Greetings and welcome to the Piedmont First Quarter 2019 Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note this conference is being recorded.

I will now turn the conference over to your host today, Robert Bowers, CFO of Piedmont. Please proceed..

Thank you, operator. Good morning and welcome to Piedmont’s first quarter 2019 conference call. Last night, we published our Form 10-Q and filed an 8-K containing our quarterly earnings release and unaudited supplemental information. These items are available for your review on our website 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 actual results to differ from those we anticipate and discuss today.

Examples of forward-looking statements include those related to Piedmont Office Realty Trust’s 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 as these statements speak only as of the date they are made. We encourage all of our listeners to review the more detailed discussion related to risks associated with forward-looking statements contained in the company’s filings with the SEC.

In addition, during this call, we will refer to non-GAAP financial measures such as FFO, core FFO, AFFO and 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.

Our senior management team is available today to address any questions that you may have. I’ll review some of the quarterly financial results after Don Miller, our Chief Executive Officer and Brent Smith, our President and Chief Investment Officer, will discuss the first quarter’s accomplishments.

Don?.

Thank you, Bobby. Good morning, everyone and thank you for joining us on today’s call. As most of you know, on March 19th, Piedmont announced that I will be retiring as of June 30th. Brent Smith will be taking my place as CEO as of that date.

This has resulted from a long, well-thought out succession plan that I’ve been working on with the Board for many years. We are very pleased this has gone so smoothly, and I’m excited to watch what Brent, Bobby and the rest of Piedmont team will do to take the firm to yet another level.

I will however, be very sorry not to see many of you before I move along at the end of June, but I’ll always continue to be reachable. I’m glad to be able to step down while the economy, markets and company, are all performing at a high level.

We’ve been very fortunate to be among the top performers in the office REIT universe on a five year total return basis, while we’ve been repositioning the portfolio from 24 markets to eight focused office markets since our IPO. I’m confident that Brent and the rest of the Piedmont leadership team will build on those successes.

The first quarter continued to run our strong financial results, and Bobby will discuss in greater detail. We earned $0.45 in core FFO per share in line with consensus estimates, despite some large offsetting items. Our mark-to-market lease economics and CapEx per square foot per year of lease term, are both among the best numbers we’ve ever achieved.

And our occupancy remained stable at 93.3% with a very good pipeline of additional lease prospects heading into the middle of the year. We also made tangible progress on New York State renewal about which Brent will go into more detail in his remarks.

Specifically on the leasing front, without considering New York State, we completed approximately 322,000 square feet of leasing, including over 138,000 square feet of new leasing, most of which was for vacant space. The leasing activity resulted in 9.4% increase in beginning cash rents and 18.5% increase in GAAP rents.

This activity was broad based as evidenced by the fact that we completed nine new and renewal leases over 10,000 square feet, but nothing larger than 28,000 square feet. We expected that will change in coming quarters as we are in advanced stages of negotiation for multiple large renewals, as well as new tenant leases at compelling economics.

Among the larger leases completed during the quarter were in Atlanta, IG Design Group executed a renewal and expansion totaling 28,000 square feet for six plus years through 2025 at Glenridge Highlands One. Also in Atlanta, Continental Casualty Company renewed 16,000 square feet at Glenridge Highlands Two for over five years.

You might recall that this is our headquarters location in the Central Perimeter submarket where we’ve been achieving strong occupancy levels in mid 30% rental rates. In Boston, at the company’s recently acquired 25 Burlington Mall Road property, Merrill Lynch extended its 21,000 square feet lease with five additional years through 2025.

We are broadly achieving rates exceeding those that we underwrote just a few months ago. We now have over one million square feet in this submarket and over 40% share of the Class A market in Burlington. And in Washington DC, where we had recently sold two nearly 100% leased properties in the Southwest submarket, Venesco-SaiTech J.V.

executed a new five year lease for 15,000 square feet at Piedmont’s 400 Virginia Avenue building. Brent will go into more detail on the One Independence Square sale in this submarket in a few moments.

Although CapEx remains stubbornly high in submarkets due to tenants’ desires for new build-outs and heightened structuring costs for long-term leases, we’ve seen other lease incentives such as free rent, moderate or reduced, to compensate. As a result, we are still experiencing net effective rental growth in many of the markets in our portfolio.

And of course, we feel fortunate that after our expected completion in the New York State lease renewal, we have very low lease turnover in the next five years, and one of the longest weighted average lease terms in the entire office REIT sector.

Combine that with the high credit quality and low leverage as measured by debt-to-EBITDA and debt service coverage metrics, we feel like we are extremely well positioned to both capture upside in our existing portfolio as the economy remains strong, but also have market-leading downside protection in the event of the downturn in the economy.

