The following discussion and analysis should be read in conjunction with the accompanying consolidated financial statements and notes thereto of Piedmont Office Realty Trust, Inc. ("Piedmont"). See also "Cautionary Note Regarding Forward-Looking Statements" preceding Part I, as well as the notes to our consolidated financial statements and Management's Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2011.

Liquidity and Capital Resources
We intend to use cash flows generated from the operation of our wholly-owned properties, distributions from our joint ventures, proceeds from selective property dispositions, and proceeds from our $500 Million Unsecured Facility as our primary sources of immediate liquidity. As of June 30, 2012 approximately $47.7 million of net sales proceeds related to the tax deferred exchange of certain real estate assets under Section 1031 of the Internal Revenue Code ("IRC") was held in escrow pending the acquisition of replacement properties. If suitable replacement properties are not identified within the requisite time frame allowed under the IRC, these proceeds will be returned to the Company as unrestricted cash and become immediately available to fund expenditures. Our $500 Million Unsecured Facility is scheduled to expire on August 30, 2012, and we anticipate closing on a comparable replacement facility prior to August 30, 2012. Any amounts outstanding on the current facility will be transferred to the replacement facility at closing. Depending on the timing and volume of our property acquisition and disposition activities, we may also seek other financing opportunities (such as issuance of additional equity or debt securities or additional borrowings from third-party lenders) afforded to us based on our relatively low leverage and quality asset base as additional sources of capital; however, the availability and attractiveness of terms for these sources of capital is highly dependent on market conditions. As of the time of this filing, we had $153.0 million outstanding under our $500 Million Unsecured Facility. As a result, we had approximately $323.6 million under this facility available for future borrowing (approximately $23.4 million of capacity is reserved as security for outstanding letters of credit required by various third parties).
We estimate that our most immediate use of capital will be to fund capital expenditures for our existing portfolio of properties. These expenditures include two types of specifically identified building improvement projects:
(i) general repair and maintenance projects that we as the owner may choose to perform at any of our various properties and (ii) tenant improvement allowances and leasing commissions negotiated as part of executed leases with our tenants. Both the timing and magnitude of general repair and maintenance projects are subject to our discretion. We anticipate funding approximately $136.0 million in unrecorded contractual obligations for tenant improvements related to our existing lease portfolio over the respective lease term, the majority of which we estimate may be required to be funded over the next several years. For many of our leases, the timing of the actual funding of these tenant improvements is largely dependent upon tenant requests for reimbursement. In some cases, these obligations may expire with the respective lease, without further recourse to us. We also anticipate funding certain tenant improvements and leasing commissions related to anticipated re-leasing efforts for several of our large tenants as they approach their lease expiration dates in the next few years. Both the timing and magnitude of these amounts are subject to change as competitive market conditions at the time of lease negotiations dictate. Subject to the identification and availability of attractive investment opportunities and our ability to consummate additional acquisitions on satisfactory terms, acquiring new assets compatible with our investment strategy could also be a significant use of capital. Further, given that the Company's board believes our common stock is trading at a discount to the estimated fair value of our net assets, our board of directors has authorized the use of up to $300 million for the repurchase of our common stock through November 2013. Through June 30, 2012 (including repurchases made in December 2011), we have expended approximately $46.2 million under the stock repurchase program (including transactions fees) and may continue to make additional purchases as market conditions warrant. On a longer term basis, we expect to use funds to make scheduled debt service payments and/or debt repayments when such obligations become due. After the $500 Million Unsecured Facility is replaced in August 2012, we will have no other pending debt maturities until 2014. Our primary focus is to achieve an attractive long-term, risk-adjusted return for our stockholders. Competition to attract and retain high-credit-quality tenants remains intense due to general economic conditions. At the same time, several large leases at our properties expired in the past year or are scheduled to expire over the next eighteen months. In some cases we have had to accept lower market driven rental rates and grant larger tenant improvement packages to renew leases or secure new tenants than a stronger economic climate might have produced. The sale of the 35 West Wacker Drive building in Chicago, Illinois during the fourth quarter of 2011, the commencement of certain recently executed leases with lower rental rates and the downtime we are experiencing while re-tenanting certain properties has put pressure on 2012 cash flow. As a result, our board of directors lowered our quarterly dividend beginning with the first quarter of 2012 to $0.20 per share, or $0.80 per share on an annualized basis.

