Greetings, and welcome to the Piedmont Office Realty Incorporated Third Quarter 2017 Earnings Call. [Operator Instructions]. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host today, Mr. Robert Bowers, the CFO of Piedmont. Please proceed, sir..

Thank you, Operator. Good morning, and welcome to Piedmont's Third Quarter 2017 Conference Call. Last night, we filed our Form 10-Q and 8-K that includes our earnings release and our unaudited supplemental information for the third quarter, all of which 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. Forward-looking statements address matters which are subject to risks and uncertainties that may cause the actual results to differ from those we discuss today.

Examples of forward-looking statements include those related to Piedmont Office Realty Trust future revenues, operating income, dividends 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'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 now turn the call over to Donald Miller, our Chief Financial Officer, as he discusses some of the quarter's operational highlights.

Don?.

Good morning, everyone, and thank you for joining us as we review this past quarter's financial and operational results. I will focus upon our leasing and strategic transactional activities, while Bobby will review our key financial results and expectations.

As for leasing activities, we're pleased to see a steady increase in leasing interest by prospects across our portfolio properties during the quarter, with good momentum going into the final quarter of the year.

During the third quarter, we completed approximately 450,000 square feet of leasing, of which 203,000 square feet was related to new tenant leases or expansions.

And our largest executed lease addressed in upcoming 2019 expiration with the 210,000 square foot 5-plus year renewal lease with Fiat Chrysler at our 1075 West Entrance building in Auburn Hills, Michigan. We are focused upon our other large 2019 expirations, and we're encouraged by discussions to date.

We hope to make more similar announcements in the near future. Highlights of other completed leasing during the third quarter included in Orlando, Florida, WithumSmith+Brown PC signing approximately 20,000 square foot 12-year new lease at Suntrust Center in downtown, Orlando. And Robinhood Markets, Inc.

signed up as a new tenant for 7-plus year lease for approximately 14,000 square feet at 500 TownPark in Lake Mary, Florida, thus stabilizing this development property which was placed in service on January 1 of this year.

Also in Florida, the law firm of Phelan Hallinan Diamond & Jones completed an approximately 19,000 square foot 10-plus year new tenant lease at 2001 Northwest 64th Street in Ft. Lauderdale, Florida. We have also witnessed an uptick in activity on our Northern Virginia portfolio, which is based in the RB Corridor.

In the third quarter, we've completed several leases highlighted by the following, Applied Predictive Technologies, Inc.

signing approximately 15,000 square foot 10-plus year lease expansion at 4250 North Fairfax Drive in Arlington, Virginia; and Federal Advisory Partners completed an approximately 12,000 square foot 11-plus year new lease of 3100 Clarendon Boulevard in Arlington.

We expect to achieve additional leasing success in this quarter and the fourth quarter of the year. As usual, we've provided more detailed quarterly leasing information in the supplemental report filed last night for your review.

As disclosed in previous press releases, this past quarter we completed the sale of our Two Independence Square assets in Washington, D.C. in early July and have included approximately $110 million gain associated with that transaction in our third quarter results.

Additionally, we also sold for an approximately $4 million gain the 8560 Upland Drive property, our last asset held in the Denver, Colorado office market and our last asset held in unconsolidated joint-venture structure.

With approximately $375 million in proceeds from dispositions received thus far this year, we paid down the outstanding balance on our unsecured line of credit as well as our $140 million mortgage to mature during the third quarter.

Also with such a large amount of taxable gains related to these sales in 2017, our board is reviewing the possible need for a special dividend later this year.

Such a dividend and its amount will be dependent upon a number of factors, including the timing of potential transactional activity related to a group of nonstrategic assets we have identified for possible disposition.

We'll certainly update you as soon as possible if any such transaction meets our normal threshold for disclosure and if a special dividend is determined prior. We've not identified any current acquisition [indiscernible] on our strategic model that are priced at a reasonable basis.

However, there are some attractive properties which we anticipate coming in the market over the next few months that are located in or near our targeted submarkets. Having said that, I want to be clear that we don't feel pressured to put money out the door. Any acquisition will be highly strategic to our business model.

