Anthony Paolone - JPMorgan Dave Rodgers - Robert W. Baird Michael Lewis - SunTrust Securities Daniel Ishmael - Green Street.

Good day, ladies and gentlemen, and welcome to the Piedmont Office Realty Trust Inc. First Quarter 2021 Earnings Call. All lines have been placed in a listen-only mode and the floor will be open for your questions and comments following the presentation. At this time it is my pleasure to turn the floor over to your host, Eddie Guilbert.

Sir, the floor is yours..

Thank you, operator and good morning, everyone. Thank you for joining us today for Piedmont's.

Good morning, everyone, and thank you for joining us on today's call to review our first quarter financial and operating results.

On the call with me are George Wells, our Executive Vice President of Operations; Eddie Gilbert, our Executive Vice President of Finance and Treasurer; and Bobby Bowers, our Chief Financial Officer, as well as other members of the senior management team. First and foremost, I hope that everyone is and continues to be healthy and safe.

This quarter, we reached a dubious milestone having been in the midst of the pandemic for over a year now. While it has been highly disruptive to the office sector in general, and Piedmont leasing pipeline specifically, we are fortunate that the vast majority of our customers are current on rent and building utilization continues to improve.

Now approaching an average of 25% across the entire portfolio, primarily led by return to the workplace by our small to medium sized tenants..

Thanks, Brent. I'll briefly 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 2021, our reported net income increased to $9.3 million, up 7.3% from the same period a year ago. We also reported $0.48 per diluted share of core FFO up $0.01 over the first quarter of 2020. AFFO was almost $39 million for the first quarter well in excess of our current quarterly dividend level.

Rent roll ups and roll downs on executed leases during the first quarter of 2021 were largely influenced by the significant renewal with Raytheon that Brent mentioned earlier. Accrual based rents increased on average approximately 7% while cash rents decreased approximately 2.8%.

However, excluding the strategic Raytheon renewal, cash and accrual rents for the remainder of the leasing activity, rolled up 8% and 10.1% respectively. Same-store net operating income increased almost 4% on a cash basis and was down slightly on an accrual basis.

The increase in cash basis same-store NOI was primarily attributable to the burn off of significant abatements at 1155 Perimeter Center West in Atlanta, and Arlington gateway in Washington DC. Along with income associated with WeWork determination in Orlando.

These increases were partially offset by reductions and transient parking and retail revenues as a result of the lingering effects of the pandemic and buy 0.8% decrease in portfolio occupancy during the first quarter of this year.

We continue to believe that same-store NOI on both the cash and accrual basis will end the year positively between 3% and 5%. And economic occupancy is also expected to improve with the burn off of over 400,000 square feet of abatement during the second quarter. Our overall lease percentage is estimated to end the year around 87% to 88%.

This estimate is before any capital transactions. Turning to the balance sheet, our average net debt-to-core EBITDA ratio improved during the first quarter of 2021 to 5.6 times and our debt to gross asset ratio at the end of the first quarter remained relatively flat compared to 2020's year-end at approximately 34.9%.

Our tenant rent collections have returned to near previously-COVID levels at over 99% collections. And we now only have approximately $3 million of previously deferred 2020 rents remaining to be paid during 2021. We currently have approximately 90% of our $500 million line of credit available for strategic capital transactions.

Along with proceeds expected later this year from the sale of the two presidential way assets in Boston. We plan to repay the only secure debt remaining on our balance sheet, a small $27 million mortgage once the loan allows for prepayment without yield maintenance later this quarter.

We also plan to go to the public debt markets later this year to refinance a $300 million term loan that matures at the end of November. At this time, I'd like to reaffirm our 2021 guidance in the range of $1.86 to $1.96 per diluted share for core-FFO for the year.

Also as a reminder, this is annual guidance and results vary by a $0.01 or $0.02 by quarter due to lease commitments and expirations as a result of seasonal expenses and other such items. Further this guidance is before any significant capital transactions. We'll adjust our guidance range when such transactions occur.

As Brent mentioned earlier, we are cautiously optimistic regarding our leasing pipeline. But please be reminded there's typically a 6-to-12-month lag between the time a new tenant lease is executed, and when occupancy physically occurs. With that, I'll now ask our operator provide our listeners with instructions on how they can submit their questions.