The amount and form of payment (cash or stock issuance) of future dividends to be paid to our stockholders will continue to be largely dependent upon (i) the amount of cash generated from our operating activities; (ii) our expectations of future cash flows; (iii) our determination of near-term cash needs for debt repayments and selective acquisitions of new properties; (iv) the timing of significant expenditures for tenant improvements and general property capital improvements; (v) long-term payout ratios for comparable companies; (vi) our ability to continue to access additional sources of capital, including potential sales of our properties; and (vii) the amount required to be distributed to maintain our status as a REIT. Given the fluctuating nature of cash flows and expenditures, we may periodically borrow funds on a short-term basis to cover timing differences in cash receipts and cash disbursements.

Results of Operations

Overview

Our income from continuing operations for the three months ended June 30, 2012 increased as compared to the prior period primarily due to a decrease in general and administrative expense driven by decreased legal expenses and the recognition of a tax benefit associated with the successful appeal of a prior period franchise tax during the current quarter. Although total revenues increased due to rental income associated with properties acquired or new leases commenced subsequent to July 1, 2011, such increases were partially offset by reductions in leased space at some of our existing properties, reimbursement income, and lease termination income during the current period. Additionally, we recognized lower interest expense in the current period due to the payoff of three secured notes totaling $230 million over the last eight months.

Comparison of the three months ended June 30, 2012 versus the three months ended June 30, 2011

The following table sets forth selected data from our consolidated statements of income for the three months ended June 30, 2012 and 2011, respectively, as well as each balance as a percentage of total revenues for the same periods presented (dollars in millions):

                                                                                                 $
                                   June 30,                     June 30,                     Increase
                                     2012            %            2011            %         (Decrease)
Revenue:
Rental income                    $    106.0                   $    103.2                   $      2.8
Tenant reimbursements                  27.0                         30.6                         (3.6 )
Property management fee revenue         0.6                          0.4                          0.2
Other rental income                     0.1                          1.3                         (1.2 )
Total revenues                        133.7          100  %        135.5          100  %         (1.8 )
Expense:
Property operating costs               53.7           40  %         53.0           39  %          0.7
Depreciation                           27.8           20  %         25.7           19  %          2.1
Amortization                           11.5            9  %         14.0           10  %         (2.5 )
General and administrative
expense                                 4.8            4  %          7.3            6  %         (2.5 )
Real estate operating income           35.9           27  %         35.5           26  %          0.4
Other income (expense):
Interest expense                      (15.9 )        (12 )%        (17.7 )        (13 )%          1.8
Interest and other income               0.3            -  %         (0.2 )          -  %          0.5
Equity in income of
unconsolidated joint ventures           0.2            -  %          0.3            -  %         (0.1 )
Gain on consolidation of
variable interest entity                  -            -  %         (0.4 )          -  %          0.4
Income from continuing
operations                       $     20.5           15  %   $     17.5           13  %   $      3.0
Income from discontinued
operations                       $     10.2                   $      3.6                   $      6.6

Continuing Operations

Revenue

Rental income increased from approximately $103.2 million for the three months ended June 30, 2011 to approximately $106.0 million for the three months ended June 30, 2012. Approximately $2.6 million of the increase is attributable to properties acquired

subsequent to March 31, 2011. Additionally, new leases commenced at our Piedmont Pointe I and II buildings in Bethesda, Maryland in late 2011 and at our 1075 West Entrance Drive building in Auburn Hills, Michigan in July 2011.

Tenant reimbursements decreased from approximately $30.6 million for the three months ended June 30, 2011 to approximately $27.0 million for the three months ended June 30, 2012. Approximately $1.7 million of the decrease relates to lease expirations at our 200 Bridgewater Crossing building in Bridgewater, New Jersey and our Windy Point II building in Schaumburg, Illinois. Additionally, approximately $0.7 million relates to an expiration of a large tenant at our Aon Center building in Chicago, Illinois in December 2011, although a portion of this space has already been re-leased. The remainder of the decrease is primarily due to new leases commencing subsequent to March 2011 which provide for gross abated rents into 2012 (including short-term relief from both rental revenue and operating expense reimbursements).

