Good morning, ladies and gentlemen, and welcome to the Piedmont Office Realty Trust Fourth Quarter 2020 Earnings Call. At this time, all participants have been placed in a listen-only mode and the floor will be open for your questions and comments following the presentation. It is now my pleasure to turn the floor over to your host, Eddie Guilbert.

Sir, the floor is yours..

Thank you, operator. Good morning, everyone. Thank you for joining us today for Piedmont's fourth quarter 2020 earnings conference call.

Last night, we filed an 8-K that includes our earnings release and our unaudited supplemental information for the fourth quarter that is available on our website at piedmontreit.com under the Investor Relations section.

During this call, you'll hear from senior executives at Piedmont and they will refer to certain non-GAAP financial measures, such as FFO, core FFO, AFFO and same-store NOI. The definitions and reconciliations of these non-GAAP measures are contained in the earnings release and in the supplemental financial information.

Also 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.

These forward-looking statements address matters, which are subject to risks and uncertainties, and therefore actual results may differ from those we anticipate and discuss today. The risks and uncertainties these forward-looking statements are discussed in detail in our press release as well as in our SEC filings.

We encourage everyone to review the more detailed discussion related to risks associated with forward-looking statements in our SEC filings.

Examples of forward-looking statements include those related to Piedmont's future revenues and operating income, dividends and financial guidance, future leasing and investment activity, and the impacts of the COVID-19 pandemic on the company's financial and operational results.

You should not place any undue reliance on any of these forward-looking statements in these statements speak only as of the date they are made. At this time, our President and Chief Executive Officer, Brent Smith will provide some opening comments and discuss our fourth quarter and annual results and accomplishments.

Brent?.

at Wed Feb 17 05:43:00 2021 ]roughly 9% stabilized cap rate. As we announced in conjunction with last quarter’s call, we completed a portfolio sale consisting of our last three properties remaining in Northern New Jersey. And as part of this transaction, we did provide secured seller financing at a weighted average interest rate of 7%.

During the fourth quarter, we also acquired 222 South Orange Avenue for $20 million, a property which is connected to our 200 South Orange Avenue in downtown Orlando. And share several building systems as well as the key entry points with that asset.

The acquisition provides our existing office tower with direct frontage on Orange Avenue, the de-facto main street in Orlando’s central business district. And we have already begun a redevelopment of the property and expect to be completed in about 12 months to 16 months.

Upon completion, our downtown Orlando portfolio will represent a preeminent destination for the market and will reflect our environmentally sustainable priorities. As I have noted, we're seeing a more intense focus on our landlord's ESG platform by our tenant base.

And in that vein, I encourage all our listeners to review our most recent annual ESG report that is available on our website.

You will see our board level emphasis on measurable improvements to address climate change risks and other environmental concerns along the proactive steps to promote social justice, diversity and community involvement, including the formation of the Piedmont Scholarship Program at two historical black colleges and universities.

Finally, I would like to point out that during the fourth quarter we repurchased approximately 2.2 million shares of common stock at an average price of $14 per share or approximately $30.6 million.

We will continue to utilize the share buyback program in conjunction with acquisitions and development – redevelopment to accretively recycle disposed disposition capital. As of quarter end, board-approved capacity remaining for additional discretionary repurchases was approximately 170 million.

At this point, I'll turn it over to Bobby to walk you through the financial highlights of the quarter and provide our initial guidance for 2021.

Bobby?.

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

For the fourth quarter of 2020, we reported $0.46 per diluted share of core FFO, which is comparable to the fourth quarter of 2019. Annual core FFO for 2020 was $1.89 versus $1.79 per diluted share for 2019, reflecting the $0.10 increase that Brent mentioned earlier.

AFFO was approximately $36 million for the fourth quarter, well in excess of our current quarterly dividend level. On a year, over year basis, same store net operating income ended where we expected, which was slightly down on the cash basis and relatively flat on an accrual basis.

The decrease in cash based same store NOI was primarily attributable to the deferral of rental payments discussed previously as a result of rent relief agreements entered into during the year. I will note the pace of such agreements slowed dramatically in the fourth quarter with only five small agreements being put in place during the quarter.

Our same store NOI on accrual basis in 2020 was impacted by a few items, including our establishment of a $4.6 million general reserve for potential collectability issues.

The write off of a few tenants straight line rent accruals, the impact of less than originally forecasted new tenant leasing and a reduction in transient parking revenue, all of which are closely tied to the impacts of the pandemic.

While individual quarters vary greatly in terms of the number of leases and the size of those leases completed, 1.1 million square feet of leasing was executed during 2020. And cash rents for these increased on average, approximately 3.5% and GAAP based rents increased over 10%.

