you got to remember there are a number of leases that expired. You had the expiration of the OCC lease at the end of March. And then the combination of expirations, of mark-to-market adjustments and tangibles, all infect -- affect your straight-line rent adjustments. And that's why you can't exactly straight-line it based on one particular lease either starting or stopping.

That answer the question, Brendan?

Not really, but I'll -- maybe I'll take that one offline. Last question, Nestle is 2 years away in L.A., in Glendale. Do you have a sense of what the likelihood is for renewal on that tenant?

Yes. Brendan, we haven't commented on that at all. We have a very good relationship with the tenant. They've been there a long time, know them well, have a sense of what they're trying to accomplish. But there's been some changes in their leadership structure recently, and so we're still working through it. But there's no comment at this point on the lease.

Brendan, the abatements were down about $2 million. Was that it, Eddie?

Yes.

That would have affected that number.

And we'll move to another follow-up from Anthony Paolone. Anthony Paolone - JP Morgan Chase & Co, Research Division: You guys are an earnings ramp-up story, in part, over the next few years. And so how do you think about ramping up potential noncore asset sales in terms of what maybe offsets may be for that, either whether it's buyback or other activity that at the margin may offset, or how do you think about managing that?

That's a constant question we debate at board meetings and other things you can imagine, Tony. It's one of those things that is sort of core to what we think through. But I think there's sort of 2 ways we look at it. We like to try to get our acquisition activity ahead of our disposition activity, and then may be why you saw a little bit of what we did earlier this year in terms of the 2 deals that we did there. We also hope to maybe do a little bit more acquisition activity, although, obviously, it won't be easy. And then of course, the buyback has been very helpful to that. You see some of the benefits of that in FFO per share from the diminishing number of shares outstanding. So all of those sort of go into it. We recognize we're going to lose a little bit of income. But with 2 -- let's say $200 million, I think, we've said towards the end of this year that we think we'll move out, that's not a huge impact from an FFO standpoint to us. But it is obviously something you got to manage through. Anthony Paolone - JP Morgan Chase & Co, Research Division: Okay. And then just one last one on National Park Service. What's in guidance there? Do you just have more of the same in hold over, or is there any assumption that something happens there?

I'm sorry, on which one, Tony?

National Park. Anthony Paolone - JP Morgan Chase & Co, Research Division: National Park Service.

National Park Service? Yes. Right now, all we assume is they continue to pay us rent at their current levels. And so to the extent that we complete something there, whatever we might complete, it should be accretive.

And it appears there are no further questions. I'd like to turn the conference back over to Mr. Miller for any additional or closing remarks.

Thank you, Anna. We're pleased again, and thank you for all the activity. We've got a fairly large congregation on the call today, and so we appreciate everybody's attending. And we're very pleased with the quarter. When you have a lot of large lumpy leases, it tends to be a "two steps forward, one step back." But we feel like this is another one of our two-step-forward quarters. And not that there won't be another step back here or there, but we feel like we're really making nice progress and building or culminating in what we think is going to be some very nice growth in the income or the portfolio as we move into '15 and '16 in particular. So thank you, everyone, appreciate your attendance. And if you have any other questions, feel free to call and follow-up.

And once again, that does conclude today's conference, and we thank you for your participation.