Greetings and welcome to the Piedmont Office Realty Trust First Quarter 2016 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Mr. Robert Bowers, CFO for Piedmont. Thank you, sir. You may begin..

Thank you, operator. Good morning and welcome to Piedmont's first quarter 2016 conference call. Last night, in addition to our earnings release, we also filed the Form 8-K which includes our unaudited supplemental information, both of which are available on our Web-site, 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 which may cause actual results to differ from those we discuss today.

Examples of forward-looking statements include those related to Piedmont's 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 today, we will 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 Web-site. 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'll now turn the call over to Don..

Good morning, everyone, and thank you for joining us as we review our first quarter financial and operational results.

As we begin, I will remind everyone that we are approaching capital allocation in 2016, much like we did in 2015, disposing of non-core properties and assets that have reached their long-term value with a cautious approach toward new investments. This will position Piedmont to be a net seller for the year.

Our objective is to continue strengthening our balance sheet while improving the overall [indiscernible] office portfolio. Despite the broader market disruption in the first several months of the year, the investment environment for office buildings remains highly competitive with near-peak pricing for high-quality well-located assets.

That said, deal activity is pulled back from the highest seen in 2015, particularly in secondary locations. With regards to property operations, Piedmont's low lease expiration schedule is helping our local management teams in eight primary office markets to remain diligent on the lease up of our currently vacant space in the portfolio.

To that end, the first quarter's leasing activity totaled just over 350,000 square feet with roughly half of that attributable to new tenants.

Highlights of executed leasing closed during the first quarter include the following; an approximately 29,000 square foot three-year new direct lease with Telogis at Braker Point III in Austin, Texas; a 28,000 square foot lease through November of 2027 with GKN Aerospace at 6031 Connection Drive in Irving, Texas; and three additional 20,000 square foot or more renewals for five to seven years each with Vertex in Sarasota, McKinsey in Detroit and Bomgar in Atlanta.

Because we completed an extraordinary amount of leasing late in the fourth quarter coupled with some caution exercised by corporate users early in the first quarter, the overall volume of completed and executed leases during the quarter was more modest than expected.

Nevertheless, as the first quarter progressed, leasing interest has improved markedly and we are optimistic about the remainder of the year. For the leases signed in the first quarter on previously occupied space, we recorded a 3% roll-up in cash rents and over a 13% increase in GAAP rents.

Regarding the largest vacancies in the portfolio, we're seeing meaningful tenant interest in our RB Corridor assets in Washington DC and anticipate making leasing progress related to available space over the coming quarters.

In Houston, at the Enclave property, we have had several large tenant prospectors but are not helpful for immediate leasing news given this very competitive market. In our one project in active construction, 500 TownPark in Lake Mary submarket of Orlando, Florida, the project is moving forward, foundation is in and steel is being raised.

Construction of this 80% pre-leased property is on schedule and on budget and is expected to be ready for CNA to take occupancy in the spring of 2017. Despite the choppiness in the investment sales market, Piedmont achieved robust capital markets activity during the quarter.

However, lease transactions were not completed until after the end of the quarter. Transactions that have closed since quarter end include, on April 21, the 176,000 square foot 1055 East Colorado asset in Pasadena, California sold for $61.3 million or roughly $350 per square foot.

On April 28, the 134,000 square foot Fairway Center II building in Brea, California was sold for $33.8 million or about $250 a square foot. And on May 2, we sold 173,000 square foot 1901 Main Street property in Irvine, California for $66 million or about $380 a square foot.

In all three transactions above, gains will be recognized in the second quarter of 2016. Furthermore, these dispositions were completed through reverse 1031 structures that we established last December upon purchasing SunTrust Center, Galleria 300 and Glenridge Highlands One.

As a result, we will be able to invest any disposition proceeds including gains where we believe they will most benefit our shareholders, in debt reduction, share buybacks and/or select strategic acquisitions.

Finally, regarding share repurchases, we were able to opportunistically repurchase 462,000 shares of our common stock at an average price of $17.20 per share during the first quarter, bringing our total purchases under the share repurchase program to over 28 million shares at $17.17 per share average price since the program began in late 2011.