We'll attempt to answer all of your questions now or we will make appropriate later public disclosure if necessary.

Operator?.

Thank you. The floor is now open for questions. Okay. Our first question comes from Anthony Paolone. Please state your question..

Thanks. Good morning. So my first question is, with regards to the leasing pipeline. I think last quarter you provided a number that was real strong and obviously included Raytheon and it now.

But, just curious how that looks now to give us some color as to what you're seeing there?.

Good morning, Tony, thank you for joining. Happy to provide a little bit more color on the pipeline.

I'd say is we've kind of characterized coming through the pandemic, we were obviously pre pandemic doing about 200,000 square feet of new leasing a quarter roughly, that went to near zero as did most companies leasing pipelines during the pandemic in the early days.

As we've continued to get into the third and fourth quarter, we've seen that trajectory go higher, we were doing call it in the high double digits in terms of 1000s and then up to around 100,000 in the most recent quarters, and now continuing that trajectory even greater in this quarter.

And we continue to see the pipeline build more so quarter-over-quarter. So I'd say that trajectory continues to be very positive. And as I noted in my prepared remarks, seeing the northern markets actually start to have tour activity in person is a very positive sign and actually getting requests for proposals.

Our prior leasing was almost predominantly in the Sunbelt, with a little bit sprinkled throughout the other northern markets, mostly on renewals, and a few new deals. But we're seeing that creep up as well as, as I noted, my premier prepared remarks that medium sized enterprise that takes 15,000 to 25,000 square feet, at least submit RFPs.

And we're scheduling tours. So I think incrementally, it's nice to see those two years or segments come in further into the market. But still, clearly, we're not going to get back to those pre pandemic pipeline levels into in terms of new leasing activity.

I think until third, fourth quarter of the year, it's really going to take a little bit more positive momentum behind the vaccine and people getting a little bit more comfortable and returning the workplace which we are seeing, I think to really see full activity get back to where it was.

If you want to go think about market by market, though we still see good activity and all our Sunbelt markets, Boston to a lesser extent Northern Virginia, Minneapolis, but New York still trails overall in terms of that new leasing pipeline activity. I'd say it -- that's how I'd characterize it.

Anything else more specific?.

No, that's helpful. The 86% lease that you had at the end of the first quarter and Bobby had mentioned 87% to 88% for year-end.

Any big puts or takes in either direction to watch out for by market or buildings?.

I think they've been mostly put are well known as the market we work is the one that will be coming out that so size in Orlando. And other than that, no, I don't think there's anything dramatic and nothing of size for quite some time. If you look in our large tenant list, the really the next larger tenant is not until the end of '22.

So we feel pretty good about having low expirations limited kind of big hits and the opportunity to capture what we think is going to be continued to focus on landlords deprive provide a high quality product, and a service with a focus on initiatives that are important to both corporations in their workers as well as I noted in my remarks.

So all things that we see with only 4.7% of our own ARR rolling in the rest of '21. And once we conclude the New York City lease, '22 also gets a lot shorter. We feel very good about our runway to achieve those occupancy levels by the end of the year..

So we work being the more notable drag, but then the positives to get to the 87, 88 just being a little more spread out.

Is that fair characterization?.

Absolutely..

Okay. And then on Boston from a capital markets point of view. Now you're putting Raytheon for sale. And I think last quarter, you talked about Cambridge, being a potential sale candidate.

What are the prospects or thoughts around just your exposure to Boston, this point?.

Yes, and maybe I'll take an opportunity here, Tony, and take a step back and explain a lot of how we thought about our really interest into that area in that market 10 years ago. And as a good, maybe illusion to what we might do if we were to ever enter a market elsewhere, or even a sub market.

And that was to say, we liked the dynamics and Burlington, Woburn was an adjacent market, and we were building a platform in Burlington, but saw an opportunity that could get an asset.

That was, frankly, we thought, a good way to create value, use our market knowledge, use that platform, but knowing all along, we were going to build our core base around Burlington. And so we were able to get Raytheon to extend to a level where we are able now to push that into the market.

We think create a lot of value on the cap rate in that process, probably to the tune of maybe 125 to 150 basis points. We'll see. And so we were then able to kind of think about our opportunities to recycle that. Now, in Cambridge, we've also got great assets. And we've continued to have a great relationship with Harvard.