At this time, let me turn it over to Brent to inform you about both the New York State’s renewal status, as well as our capital markets activity.

Brent?.

Thank you, Don. Before discussing the New York State lease, I feel it’d be appropriate to update everyone on our capital markets activity for the quarter. As we previously announced, we were successful in completing the sale of One Independence Square, a 334,000 square foot office building in the Southwest submarket of Washington, DC.

The sale furthers our goal of concentrating our Washington DC portfolio in two target submarkets, in the CBD and in the Rosslyn-Ballston Corridor of Northern Virginia. The sale of One Inde [ph] leaves just one building 400 Virginia outside of those two defined submarkets.

The sale price of $170 million translate into giving up approximately a low 5%s FFO yield to Piedmont and furthers our strategy of recycling capital into our strategic submarkets, all while enhancing the growth of the company’s income stream.

In fact, if you look at our $1 billion worth of dispositions since 2014, the subsequent REITs and in the subsequent recycled acquisitions, we’ve averaged a 7.5% FFO yield on acquisitions and a 6% FFO yield on dispositions at roughly the same occupancy, all while further concentrating high-quality assets in existing submarkets like Atlanta, Burlington and Boston, downtown Orlando and Minneapolis among some others.

And all of this is furthering our local submarket dominance and expertise. Let me take a moment to stress the high-quality nature of the replacement assets. There may be a misconception that buying at higher cap rates implies a decrease in quality.

To the contrary, we’re buying assets of equal or greater quality and those assets are located in our strategic submarkets.

The difference in cap rates is largely the result of selling well-leased, stabilized and fully-valued assets and redeploying the proceeds to the assets that have something that needs to be fixed, giving us both, value and income growth potential.

We believe we can continue to find strategic acquisitions that are accretive to both cash flow and net asset value over time. We will continue to create stockholder value as recycled proceeds from dispositions into NOI accretive property within our identified strategic growth markets where we have established competitive advantages.

You should anticipate us pairing disposition assets that are either non-strategic geographically or in situations where we believe we’d optimize the value of the building at our ownership. Our capital markets team has identified a pipeline of strategic assets from which we hope to make acquisitions, should we need to recycle capital.

One such property is the Galleria 100 building and an adjacent development site that is located by our Galleria 200 and 300 buildings in the Northwest market of Atlanta. Subsequent to quarter-end, our contract to purchase this property went hard and we expect to close this deal in the middle of May.

The 89% occupied Galleria 100 building is an 18-storey, 414,000 square feet building, which will bring our total ownership in this growing submarket to 1.3 million square feet and underscores our focus on urban infill amenity-rich properties with strong rent growth potential.

The Galleria is the only Class A office there with direct access to the Battery. The entertainment, retail and residential mixed use center in northwest Atlanta, which includes SunTrust Park, home of the Atlanta Braves and the Coca-Cola Roxy Theatre.

More information about this will be forthcoming as we close this transaction and make progress on our other transactional activity. Switching gears now to the New York State lease.

The tenant came to us in the first quarter and asked to execute a short-term lease extension that modestly increased renewal rates prior to the lease expiration at March 31, 2019. So they did not risk going into a punitive holdover rent situation.

We agreed to a four month extension provided that the tenant is still obligated to pay holdover rent in the very unlikely event that we do not come to the final terms in the lease. Both sides are rapidly and cooperatively working toward a completion of a 15 plus year lease extension and all of the material economic terms of lease are agreed upon.

We anticipate the extension to be completed this summer. At this point, I will turn it over to Bobby to walk you through the financial highlights of the quarter.

Bobby?.

Thanks, Brent. While I’ll discuss some of our financial highlights 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 2019, we reported $0.45 per diluted share for both FFO and core FFO, which was up $0.04 per share over FFO and up $0.02 per share over core FFO for the same period a year ago.

The increase is primarily attributable to rental rate growth and higher occupancy across the portfolio, as well as fewer common shares outstanding as a result of our stock repurchase program.

We acquired 728,000 shares during the first quarter at an average price of $17.14 per share, bringing the lifetime share repurchase activity to nearly 49 million shares at an average repurchase price of $17.70 per share.

We anticipate we will prudently take advantage of this program when dramatic differences in our share price and our underlying NAV exist. If we do so, we’ll utilize proceeds from the sales of non-strategic assets and not increase leverage. As of quarter-end, we have $74 million of board approved capacity remaining under this program.

AFFO was approximately $52 million for the first quarter, which is double our current $26 million quarterly dividend level. Same-store NOI was up approximately 3.7% on a cash basis for the first quarter and up 3.1% on an accrual basis. These metrics included net termination fee paid during the quarter.