Turning now to the balance sheet, our average net debt-to-core EBITDA ratio as of the end of the fourth quarter of 2020 was 5.8 times. And our debt-to-gross asset ratio was approximately 34.4%. We currently have the vast majority of our $500 million line of credit available to us.

And debt maturities in 2021 included a very small mortgage that matures during the third quarter and a $300 million term loan that matures during the fourth quarter. At this time, I'd like to turn the focus to 2021 and introduce our guidance for the year. We currently estimate core FFO for 2021 to be in the range of a $1.86 to $1.96 per diluted share.

Certainly the pandemic will still represent challenges in 2021, but we believe our strong credit worthy tenant base, our attractive amenity rich locations that are easily accessible by car and not dependent upon mass transit, combined with low-lease expirations projected for 2021, our limited exposure to transient parking income, and our limited exposure to retail and co-working tenants, as well as our prudent balance sheet which includes a $4.6 million general reserve for lease related receivables all will contribute to stability, competence and greater predictability than last year in our anticipated operating performance.

Our guidance does not include any speculative acquisitions or disposition activity. We'll update this guidance upon such activity. However, our 2021 asset recycling if any, in total is expected to continue to be accretive as our recycling transactions have been over the last several years.

Based upon these estimates, same store NOI growth is expected to be between 3% and 5% on both a cash basis and accrual basis. We also believe there'll be a slow gradual ramping up of business and leasing activity over the year with a return to more typical state of operations in the latter portion of 2021.

While our occupancy over the last few years has been impacted by the dispositions primarily of large, fully or near-fully leased assets, we expect our current portfolio’s overall occupancy to improve 1% to 2% by year end.

We anticipate updating and narrowing this guidance around mid-year as we learn more, as vaccines become more fully distributed, as more schools have reopened and as herd immunity is more widely expected.

It's also important to note, as you prepare your financial models that our quarterly earnings can vary about $0.01 or $0.02 based upon the timing of seasonal expense items and the volatility of certain accruals, such as potential stock-based compensation. We'll be happy to work with you on your individual modeling questions at the appropriate time.

However, right now I'd like to ask our operator to provide our listeners with instructions on how we could submit their questions. We'll attempt to answer all of your questions now or we'll make appropriate later public disclosure, if necessary.

Operator?.

Certainly. Ladies and gentlemen, the floor is now open for questions. [Operator Instructions] Your first question is coming from Dave Rodgers [Baird]. Your line is live..

Hey, guys, it's Nick on for Dave. Just want to go circle back to that over 500,000 square feet of leasing to start the year.

Can we get a little additional color on maybe the mix between renewals and new leasing? And then also like where the geographic regions are for that?.

Sure, Nick. Thanks again for joining us this morning. Part of that desire to put that into our materials was really to help give real-time. I think as we continue to talk to investors, they want to understand what's going on, on the ground. And so we did want to provide a little bit more color.

As you think about the combination or the split between new and renewal leases, I'd say that that level is in line with kind of prior quarter splits, if you will.

And I'd say it's in various parts of the portfolio, not necessarily concentrated in any single market, but we've seen the activity on just the number of leases signed, pretty consistent across both Boston, Dallas, Atlanta as well. And so we'll continue to – we think see that pipeline growth through the year.

But we were pleased and wanted to share that we've already made a pretty significant achievement relative to what the leasing momentum was in 2020..

Yes, that was some surprising good news to start the year.

I guess, going back to what you mentioned on like utilization, I guess we kind of have an idea of what markets are performing better on the returns to the office, but I guess maybe like the industries or the tenant size that you're noticing that are being in the office more than like other tenants?.

We continue to see small tenants have really come back a little bit more in force than most of the other tenants and say, large national corporates probably be the most timid in coming back to the office.

If you think about markets though, and kind of tenant size, so it costs less than 25,000 square foot type tenants, and we're seeing, obviously, it's been widely reported, just general economic activity is more robust than the Sunbelt. And no surprise, that's where we do see the higher levels of utilization.

That's not to say we don't have, for instance, government-related or critical business operations elsewhere in the portfolio, where we're seeing almost 100% utilization, but I think that's the generalities that you're probably more interested in.

We're seeing it really translate also to a leasing pipeline activity, being more active in those markets as well..

Okay. And then last one for me, like moving to the portfolio, I know like prior calls, you mentioned the possibility of maybe monetizing some of your assets in stronger markets, such as Cambridge.

I guess, is that still the case? And then turning to non-core portfolio, you trimmed a decent portion of that with 1901 Market and then the New Jersey portfolio in Q4.

I guess, what are your plans as we look ahead into 2021?.

at Wed Feb 17 05:48:00 2021 ]our 25 Mall Road building up in Boston, completing the 200 South Orange Avenue Campus now with the acquisition of 222 South Orange Avenue, really creating a preeminent product there at Downtown, Orlando.