As of the beginning of this second quarter, we have over 70 million in authorized capacity remaining in the program. With that, I will now turn the call over to Bobby to review our financials and the balance sheet.

Bobby?.

Thanks, Don. While I'll discuss some of the highlights of our financial results for the quarter, I encourage you to please review the earnings release and supplemental financial information which were filed last night for more complete details.

For the first quarter of 2016, we reported FFO and core FFO of $0.41 per diluted share, an increase of $0.02 over the same metrics in the first quarter of 2015.

We were pleased with these first quarter results as we were able to directly offset the loss of revenue associated with over $1 billion of sales in 2015 from nine assets including Aon Center, with revenue from the commencement of new leases over the past 12 months as well as revenue generated from five assets acquired in 2015.

From a per share perspective, FFO and core FFO growth is a result of a combination of same-store income improvements and the benefits of the share repurchases over the past year.

AFFO for the first quarter of 2016 was $0.30 per diluted share and contractual non-incremental capital commitments over the next five years totaled $35.7 million as of March 31, the lowest level in many years.

Our reported same-store cash NOI for the first quarter was up a little over 1% when compared to the first quarter of last year, and this growth was tempered by the rent abatement during the first quarter for the entire quarter on 401,000 square feet of a lease renewal for Nestle at 800 North Brand at Los Angeles.

With the Nestle abatement expiring on March 31, same-store NOI is still expected to be in the 3% to 5% range for the year 2016. Our quarter-end leased percentage of 91.7% was up 20 basis points from year-end and up almost 300 basis points from a year ago.

Our economic leased percentage was 83% as of quarter end and was also affected by the Nestle abatement issue I mentioned a moment ago.

As of the end of the first quarter, we still have 1.4 million square feet of leases that were in some form of abatement and another 600,000 square feet of executed leases for currently vacant space we have yet to commence.

From a balance sheet perspective, we paid off $125 million mortgage loan in early January using disposition proceeds in our $500 million line of credit.

More recently, we applied the disposition proceeds received subsequent to the end of the quarter to the outstanding balance on our line of credit, and as a result we currently have nothing outstanding on our line.

The only near-term debt maturity is a $42.5 million mortgage due in October which we currently anticipate prepaying without penalty in July using the line. With lower secured and unsecured debt outstanding and EBITDA growth occurring, our debt to EBITDA ratio improved materially during the first quarter.

Now at this time, I'd like to affirm our previously issued annual guidance for 2016 in the range of $1.58 to $1.66 per diluted share for core FFO. So now, I would ask our operator to provide our listeners with instructions on how they can submit their questions.

We'll attempt to answer all of your questions now or 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 comes from the line of Dave Rodgers with Robert W. Baird. Please proceed with your question..

Wanted to maybe start with you, Don, and maybe Ray can chip in as well, but talk about asset sales. You obviously achieved some at the end of or after the end of the quarter. I was curious I guess on a couple of fronts.

One is, what's left in LA and what's the plan there, and then talk about kind of remaining non-core asset sales and kind of cash proceeds throughout the year?.

Okay, glad to do so, Dave. Actually Ray is off on a nice little trip today, so he doesn't get to participate, but I'll do my best and see if anybody else wants to jump in. So the three buildings we mentioned last night are sold. We are very happy about it and we were able to achieve our internal NAV or higher kind of numbers for each of those assets.

So we feel good about that. We have not put the Nestle building, 800 North Brand, under contract as we didn't get a number we were looking for on that building.

And I think part of it was, when we brought the portfolio out right in the middle of sort of January when things were a little more crazy on the financing side and the lease with Nestle only had about five or six years left, it didn't make for a highly financeable asset despite the fact it's a great quality building in a great location.

So we decided to pull back on that one. We're going to hold that for a little longer, particularly because there are some really sexy things going on in Glendale. I don't know if you know about the park in Dallas over Woodall Rodgers that's become such a great amenity for the in-town Dallas market.

They've got a plan for a very similar park over the State Route 134 that runs through the middle of Glendale, and the first phase of that is scheduled to take place right outside our building. And so we don't know that the market fully appreciated how much additional value we think that brings to the building.