We don't feel in a rush to sell those necessarily. I think that market is quite strong. That tenet is well-known that at the right time will -- as I have coined that use those as our piggy bank. But we're still very committed to the Boston market.

We think there's a lot of great opportunity to continue to provide good office space, particularly as a competitive office space has continued to use, pulled into other uses.

And really creating the need for tenants that are more than the urban core looking for, as we've talked about in other calls, a more reasonable rate and more space for their employees. So we continue to see very positive things in that market.

I would also note maybe a credit upgrade from our nuance tenant in that market, which is potentially being acquired by Microsoft, and a full building user there. But that's a core holding again, in our bought Burlington, a market I wouldn't anticipate disposing of that one.

But with Raytheon, we saw a chance to really harvest the value created and we launched that it..

Got it. That's helpful. And then just last question, the industrious lease.

Is that a straight lease that you saw in there is that a like a revenue sharing operating type deal?.

Yes. I think it's that bag that just to be clear, is it really a replacement of an existing co-working operator. As we've talked about on prior calls, we've taken our operating risk or counterparty risk, if you will, and spread it across a number of operators. We were being one but also some local operators.

However, the disruption in that sector has been meaningful and as time has gone on the equality operators we think being primarily industrious and we work or we think it's going to drive incremental tenancy. Again, it's not an additional exposure to co-working and so co-working still comprises only 2% of ARR.

We replaced a company called make offices with industrious. It is a lease with a revenue sharing component, but it is a lease..

Okay. Great. Thank you..

Okay. Our next question comes from Dave Rodgers with Baird. Please state your question..

Yes. Good morning, everybody. I wanted to touch on the Raytheon sale. It sounds like those have been in the market maybe 30 to 45 days. Brent, can you give us some color on kind of the appetite and maybe the timing of closing something? And then the flip side of that question is you obviously want to reinvest that you mentioned that in your comment.

Can you talk about what the reinvestment pipeline looks like today? And is there sufficient opportunity in your mind to then bring more assets to market this year to pursue that pipeline of activity?.

Good morning, Dave. Yes, so again, touching on Raytheon. We kind of had a unique situation where we were able to extend that tenant and get that 10 years a term, which as I noted before, we felt really created a lot of value. On top of that it was a low capital deal. So we were able to keep a lot of that down in our metrics for the quarter.

But I would know it was a slight rollback on the rate, modest mid-single-digits, we felt like that was more than made up for what the cap rate might achieve in the market. As you know, we've been in the market now not even 30 days really, it takes a little bit of time to get people under CA's, et cetera.

So at this point, it'd be a little bit early overall to comment. But I would say as you can imagine, Boston is a very hot market, it's got a credit worthy tenant with long-term lease, it should do very well, we think. But I think it'd be too early to tell. In terms of timing, that's also a little bit tough to pinpoint.

And the reason being is this is a very strategic asset for the user. And as I would anticipate this may require some government approvals, and dictate exactly how long that might take depends on the ultimate buyer. And ultimately, we'll be able to shed a little bit more light on towards that on the next call.

But in terms of then redeploying that capital, and how we think about things. We're looking at several acquisitions, both off market, and a few on market, most off market. But they're all strategic opportunities in our core markets and sub markets.

And as we've thought about on the past day, today, we think of initial yields in the 6% to 7% range, where we can create value. We feel like we're in a good position to pursue acquisitions. And we've got a pipeline for potential deals and we think that's growing.

I would say at this point in time, as we think about capital allocation, probably developments further down the list. We feel pretty good about where the stock trades today and see some opportunities that are better and assets for growth.

And then, of course, we always have the alternative to pay down debt if we needed to with a little bit on the line currently. But I think you'll find us be able to marry that disposition. Well, as we have done in the past with an acquisition, there is a modest gain there. We think that would be a taxable gain that we can handle appropriately.

But ideally, yes, you'd like to 10.31, if possible. Is that helpful..

I appreciate that color Brent. I guess, I wanted to ask in an asset like enclave where maybe the credit isn't as good.

Is that something that you could perceive bringing to the market, and redeploying as well? Or is the market not strong enough for that type of tenancy just yet?.