We are comfortable paying down debt and waiting for the right opportunities and finding other uses for such capital such as repurchasing our own stock when appropriate.

As disclosed in our Form 10-Q, we did repurchase, during the third quarter, a small amount of shares less than $200,000 under our share repurchase program at a significant discount to what we believe is our net asset value per share. Approximately $246 million of board-approved capacity remained under this plan at September 30.

With that, I'll now turn it over to Bobby to review the third quarter financial results and balance sheet and talk a little bit about our initial views on 2018.

Bobby?.

Thanks, Don. While I discuss some of our financial highlights for the quarter, I want to again encourage you to please review the earnings release and supplemental financial information which were filed last night for more complete details. For the third quarter of 2017, we reported FFO of $0.42 per diluted share.

That's compared to $0.41 per share a quarter ago. Core FFO of $0.42 per diluted share was in line with the third quarter of 2016 despite Piedmont currently being at $375 million net seller in 2017. AFFO was approximately $52 million this quarter.

That's $2 million ahead of the third quarter last year and well in excess of our $30 million third quarter dividend. Our overall reported occupancy kicked down for the quarter, given the sale of the Two Independence Square property, which was 100% leased as well with the expiration of the 2 leases in our Washington, D.C. portfolio during the quarter.

Our overall outlook for leased [indiscernible] at the end of the year remains around 90%. However, this ratio may fluctuate marginally depending upon the span of any fourth quarter acquisition and disposition activity.

Same-store cash NOI for the third quarter of 2017 was up approximately 5% compared to the third quarter of the previous year, primarily driven by the commencement of new leases and expiration of rental abatements. And we still expect to end the year with a 9% to 10% growth overall in same-store NOI on a cash basis and 5% to 7% on a GAAP basis.

For completed leasing activity, cash rents were basically flat this quarter up on lease roll, but we're up over 10% for GAAP rents. After the payoff of the outstanding balance on our credit revolver and the pay off of $140 million mortgage during the quarter, we've strengthened our liquidity position and lowered our leverage.

Our average net debt for EBITDA ratio for the third quarter of 2017 was 5.6x, and we've lowered our debt versus asset ratio to under 34%. We have full capacity available on our $500 million line of credit for strategic opportunities, and there are no additional debt maturities for the remainder of the year.

At this time, we would like to narrow our previously issued 2017 guidance to a range of $1.74 to $1.76 for core FFO per diluted share. The guidance reflects the sale of the 3 assets this year, including one of our largest assets, Two Independence Square mid-year.

Combined all 3 properties contributed approximately $24 million in property NOI on an annualized basis. We're pleased to be at the midpoint of our guidance especially [indiscernible]. I think we'll be a larger net seller of assets during 2017 than we originally vested, and that is without any further dispositions taking place this year.

As we've indicated before, we believe that being a net seller today is the right thing to do at this point in the cycle.

With guidance remaining at the original midpoint of our range, with an improved balance sheet strength and with plenty of [indiscernible] to prudently capture strategic asset acquisitions should they arise, or repurchase more of our own shares when they are trading materially below our perception of net asset value.

Obviously, the loss of $24 million of annualized property NOI due to our year-to-date dispositions will impact our 2018 guidance. We'll provide that guidance during the first quarter of 2018 after we've completed our budget and have more information regarding any potential property transactions.

With that, I'll now ask our operator to provide our listeners with instructions on how they can submit their questions. We're joined today by Brent Smith, our Chief Investment Officer, and by our regional heads and others. We'll attempt to answer all of your questions now or we will make appropriate later public disclosure, if necessary.

Please try to limit yourself to 1 follow-on question so we can address as many of you as possible.

Operator?.

[Operator Instructions]. It's from Jed Reagan with Green Street Advisors..

You talked about being a little more optimistic on leasing. I guess, I mean, have you observed any changing in terms of the fundamentals landscape in your market? Or is it been more just kind of one offs? And then, specifically, in Northern Virginia, you said there was some better activity.

Have you seen a turn in market conditions there, just sort of a pickup in demand?.