Other rental income is comprised primarily of income recognized for lease terminations and restructurings. Unlike the majority of our rental income, which is recognized ratably over long-term contracts, lease termination fee income in other rental income is recognized once we have completed our obligation to provide space to the tenant. Lease termination fee income for the three months ended June 30, 2011 of approximately $1.3 million related primarily to lease contractions/terminations at the US Bancorp building in Minneapolis, Minnesota and the Crescent Ridge II building in Minnetonka, Minnesota. We do not expect such income to be comparable in future periods, as it will be dependent upon the exercise of lease terminations by tenants and/or the execution of restructuring agreements that may not be in our control or are deemed by management to be in the best interest of the portfolio over the long term.

Expense

Property operating costs increased approximately $0.7 million for the three months ended June 30, 2012 compared to the same period in the prior year primarily attributable to properties acquired subsequent to March 31, 2011.

Depreciation expense increased approximately $2.1 million for the three months ended June 30, 2012 compared to the same period in the prior year. The variance is largely attributable to depreciation on additional tenant improvements subsequent to June 30, 2011 which contributed approximately $1.4 million of the increase. The remainder of the increase is due to new properties acquired subsequent to March 31, 2011.

Amortization expense decreased approximately $2.5 million for the three months ended June 30, 2012 compared to the same period in the prior year. The variance is primarily attributable to reduced amortization expense as a result of lease intangible assets becoming fully amortized at certain of our existing portfolio of properties subsequent to June 30, 2011.

General and administrative expenses decreased approximately $2.5 million for the three months ended June 30, 2012 compared to the same period in the prior year. The decrease is primarily attributable to recoveries in excess of current period billings from our insurance carriers related to our ongoing litigation defense, as well as lower costs associated with our deferred stock compensation plan in the current period. Additionally, we recognized a reduction in state and local tax expense in the current period of approximately $0.5 million related to the successful appeal of a prior year franchise tax.

Other Income (Expense)

Interest expense decreased approximately $1.8 million for the three months ended June 30, 2012 compared to the same period in the prior year. The decrease is mainly attributable to paying off the $45.0 Million 500 W. Monroe Mezzanine I Loan in November 2011, the $140.0 million 500 W. Monroe Mortgage Loan in January 2012 and to a lesser extent, the $45.0 million 4250 North Fairfax note in May 2012.

Interest and other income increased approximately $0.5 million for the three months ended June 30, 2012 compared to the same period in the prior year. The increase reflects higher interest income in the current period related to interest earned on a $19.0 million note receivable originated as part of the sale of the Deschutes building, the Rhein building, the Rogue building, the Willamette building, and 18.19 acres of adjoining, undeveloped land in Beaverton, Oregon (collectively the "Portland Portfolio") in March 2012.

Income from continuing operations per share on a fully diluted basis increased from $0.10 for the three months ended June 30, 2011 to $0.12 for the three months ended June 30, 2012, primarily due to higher rental income related to new acquisitions, lower general and administrative costs, and lower debt service costs. These favorable variances were offset in the current period by a decrease in tenant reimbursements.

Discontinued Operations

In accordance with GAAP, the operations of the Eastpointe Corporate Center in Issaquah, Washington, the 5000 Corporate Court building in Holtsville, New York, the 35 West Wacker Drive building, the Portland Portfolio, and the 26200 Enterprise Way building in Lake Forest, California are classified as discontinued operations for all periods presented. Income from discontinued operations increased approximately $6.6 million for the three months ended June 30, 2012 compared to the same period in the prior year primarily due to the gain realized on the sale of the 26200 Enterprise Way building for approximately $10.0 million. We do not expect that income from discontinued operations will be comparable to future periods, as such income is subject to the timing and existence of future property dispositions.