And so we just weren't going to let it go for anything less than we thought was full value. And so as a result, we're going to pull back on that one for a little bit and just see what happens. It may still come back to market this year, but for now anyway, we're going to probably hold for a little bit.

We also do have a fair number of additional assets coming to market as we speak. We are negotiating couple of deals right now. So I would guess that our progression or our forecast for $200 million of net sales for the year is still pretty good. We have a little bit of acquisition work we are looking on as well.

So if you suggest that our acquisition work and disposition work largely offset each other for the rest of the year, we're net $160 million with the sales activity so far, maybe we get back up to the $200 million and beyond depending on how much we sell for the rest of the year.

Obviously, if we sell 800 North Brand, we'll probably blow through that $200 million and might even be higher than that..

That's fair. Thanks for that color. And then maybe just a follow-up, talk a little bit about leasing. You mentioned in your comments, Don, that you have some good leasing prospects in the RB Corridor.

Is that consistently what you're seeing across the vacancies in the portfolio? And I guess maybe the second to that would be, can you talk about how rents are coming out relative to your expectations there?.

I'll jump in on a national basis and I'm going to let Bob Wiberg provide some color or commentary on DC. But I would say, it was eerily quiet for about 30 or 45 day period in early part of the first quarter and we were sensing that from other people around the marketplace as well.

I think a couple of people made some comments in their fourth quarter calls, they were feeling that in other markets as well. And I think that was just a function of what was going on economically in the market pulling back, et cetera.

And then all of a sudden sort of probably about mid-March or so, we started seeing a really nice pick back up in activity.

So I think some things that were put on hold for a short period of time in January and February have come back out, and now I'd say we've got a very nice pipeline of leasing activity for the rest of the year, and across our markets I would say the best amount of activity we're seeing is in DC, and I'll throw it to Bob for a minute to just give a little bit of color or commentary without obviously pre-announcing anything..

Yes, I think we have seen a good pickup in activity and it really I think stems from really good job growth numbers in 2015 where we had about 68,000 new jobs. So it's starting to play through the economy. But we have seen activity pick up all across the portfolio.

The sectors that are most active in the market right now are really the coworking facilities, the technology sector, and then we have seen a lot of associations being active, either musical chairs or jumping markets from downtown to Arlington to try to take advantage of lower rents.

But as Don mentioned, for our Arlington buildings and the RB Corridor, all three were seeing good leasing activity, good tours, and I think we should have some leases signed in the second quarter..

Our next question comes from the line of Gene Nusinzon with JP Morgan. Please proceed with your question..

More on dispositions.

How much of the portfolio do you currently perceive to be non-core non-strategic?.

I'm not sure that I have a specific number in front of me, but I would say over the next three years, we've got about $1 billion worth of, sort of I'll call it, targeted disposition activity.

Obviously there are a handful of buildings in there that might become back into our core portfolio depending on decisions we make around strategic submarkets and such and others may get added, but I think that's probably a pretty good estimate when you look at our three-year budget for disposition activity.

Now that includes the things that we have already done this year, and so that would be another say $850 million beyond what we already announced..

Got it. Thank you.

And just with the 2015 acquisitions, has lease-up there been going kind of in line, better, worse than underwriting?.

I would say slightly better, Gene. We've moved up from – I think we were 80 to 89 in several of those deals, up in the low to mid 90s with projected activity going on right now, and some of which is announced, some of which isn't, but I would say it's going marginally better than we would have expected.

But I guess that shouldn't be a surprise because those are all deals in active markets right now that we are seeing really good leasing activity. So it shouldn't be a surprise that that's going as well or better than expected..

Great.

And on the leasing front, the large vacancies that you detailed on Page 6 of the supplement, can you talk about just which of those are most challenging, least challenging, and just prospects for back filling them?.

You're referring to the three that are coming up in the next year or so. I would say probably the good news is, all three are really good quality buildings in good locations. So from that standpoint, there's nothing that sort of scares you.

Obviously the DC deals, because it's Washington, and Washington has been slower, although Bob indicated it's picking up now, I would say would normally have given us a little bit more cause for concern.