I'll start and I'll probably throw over the second question to Bob. But no, I don't think there's been any change in what we'd say the overall outlook across the leasing markets in the country are.

I think we've been signaling that and we though the environment was a little bit more positive than we were showing in terms of results for the first 3 quarters.

And we anticipate that, that's going to change in the fourth quarter that we should have quite a bit higher volumes in both, some renewal activity and some new vacant space activity in the fourth quarter. And some of that is happening in the Northern Virginia quarter and that's why we highlighted it.

Bob, would -- anything you would add on Washington itself?.

Not really, but I'd say, as you mentioned that the broader market's kind of sluggish but our Arlington property is -- they're really seeing a good activity.

And I'd say it's probably the best we've seen in at least the past 12 months primarily from small- to midsize tenants, but interestingly, I'd say the majority of those requirements are actually growth in the market not just people moving around..

And any -- Bob, any change sort of in tempo from the defense tenants that you're seeing and could that benefit you directly?.

You know we really haven't seen much more activity out on the defense side. Really, where we've seen [indiscernible] already is certainly on the technology side..

Okay. And then I think in the supplemental there was a mention of good interest on the Dallas space, the Goldman space.

Would that likely -- I mean, are those single-tenant conversations you're having or would that go multi-tenant on that backfill?.

Yes. Well, so you noticed that, Jed. Yes, we try to be -- we try to signal for everyone who is looking at our supplemental. I think if you look at those kinds of comments and, especially, if you look at them quarter-to-quarter, we try to be -- try to give signals as to whether we think we're making progress on something or not.

Obviously, we're signaling that we think we're making progress on some of that vacancy, and at least a bigger chunk of that space will likely be a sizable tenant if we are successful on what we're working on today..

Okay. And then maybe just one last one for me.

In terms of the portfolio that you're marketing, any better visibility on whether you'd like to sell that in one block or break it up in chunks? And I realize you maybe limited to what you can say, but any better sense of when you might have more information to share with the market?.

Yes, let me throw that to Brent for you..

Jed, we recognize you in the market's curiosity and anxiousness really around a potential transaction. I don't think there's any new details we can share at this time. But we are hopeful we'll have some clarity around the outcome of the process in the coming weeks.

And to your point if we sell them all or part, I'd say it's still not clear at this point and we continue to kind of work through some alternatives..

Our next question comes from Dave Rogers..

Maybe one other space that you have coming up is the Gallagher space in Chicago. It didn't look like your commentary in the supplemental was as robust as that in [indiscernible], any additional thoughts there would be good..

A good point. You identified that appropriately, Dave. There's a little bit activity there. I would say it's a -- we probably going to see majority of our activity really pick up once we've completed a repositioning of the asset.

We're doing a full sort of a minimization of the lower levels with an [indiscernible], an architectural term to say we're activating the outdoor space as well and really going to do some really kind of uncool stuff in that building as part of repositioning.

Obviously, we're marketing that today, but sometimes it's harder to get tenant activity to come along until they have got to see it and touch it and feel that. But there's actually some early activity there that we're encouraged by. But, obviously, we've got a lot to do there and so there's a lot of wood to chop..

And then with regard to the sale of Two Independence, I think you were going to reinvest those proceeds in 1031, you would have to identify those already.

Have you identified anything? Or what were your comments about the special dividend to really set up the expectation that, that's coming? And then, Bobby, any additional clarity after last quarter on sizing?.

Yes, I'll start. We're not anticipating 1031 in any of the asset -- any of the proceeds from the Two Independence transactions. And so left to its own, if that's all we did at this point, that would [indiscernible] enough gain that we would be having to think about a special dividend.

Let me throw it to Bobby, though, to address that topic a little more specifically..

Yes. We hope to provide a valued -- more specifics in early December regarding any special dividend that can be highly dependent upon the amount and timing of any of the disposition activity that's completed here by year-end. So just have to wait a couple of more weeks, but....

Okay. Thanks for that. Last one, I just want to follow up on Jed's comment and you guys have obviously talked about the portfolio sale. But I think first round has already come in, I don't know if you're through second round already.