Comparison of the six months ended June 30, 2012 versus the six months ended June 30, 2011

The following table sets forth selected data from our consolidated statements of income for the six months ended June 30, 2012 and 2011, respectively, as well as each balance as a percentage of total revenues for the same periods presented (dollars in millions):

                                                                                                $
                                   June 30,                     June 30,                     Increase
                                     2012            %            2011            %         (Decrease)
Revenue:
Rental income                    $    211.3                   $    203.0                   $      8.3
Tenant reimbursements                  53.7                         57.5                         (3.8 )
Property management fee revenue         1.2                          1.2                            -
Other rental income                     0.2                          4.8                         (4.6 )
Total revenues                        266.4          100  %        266.5          100  %         (0.1 )
Expense:
Property operating costs              106.4           40  %        101.7           38  %          4.7
Depreciation                           55.2           20  %         50.7           19  %          4.5
Amortization                           24.2            9  %         24.3            9  %         (0.1 )
General and administrative
expense                                10.1            4  %         14.0            5  %         (3.9 )
Real estate operating income           70.5           27  %         75.8           29  %         (5.3 )
Other income (expense):
Interest expense                      (32.5 )        (12 )%        (33.4 )        (13 )%          0.9
Interest and other income               0.4            -  %          3.2            1  %         (2.8 )
Equity in income of
unconsolidated joint ventures           0.4            -  %          0.6            -  %         (0.2 )
Gain on consolidation of
variable interest entity                  -            -  %          1.5            1  %         (1.5 )
Income from continuing
operations                       $     38.8           15  %   $     47.7           18  %   $     (8.9 )
Income from discontinued
operations                       $     29.2                   $      7.3                   $     21.9

Continuing Operations
Revenue
Rental income increased from approximately $203.0 million for the six months ended June 30, 2011 to approximately $211.3 million for the six months ended June 30, 2012. Approximately $11.7 million of the variance is due to properties acquired subsequent to January 1, 2011. Additionally, new leases commenced at our Piedmont Pointe I and II buildings in late 2011 and at our 1075 West Entrance Drive building in July 2011. However, these increases were partially offset by a reduction in leased space due to lease expirations at various properties (primarily at our 200 Bridgewater Crossing building and our Windy Point II building). During June 2012, we executed a new lease for approximately one-third of the 200 Bridgewater Crossing building which will commence in first quarter 2013.

Tenant reimbursements decreased from approximately $57.5 million for the six months ended June 30, 2011 to approximately $53.7 million for the six months ended June 30, 2012. Approximately $3.0 million of the decrease coincides with the lease expirations noted above at the 200 Bridgewater Crossing building, the Windy Point II building, and the Crescent Ridge II building subsequent to January 1, 2011. Additionally, approximately $1.0 million of the decrease is due to new leases commencing in late 2011 at our US Bancorp building which provide for gross abated rents into 2012 (including short-term relief from both rental revenue and operating expense reimbursements).