While such fees may cause volatility between quarters, this is a recurring income source for Piedmont as we received between $2 million and $3 million of net termination fee income in each of the last five years.

From our reported core FFO perspective, this termination fee income does not impact the comparability of our overall results for the current quarter when compared to last year.

The current quarter’s $1.4 million higher termination fee income, plus $1.5 million property management income related to construction fees, are offset almost entirely this quarter by $2.8 million higher general and administrative expenses for non-cash compensation accruals related to our total shareholder return performance and more significantly due to the stock price rising in the REIT sector.

Turning to the balance sheet, our average net debt to core EBITDA ratio for the first quarter of 2019 is 5.8 times, unchanged from the end of last year. Our debt-to-gross asset ratio was approximately 34.9% at the end of the quarter and 88% of our debt was unsecured.

We have no maturities until 2021 and we have approximately $422 million of capacity available on our line of credit as of today. Any near-term cash operating surplus and disposition proceeds will be used to fund acquisitions and/or pay down our line and lower overall leverage.

At this time, I’d like to reiterate our $1.74 to $1.80 guidance for core FFO per diluted share in 2019. The core FFO guidance incorporates the sale of One Independence Square in Washington DC during the first quarter of 2019 and the removal if it’s a core-based NOI contribution, which was approximately $10 million in calendar 2018.

It also adds the current estimated contribution to net operating income and FFO from the acquisition of Galleria 100, and it includes updated leasing forecasts and updated anticipated operating expenses. No other significant capital markets activity is embedded within this guidance.

Also with a few large leases in abatement in the first half of 2019, such as the 254,000 square feet, Schlumberger lease in Houston along with the anticipated downtimes beginning in the middle of this year for leases in Orlando, within Atlanta, our assumptions related to same-store NOI growth remain unchanged.

That is in the range of 1% to 4% on both a cash and accrual basis in 2019. However, we project a core-based NOI growth will accelerate in 2020 followed by meaningful growth and cash NOI growth in 2021. As previously disclosed, leases commenced as abatements on over 700,000 square feet of commenced leases, burn off.

And that’s two large leases in particular I renewed in New York. We anticipate these to be completed with negligible abatement periods and sizable step-ups in accrual base rents. With the existing portfolio of properties, our year-end lease percentage in 2019 is expected to stay around 93%.

Keep in mind that upcoming lease expirations and with the anticipated backfilling of those spaces, we expect our lease percentage to dip during the second and third quarter, but then increase back to 93% by the end of the year. We do continue to believe that the company will be a net seller in 2019.

Therefore, we will keep you informed of all capital markets transactions as they occur, and what we believe the impact of such activity will have on our annual projections. With that, I’ll now ask our operator to provide our listeners with instructions on how they can submit their questions.

We will attempt to answer all of your questions now or make appropriate lighter public disclosure, if necessary.

Operator?.

[Operator Instructions] Our first question comes from Barry Oxford with D.A, Davidson. Proceed with your question..

Great, thanks guys. Brent, you did a good job on the New York State lease and explaining that.

Is there any more color on the city and would we might see the same sort of thing happen with the City as far as maybe move into a short-term, because they need extra time to kind of get their ducks in a row, or would you anticipate signing a full leaf right off the bat?.

Hi, Barry, thanks for joining the call today and appreciate your time. I wanted – in regards to the New York City, there is still about a year out. So I think it was a bit premature to really have a lot of insight into the pace of our negotiations.

I would say that we did engage the New York State two years prior to their expiration and we had the same approach with the City, so we’re about halfway through that process. And really now, I guess the main ingredient is between here and the end of the actual lease and expiration, which again is in April of 2020.

It’s always a little, I guess, the answer is, it’s difficult to say. I think we continue obviously to push and use that ending and expiry is a means to try to drive them to execute, obviously sooner.

With the State, we had the unique situation where the paperwork and just the number of agencies that are coming in and out of the building are complicated. So we were able to get that four month extension and get a – basically maintain the higher cash rate that we’re receiving today.

But that obviously means that the GAAP income from that long-term lease has been delayed slightly..

Right, right. Great. And then switching gears, Brent, real quick. I really will site [ph] the acquisition that you talked about, 100 in the Galleria in Atlanta.

When you’re looking at your strategic pipeline, are there more properties like that in there, and if so, maybe – obviously you can’t tell us the property, so maybe you could point to the cities that we might see some acquisition activity?.

So we’re really excited about Galleria 100.