Yes, I think Dave as we think about the non-core portfolio. We've got realistically a little bit of maybe a few months on two periods place in terms of trying to get a tenant that's in tow, when I searched for land that. But in any case, that's the non-core asset. I think that I'd like to definitely get out the door this year.

As I think about the two Houston assets, given the credit in Schlumberger, maybe that one's a little bit more primed. But as we continue to see oil recover, and Transocean is paying rent now. Cash rent it is an opportunity to potentially monetize that asset.

But I think it's more likely to be a next year event this year event, as we think about that specific one with TO..

Helpful. And then last, for me on the New York City renewal sounds like that it'd be midyear and you didn't make the comment that it would be consistent with terms in the past.

I guess, I just wanted to go back and reconcile are we talking about kind of terms on, this would look like a long-term deal, just in a shorter form until you're done? Or would this look like the holdover rents? I guess I just wanted a comparison between kind of holdover and kind of where we go there the impact of this year's financials..

Yes. And maybe, I'd say take a step back. And let's talk about the New York City process and lease in whole.

I'd say, overall, all the incremental progress we're seeing in New York City opening up is a great thing for in the state of New York and the country, frankly, and in 50 broad there in New York City employees themselves are actually returning next week and I saw it this morning, de Blasio opened up the city 100% starting July 1 to all very positive things.

But unfortunately, as we've taken through this process, it's certainly been more protracted than we anticipated. But rightfully so, given what that region has dealt with and had to contend with a pandemic. So, as I noted in my prepared remarks, all government leases require.

We signed first, which we've done so and then follow through with the various agencies that occupies. The next step will be a Citywide hearing. And there'll be put on the calendar. The mayor offices will have to apply, so there's a few more steps. But we still think that gets executed sometime around the end of June, that interim lease.

And so that initial lease was really designed to provide the time required to complete their swing space, design plans and cover what would be a construction period. So once that construction is complete, that longer term 20-year lease that we're still negotiating would commence. And both Piedmont and the city are engaged on that longer term lease.

So that's how we kind of think about that overall process. Now getting your initial question, which is -- what's that mean from an economic standpoint? You're exactly right. We've thought about the current rate that they pay today and hold over as being what I've called market for unimproved space.

And so roughly what they're signing that interim lease is at that market rate, with a modest annual escalation is anticipated. So there's very little capital associated with the lease. All that kind of significant build out would be triggered once that 20-year lease is executed and again, we're working on that.

But we obviously needed some time, and neither group wanted to have this continue to be in a holdover status..

I appreciate all the color..

I would note that the term of five years is from the date of execution by all parties..

Got you. Thank you..

Okay. Our next question comes from Michael Lewis, SunTrust Securities. Please state your questions..

Thank you. When I think of work from home threat, I don't really think of city of New York or Raytheon. But Raytheon has been a company that has talked publicly about reducing square footage, maybe in their case, because they're reducing headcount in certain areas.

But is there any change, in either of those renewals in the way that the companies intend to utilize the space? Or their philosophy on hybrid work or anything else like that? Or have you seen anything else tangible anywhere else in your portfolio yet?.

Good morning and I appreciate the time today, Michael. It's surprising and we're still learning more day-by-day, as you talk to more and more tenants, more and more architects, and more and more CEO's thinking about their business longer term.

It's surprising that I think people are coming back to a very similar design space that existed in many offices, not everyone.

But bench style seating is definitely fallen by the wayside, more perimeter offices, open areas, but absorbing the light from the window line, which is why the window line is important into the center portion of the core of the building. But overall space planning and space needs has not materially changed for those two tenants, specifically.

Raytheon will continue to operate and very much the same footprint and the New York City is going to need it refreshed given a 20-year-old -- now 22-year old space. But it's very much in the same vein is to what it was designed to be beforehand.

And so similar with the New York City, though pre-pandemic, they went to a design that was utilizing a little bit more, average space that they had before per employee.

But utilizing team building space and conference room space more efficiently, we created their own little, we work area on about a 20,000 square foot floor printer, one of the floors that was shared conference just for the various agencies.

So they're getting creative in their own way, I think you're just going to continue to see that in the design process and focus on collaboration space, but we're not seeing at this point, I could point to them, I could point to Lux here in Atlanta, which is a sub tenant but redoing 170,000 square feet.