But given the quality of the buildings and the fact that we've got some time to work and a fair amount of activity in both of those buildings already, we feel pretty good about them.

So, I would say as opposed to some in the past where we have announced a year or so in advance we have a big vacancy coming and there may be a challenge, like we had in northern New Jersey last year with the KeyBank space for example where we were generally concerned, none of these three give us any real cause for concern, they all are – they may not be leased immediately but they should be leased over a normalized period of time.

So we feel pretty good about them..

Terrific. Thank you so much..

[Operator Instructions] We have one more question from Dave Rodgers with Robert W. Baird. Please proceed with your question..

Thanks for letting me jump back in.

I think on the last call you had talked about a 93% year-end occupancy target for 2016, and I don't know if that was a function more of asset sales or leasing, is that still a reasonable occupancy or leased percentage target as you move toward the end of the year, Don?.

Yes, David, it is. I would say we're off to a slower start admittedly than we would have liked to have been in the first quarter. It's so little rollover in the first part of the year that we thought we'd pick up more occupancy than we have.

But that leasing activity that we've mentioned we think is still going to get us upper 92s to 93% is what we I think forecast at the end of the year.

And that was sort of the same-store number, that wasn't we think we're going to sell this building, it has a bunch of vacancy and that's going to pick our occupancy up, it was sort of a same-store number. So we still feel good about that.

Now that is reported occupancy number, so there could be an impact of that being where we just get some leasing done in the fourth quarter, our reported occupancy is there but our economic occupancy hasn't followed yet. So we're still pretty optimistic we'll get there given the level of activity we're seeing in the portfolio..

And just wanted to dive deeper maybe on acquisitions too in terms of you had said maybe acquisitions offset dispositions for the rest of the year, maybe just more color on the depth of the pipeline, what's interesting, is it deepening, is it getting thinner, are you really opportunistic here, what's the overall thought?.

Dave, I would say, obviously within the $160 million we just brought in will go to pay down probably the $120 million on our line and then we have a $40 million note coming due in third or fourth quarter that we'll pay off as early as we can. So that's sort of a natural match-up for the $160 million we have already raised.

With your question on the acquisition side, I would say, as we've been telling everyone, with where pricing is in the market and given how long this economic expansion has run, we're being more cautious than ever and being a little careful about being too aggressive in buying a product.

Having said that, when we find something that's very core to what we do, and what I mean by that is, something in a submarket we already have a presence in and/or will allow us to further dominate that marketplace and it fits within what we do well in terms of strong corporate presence, et cetera, et cetera, those are strategic opportunities that we would look at in any point in the cycle.

But obviously there's very little out there of a value-added nature that's highly opportunistic or big-time IRR availability. So really what we're trying to do is continue to position the portfolio becoming more and more concentrated in those places where we feel like we can have a competitive advantage and create a lot of value for the shareholder..

There are no further questions at this time. I would like to turn the call back over to Mr. Don Miller for any closing remarks..

Thank you, Michelle. I would say, the only thing that we didn't get asked and we thought we might get asked was around the first quarter same-store cash NOI number of about 1%. I think it was fairly clear in the supplemental for those of you who were paying attention.

Nestle had 400,000 square feet of free rent in the first quarter as a result of a renewal we did several years ago with them that started at the end of 2015. And so the first few months of the renewal ran through the first quarter of 2016. So on 400,000 square feet at a fairly large rent, we had a major impact on same-store cash in the first quarter.

We still are forecasting, as you might have seen, 3% to 5% same-store cash for the year. That hasn't changed. We knew the first quarter was going to be lighter. And in fact, just to give you a sense of the impact of that Nestle free rent, had Nestle not had free rent in the first quarter, we would have had a same-store cash number of 5.5%.

So, obviously dramatic perspective or differential in thought if you look at it with and without Nestle's free rent. So that's all we have to add today. We have got to stop scheduling our calls at the same time as one of our larger competitors. We thought we had done that this time, but things changed.

So we'll continue to try to do a little better job of missing everybody else's calls and we appreciate all your support. Thank you..

This concludes today's teleconference. Thank you for your participation and you may all disconnect your lines at this time..