And really the strategy behind that again, focusing on where large corporates want to be pro-business environment, walkable amenities and also getting scale, which certainly Galleria 100 helps us to continue to drive scale in that northwest submarket of Atlanta, we do have and continue to see a number of compelling properties that we think are big discounts to replacement cost that are well located and have a growing kind of urban infill amenity base around it that we can still stabilize in very mature assets and then redeploy those accretively into quality assets that we can then further drive both NAV and cash flow growth.

Galleria 100 are perfect example of that and we’re still seeing more opportunities in our pipeline in Atlanta, Boston, Dallas, Minneapolis as well. And we – we’re very enthused by some of those opportunities that we see. But of course, everything – it’s not done until it’s done, and in fact, Galleria 100 itself is not done.

We do anticipate though to close on that in mid-May.

But we do have as well in terms of growth within the portfolio, not only on an acquisitions basis in that accretion, but development opportunities as well and I think those two opportunities really reside mainly in Lake Mary right now, and then also near our headquarters here in Atlanta in the Central Perimeter.

And we continue to see interest although it’s early in both of those locations from tenancy..

Great. Thanks so much guys. And I’ll leave the floor..

Thank you. Our next question comes from Dave Rodgers with Baird. Please proceed with your question..

Yes, good morning. Don, just wanted to say, we don’t see any congratulations and good luck and the recent trackers, it’s been really good to see. So, wanted to leave you with that.

Wanted to turn to – Brent in terms of asset sales, while these comments have suggested that you would continue to be a net seller this year, can you talk about kind of what’s in the market, what might be up next and how you’re thinking about that?.

Yes, Dave. Appreciate again, the time today and you during the call.

We continue to really focus on our I call them paving [ph] properties, but the non-core assets in Philly, in Houston, although I think probably Philly is a little bit more near term, executable in Houston given we still need to get some of the tenancy transition into the building and that opportunity, but those are probably top of the list in terms of putting them into the market and then we being able to redeploy those proceeds into our eight core markets.

But then we – as with One Inde, we continue to evaluate those assets that are very well leased, have good credit tenancy and long-term weighted average lease terms that might be to a point where we again, maximize value under our ownership and we would sell those. But nothing is specifically at that point on at the moment..

Okay, great. That’s helpful. And then DC is obviously – continues to be kind of the lower occupancy component of the portfolio and the biggest opportunity.

Can you dive a little bit more either Brent or Bob into the leasing activity that you’re seeing there? Any kind of hope to pick up activity in some of the vacancies especially in the RB corridor?.

Yes, Dave as usual – by the way, thank you very much for the comments and I’m sorry [indiscernible] NAREIT but like I said if anybody wants to pick a phone, my number won’t be changing. But I’m going to throw it to Bob for the Washington comments. I think he is obviously much more qualified to do so than anybody here in Atlanta..

Yes, I think that in the metro area, really the drivers of growth these days are co-working and technology and kind of the negatives are law firms and GSAs. So the way that plays out is in the district, you’re kind of at a neutral spot where you get some gains and you get some law firms as you get these consolidations.

In Virginia, you really are seeing net growth. You don’t have the GSA consolidating the law firm effect and it’s definitely where more of it – positive impacts are being seen.

The obvious one at the moment is Crystal City, and the way that really helps us is they have been the low cost provider for the past five years of office space and that’s completely changed. Their rents are going up, the occupancy is going up, so that really has been dialed out.

So I think that will really help anywhere in Arlington and other markets, too, but particularly on the RB corridor getting rid of the low-cost offering that they had at Crystal City..

And Dave the only thing I’d add to that is, we like to remind everybody that we have virtually no rollover for the next five years in Washington DC. And so, although we are continuing to sort of whack away getting the occupancy up in that market, we don’t have anything going out of the back door anytime soon.

So everything that Bob’s able to accomplish is good net pickup for us. So that’s the best news out of DC for us..

Okay, great. Appreciate the color. Thanks guys..

[Operator Instructions] Our next question comes from Patrice Chen with JPMorgan. Please proceed with your question..

Hey guys. So regarding the $2 million in property management fee from construction work that you guys did around in assets, do you see this as like something that has become more prevalent in the business or is it more just like a one-time thing for the year? Thanks..

Well it was $1.5 million. This is Bobby, Patrice. Thanks for the question. And it is sporadic. So I wouldn’t model that in and say an ongoing recurring item..

Gotcha. Thanks..

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

Thank you, operator. I think as we sometimes do, we end up getting call time, same time there is another call and sometimes those calls are more intriguing than ours, so there are probably fewer questions than we would normally expect. But obviously, we had another great quarter.

I’m going to be really not to be participating in these quarterly calls going forward, but I’m sure the group will do a great job for you, and I look forward to get snap with everybody else as we move forward..

Thank you. This does concludes today’s teleconference. You may disconnect your lines at this time and have a great day..