Can you give a little more color on the process, if not on the timing, just in the sense of how else can you impact earnings next year and it doesn't sound like you'll reinvest many of those proceeds either or all of them anyway. And so just want to make sure that we kind of set up the right expectations for 2018 earnings..

Yet, I think, Dave, given where we are in the process, I think we're just going to continue to hold off giving any more color until we've got more clarity around that. I'll put it in a plug for everyone that we're going to be doing a Dallas Investor Day as everybody here knows that [indiscernible] a week from Monday. So on the 13th.

I don't imply more information about it then or not, but I'm hopeful we will. And if we do then we'll share it with you at that point in time. And then, obviously, maybe that gives you more motivation to attend as well..

[Operator Instructions]. Our next question comes from Anthony Paolone with JPMorgan..

So just on the potential asset sales, the stuff you have in the market, can you give us any brackets around if it all gets done, how many markets that leaves Piedmont in? And whether that it really net results in, sort of, a reduction in markets in greater concentration in those markets or if it's really kind of a cross-section of all place you're already in?.

Yes. You probably have a sense of what we had brought to market for sale. And if we were successful in moving all the assets that we were hoping to move, I think that formally gets us out of, depending on how you look at it, 3 to 5 markets.

Obviously, there is Detroit, Phoenix and Nashville are all -- the assets that we own in those markets were all included in our portfolio sales. And those will be 3 markets that we would be definitely departing.

And then, again, depending on how you count markets, we also have assets in places like South Florida that were sort of lumping or our Orlando portfolio. We had some assets in Maryland. They are in our D.C.

portfolio, of course, and then 1 or 2 others like that, that -- I'm not sure you would count them as markets, but we sort of think of them as getting out of a submarket, if not a market..

Okay. Got you. And then just in terms of portfolio occupancy and then you talked about leased rate and where that's trending.

Can you help us just with, like the bridge from 2Q to 3Q and 3Q into the end of this year on the occupancy sides? I know you had those couple of large leases that were known vacates in the third quarter, but still seemed like you had lost some space in addition to that..

Yes. Saw your note last night. Not sure we thought that the impact was as great as you identified, but let me see if we can try to identify. So we have said last quarter that we were targeting a year-end occupancy after all the noise of selling properties in the like of somewhere in the 91 to 92 range -- I'm sorry, 90 and 91 range.

It was 91 and 92 before all the noise. So when we restructured it to 90 to 91, we fell, as you saw, down into the low 89s this quarter.

But as I think some of you identified, there's a very little or virtually no vacancy coming up in the fourth quarter and with some of the leasing activity we have, we still believe we're forecasting that we'll get into the lower end of that 90 to 91 range that we had indicated last quarter.

So I think the good news is there should be some pickup in occupancy in the fourth quarter relative to the third quarter. But it's still -- we're still going to be within the range of what we had talked about last quarter..

Okay. Is there a way to express that on your commenced leased percentage? Like, I guess, you ended the quarter at 87. Just in terms of what impacts your FFO, AFFO..

We don't have that readily available, Tony. Everybody is shaking their heads. We don't have that readily available. We can, obviously, do that calculation and maybe try to include that in our NAREIT Investor Day in a couple of weeks so that we release it all at one time..

At this time, I will like to turn the call back over to Mr. Miller for closing comments..

Well, as we mentioned a couple of times, we sent out invitations to a good part of the marketplace, and we're expecting a fairly large turnout at our NAREIT Investor Day. It's a Monday afternoon before the conference actually gets started. It's actually taking place in Las Colinas, which is, of course, right there by the Dallas/Fort Worth Airport.

So we're trying to make it as convenient as possible for everyone to fly into DFW, come on over to our Investor Day. We plan on ending into a kind of a fun menu, like we've done in some of our past events. And we already have a sort of a fairly sizable crowd coming, and we hope we'll add a few more.

So if you're thinking about it, please see if you can add that to your schedule. We'll certainly make it both informative, fun, and we hope as easy on your schedule as possible. So we look forward to seeing as many people there as we can. And we thank you for your interest, and we appreciate your calls..

This concludes today's teleconference. You may disconnect your lines at this time, and have a great day..