And then of course, we're continuing to build out the phases of redevelopment at the Galleria in Atlanta, and hope to have more to share with the market on that this summer. And of course our big boy right now is 60 Broad, and that's really related to the leasing, obviously with the state that's completed and the New York City that's underway.

So we'll continue to evaluate those from a capital allocation standpoint as well as our buyback program appropriately within that same historical framework that we have in the past..

Great. Thanks..

Your next question is coming from Anthony Paolone [JPMorgan]. Your line is live..

Thanks. Hi, everybody. First question is on the 500,000 square feet of leasing here in the first month or two of the year. What does that do to the expiration schedule? I guess, because you only have I think in the supplemental 900,000 square feet this year.

So, how much of that kind of knocks out this year versus future years?.

I would say very little of that actually reduces the 2021 expirees. We've talked about, and you've heard me mentioned, Tony, we continue to have meaningful dialogue with these larger corporations and technology companies, who know their businesses really well, moving wholesale divisions or groups or expanding, et cetera.

And so we've been sharing that dialogue and we've continued to see that translate now into some leasing activity. And we think that's going to be a positive that we'll want to share more detail with the market at the end of the first quarter, but overall that 2021 expirees still stands at about 5.8%.

It was an early – series of early renewals and some new leasing that's really comprising that 500,000 square feet..

Okay, got it.

And then is there a way to characterize just from what you've been able to execute so far and where your market discussions are, kind of where the all in net effective rents are landing compared to say pre-COVID levels?.

It can vary by market. And right now I'd say we're seeing again, the most activity in the Sunbelt. So that's where the majority of our data points come from as well as Boston. But in generalizing, I'd say net effectives because concessions have moved up, call it, 10%, 15%, while rates have still held steady.

So we've seen that effectives right now depending on the market, declining where from 5% to 10% just depending on the dynamics. But I think we view if you've got a larger indoor credit worthy tenant looking for space, we're going to fight for them.

And right now in this marketplace, I think that's pretty reasonable to say those net effectives have been deemed. But we are pleased that ourselves and other landlords are holding rent.

Despite the sublease space that is coming on in some of our markets, I think you have to peel back the onion a little bit and examine that a lot of that is not of the same quality and or duration that we provide as tenancy within the portfolio.

So we still feel very good about our – where we are positioned in the market and where we're able to accomplish deals. I would say overall, we still feel like the mark-to-market and the whole portfolio of the leases still around that 5% to 10% level depending on market and building obviously..

On the 5% to 10% on the positive side for the whole portfolio?.

Yes..

Okay. And then maybe a couple for Bobby.

The $2.6 million termination fee from WeWork, is that something we'll see I guess in the first quarter? Or is that in the guidance like where's that show up?.

Yes. Tony, this is Bobby. It is in our guidance, each year for the last several years we've recorded between $2 million to $3 million per year of termination fee income. In 2019, it was 2.8 million, believe it or not in 2020 is $2.8 million and in 2021 is exactly the same thing right now we're forecasting $2.8 million.

So it's not an unusual item, but we do – but we are able to identify it now and tell you what it is. It will come through as you just asked primarily in the first quarter..

Okay. And then just remind us on that space, you mentioned no work ended up getting done.

Was WeWork teed up to flip that bill or was that part of Piedmont's TI package that now you won't be spending those dollars, I guess?.

That's correct. We were – had a TI obligation and those dollars will not be spent..

Okay.

And then just last one, if I might free Bobby, just any brackets around G&A for 2021?.

In terms of size Tony, that's what you're wondering?.

Yes. I know it's tough with the comp accrual and the stock and stuff, but just kind of what's loaded into the guide..

Yes. In total, maybe $28 million somewhere in that, in total $7 million per quarter or something like that..

Okay. Great, that's all I got. Thank you..

[Operator Instructions] Your next question is coming from Michael Lewis [SunTrust]. Your line is live..

Yes. Great, thank you. So I'm going to lead-off asking about the 0.5 million square feet of leasing year-to-date as well. I think it caught everybody's eye, I think you did about 230,000 a quarter, the three quarters during the pandemic. And Tony already talked about the low-lease expirations this year.

With the 500,000 is there one or two big chunks in there that drive the bulk of that or is this kind of a broader level of activity? I'm just curious what kind of tenants are looking for space right now?.

at Wed Feb 17 05:57:00 2021 ]hen we get into the detail into the first quarter and we can't disclose who that top 20 tenant is at this point in time, but when we can share that and the other detail, I think you'll see that it's very much that what I described is what we're seeing in real time..

Okay, thanks.