Other rental income is comprised primarily of income recognized for lease terminations and restructurings. Unlike the majority of our rental income, which is recognized ratably over long-term contracts, other rental income is recognized once we have completed our obligation to provide space to the tenant. Lease termination fee income for the six months ended June 30, 2011 of approximately $4.8 million primarily relate to leases terminated or contracted at the 1201 and 1225 Eye Street buildings in Washington, D.C., the US Bancorp building, and the 1075 West Entrance building. We do not expect such income to be comparable in future periods, as it will be dependent upon the exercise of lease terminations by tenants and/or the execution of restructuring agreements that may not be in our control or are deemed by management to be in the best interest of the portfolio over the long term. Expense
Property operating costs increased approximately $4.7 million for the six months ended June 30, 2012 compared to the same period in the prior year primarily due to properties acquired subsequent to January 1, 2011.
Depreciation expense increased approximately $4.5 million for the six months ended June 30, 2012 compared to the same period in the prior year. The variance is largely attributable to depreciation on additional tenant improvements subsequent to January 1, 2011, providing approximately $3.5 million of the increase. The remainder of the increase is due to properties acquired subsequent to January 1, 2011.
General and administrative expenses decreased approximately $3.9 million for the six months ended June 30, 2012 compared to the same period in the prior year. The decrease is primarily attributable to recoveries in excess of current period billings from our insurance carriers related to our ongoing litigation defense, as well as lower costs associated with our deferred stock compensation plan in the current period, totaling approximately $2.8 million. Additionally, we recognized a reduction in state and local tax expense in the current period related to the receipt of amounts owed from a prior year amended return. Other Income (Expense)
Interest expense decreased approximately $0.9 million for the six months ended June 30, 2012 compared to the same period in the prior year primarily due to the repayment of the $45.0 Million 500 W. Monroe Mezzanine I Loan in November 2011 and the $140.0 million 500 W. Monroe Mortgage Loan in January 2012. However, in November 2011, we entered into a new $300 Million Unsecured Term Loan which had an effectively fixed interest rate, through interest rate swap agreements, of 2.69% compared to the previous $250 Million Unsecured Term Loan, which carried an effectively fixed rate of 2.36%, and matured in June 2011. The higher interest rate on the new debt, coupled with the higher outstanding balance, resulted in the recognition of increased interest expense in the current period, partially offsetting the effect of the loan pay-offs noted above. Interest and other income decreased approximately $2.8 million for the six months ended June 30, 2012 compared to the same period in the prior year. The decrease reflects the recognition in the prior period of approximately $2.6 million of previously deferred property operating income upon consolidation of the 500 W. Monroe building.
The approximate $1.5 million gain on the consolidation of our VIE recognized during the six months ended June 30, 2011 is the net result of recording the estimated fair value of the net assets associated with taking ownership of the 500 W. Monroe building through foreclosure.
Income from continuing operations per share on a fully diluted basis decreased from $0.28 for the six months ended June 30, 2011 to $0.22 for the six months ended June 30, 2012 primarily due to the increase in property operating costs and depreciation expense associated with properties acquired subsequent to January 1, 2011. Although rental and reimbursement income increased due to properties acquired subsequent to January 1, 2011, such increases were partially offset by reductions in leased space or reimbursement abatements at some of our existing properties during the same period. The decrease in continuing operations per share is also due to the non-recurring, one time increases in other income in the prior year: the recognition of (a) a non-cash gain of approximately $1.5 million upon consolidation of the VIE containing the 500 W. Monroe building, (b) approximately $2.6 million of previously deferred property operating income upon consolidation of the 500 W. Monroe building, and (c) other rental income of approximately $4.8 million due to lease terminations and restructurings.
Discontinued Operations
In accordance with GAAP, the operations of the Eastpointe Corporate Center, the 5000 Corporate Court building, the 35 West Wacker Drive building, the Portland Portfolio, and the 26200 Enterprise Way building are classified as discontinued operations for all periods presented. Income from discontinued operations increased approximately $21.9 million for the six months ended June 30, 2012 compared to the same period in the prior year. We realized gains on the sales of our Portland Portfolio and our 26200 Enterprise Way building of approximately $27.8 million during the current period, which were offset by the lack of operational activity in the current period at the 35 West Wacker Drive building, Eastpointe Corporate Center or the 5000 Corporate Court building, as these properties were sold in 2011. We do not expect that income from discontinued operations will be comparable to future periods, as such income is subject to the timing and existence of future property dispositions.

Funds From Operations ("FFO"), Core FFO, and Adjusted Funds from Operations
("AFFO")

Net income calculated in accordance with GAAP is the starting point for calculating FFO, Core FFO, and AFFO. FFO, Core FFO, and AFFO are non-GAAP financial measures and should not be viewed as an alternative measurement of our operating performance to net income. Management believes that accounting for real estate assets in accordance with GAAP implicitly assumes that the value of real estate assets diminishes predictably over time. Since real estate values have historically risen or fallen with market conditions, many industry investors and analysts have considered the presentation of operating results for real estate companies that use historical cost accounting to be insufficient by themselves. As a result, we believe that the use of FFO, Core FFO, and AFFO, together with the required GAAP presentation, provides a more complete understanding of our performance relative to our competitors and a more informed and appropriate basis on which to make decisions involving operating, financing, and investing activities.

We calculate FFO in accordance with the current NAREIT definition as follows:
Net income (computed in accordance with GAAP), excluding gains or losses from sales of property and impairment charges (including our proportionate share of any impairment charges and/or gains or losses from sales of property related to investments in unconsolidated joint ventures), plus depreciation and amortization on real estate assets (including our proportionate share of depreciation and amortization related to investments in unconsolidated joint ventures). Other REITs may not define FFO in accordance with the NAREIT . . .