I wanted to ask, I was looking through the list of properties that you've got kind of a handful here that are 50% leased or below Two Pierce Place, 1201 Eye, 6031 Connection Drive, Las Colinas Corporate Center II, are those mostly just frictional vacancy or are there, redevelopment opportunities in that group or kind of – are these risks or opportunities?.

We certainly see, many of them as more opportunities than I would say risks. The Las Colinas Corporate Center, I'd start with that one, a great asset right off by DFW, where we've seen a lot of the activity from those larger corporates kicking tires into the Dallas market and it's recently redeveloped.

So we've done lot of amenity package, tenant lounge, fitness facilities great structured parking around that asset, free structured parking. So it has again, ease of access and we had a large center vacate there at the end of last year, which gave us the chance to reposition it.

And we've already done with all of that work and so again, that fits within that encouraging pipeline in Dallas. And see as an opportunity. Our Eye Street assets in DC, we feel like they're well positioned in the market. One has done extremely well.

The other one we continue to frankly struggle with, but the good news is we have very little expirations, expect none in DC.

And we do have traction in that market with a number of tenants, because that is a more of a value priced asset there around the big city center, complex and development where rents are closer to 70 to 80, and we're more in the 50 zip code.

And we feel like that's a compelling offering and we are seeing traction with that now as that market starts to reopen, but admittedly has been slower to reopen than our Sunbelt projects.

I think the other locations that you mentioned, Two Pierce Place would be the one where I would say it's probably in your mind risk, but we view it as a likely disposition candidate. There are a number of large potential users that we're recording right now.

And depending on whether they land or not land will really ultimately decide the disposition price, but you're likely to see that asset go within the next 12 months to 18 months, because it is part of that non-core market set that we have, which really includes the Chicago building and then the two buildings next door each other in Houston.

So that's the one I would maybe deem more as a risk than the others. The others, we certainly view as opportunities..

Great. And then last one from me, just maybe you said this before. What's the term on the New Jersey seller financing once that get paid back.

And I think you said it was 7%?.

Yes. It's a bifurcated note, a senior and a mezz piece, bothtechnically have a term of three years, although I will say we've worked with this buyer before and maybe a little bit of background on the whole transaction would be helpful. So it's always been a strategic goal of ours to get out of the New Jersey market.

And it was a matter of really finding the right opportunity and really have someone appreciate which was at Bridgewater Crossing, one of the premier assets in Northern New Jersey.

It's everything we described in our portfolio that's compelling, walkable, mixed use around it, lots of food and beverage and retail without ever having to get into a car, so really a unique office setting for Northern New Jersey.

But we felt like we had some leasing momentum and given the high quality nature of the asset, we weren't – we felt like it was a good time to maybe see if some of the parties that expressed interest in the asset would be a willing to step up and purchase it, because we had not been willing to part with it prior to that.

They had a few bid on the asset and particularly one group stood out from the others, three parties that we really whittled down to, all when we had prior relationships with. And the ultimate group that won, we have done deals with in the past and utilized a similar structure. So that's a longer winded answer, but I wanted to give you some background.

So that final structure for that again, is the med is at roughly 13.6% as well as senior at 6% – to 7%. I anticipate generally this buyer pays-off the mortgages that we've used for financing within a year. I certainly would expect that on the mezz.

And frankly, I think it's likely on the senior, given the leasing velocity at the asset that we had in tow when we sold the building to them. And we think that is going to come to fruition and give them an opportunity to refinance out of the asset. I know that was a long-winded answer, but hopefully that's helpful..

No, it is helpful. I was going to say, I see those loans now with [indiscernible]. So I apologize for asking a question that was answered in there, but the color is certainly helpful. So that's it for me. Thanks guys..

There are no further questions in the line. I would now like to turn the floor back to Brent Smith for closing remarks..

Appreciate it. I want to thank again, everyone for joining us today. You know, despite a challenging 2020, I want to take this opportunity to one last time, thank the other employees at Piedmont for the job that they've done and really in an uncertain environment to protect each other, our vendors and our tenants.

But we're excited about what we were able to accomplish from growth in 2020 and we entered into 2021.

We've got low near term lease expirations, manageable debt maturities and frankly our portfolio vacancy, which has been pointed out is in the more attractive markets of Atlanta, Dallas, and Orlando, where we're seeing that activity and the pipeline rebuild fastest.

We think that combined with our best-in-class ESG platform and paired with a high quality amenitized environments is going to position Piedmont to do well this year. And we look forward to continuing this dialogue as hopefully the economy opens back up and the vaccine rolls out. Thank you everyone.

And we look forward to talking to you in the second quarter..

Thank you. Ladies and gentlemen, this does conclude today's conference. You may disconnect at this time and have a wonderful day. Thank you for your participation..