No material change right now, which is a little surprising in our regard -- our mind. But as I talked about, in the call a much greater focus on the service, and the physical characteristics of the building and the quality of the landlord more than ever before..

Thanks. That's interesting. We finally have a 10-year renewal so look at and sounds like not a lot of changes, at least for them. My second question is kind of a two part on that kind of shares a theme though. You talked about the expectations for selling the Raytheon asset.

Did Raytheon know, you might market that property for sale? And does that impact the lease negotiation at all? And I've mentioned there's a second part.

The second part would be the city of New York, care doesn't enter into the talks at all, whether you may not be the long-term landlord for them at that property if you decided to sell that after a long-term lease besides?.

Good question. Take them in each in separate part. I think in the instance with Raytheon giving its a seat to sole tenant in the building, and as we've had a deep relationship with that firm at that location for 10 years now. I personally negotiated the last renewal prior to this. So knew that the Raytheon team and their representatives very well.

I know they're very astute, I think it would be naive to think that they didn't understand that there was that potential, and that we were -- had always asked to do more than a five-year renewal. And they always had rebuffed. But in this instance, we saw an opportunity, I think they did too.

And that's the only reason why there was a modest rollback in the rate, because there was very little capital. And we felt like we were creating a lot of value. And obviously, they probably want to distract a little bit of that value as well. But again, that was not really a significant part of the negotiation.

But it obviously had to play into their minds, I would think. But that's speculation, and I do not know..

:.

I would say no, and that has not proved to be a point in the current interim lease that we just executed. But also that's also not a single tenant building. And is also provides the city with the various I've talked about prior calls.

It's very unique building within a building their own elevator bank, it fits their uses very well, particularly at that value price point. So I don't think in that regard, it's going to be a lever or on their mind at all, versus was raised here, and I would suspect, they were aware..

Okay. All right. Thank you..

Our next question comes from Daniel Ishmael with Green Street. Please state your question..

Great, thank you. Pretty similar to the question asked about work from home previously. I'm curious how you're thinking about Minneapolis as a market long-term. I know the closer to the CD is the limited, but with a target sublease news recently.

I'm curious how you'd rank markets relative to your other core markets?.

Good morning, Danny. I appreciate you joining. In regards to Minneapolis specifically, I think we know we've been a long-term operator in that market and we enjoy being one of the £800 gorillas in terms of being a major player and deep relationships with a lot of corporations that operate within that market.

So we still view our platform and capability there as being one that gives us an advantage and we're still committed to the city.

As we continue to talk very closely with the tenants that we have both downtown in the suburbs, I would say there's obviously more disruption downtown, given what's been going on with the pandemic and also with social unrest. The good news is, to some degree, the city is moving forward and continue things continue to open up from the pandemic.

And things continue to move forward from the social reform aspect within the city. So businesses are getting more constructive and returning back to the workplace, which is a positive, we're starting to see some of that tour activity picked up particularly in the suburbs. I think it's still to come in downtown.

But overall, we're still very optimistic about the city. It provides a great kind of work life balance that we've talked about.

The ability to attract large corporations, great airport, good education systems and neighboring markets, the feed into it, location advantage for our asset downtown right next to target headquarters, and very little competitive sublease space that would I would concede being superior to ours in the downtown market.

And as I note, the suburban market continues to kind of perform as I would have expected any of our other northern markets at this point..

And then moving….

I would note that we do load in that market for the next two years. Sorry..

No, no. That's helpful. Next one is on your land bank. And with the rising construction costs.

I'm curious how you perceive that impacting the attractiveness of development these days?.

I'm sorry, was our last point the choppiness of the what?.

The attractiveness of development these days?.

Attractiveness. Yes. Interesting, we've been watching commodity prices continue to accelerate. And certainly right now there is, I think a supply chain constraint. That's going to continue to keep those materials for construction elevated for probably at least the next 12, maybe 24 months.

So if you think about that impact on your ability to start a construction project, it's going to obviously impact it's going to be very difficult to get GMP pricing. But most leases with prospective tenants typically have some sort of flex component to it related to the cost.

So you're able to some degree cushion against that if you were to found the right opportunity. But at this point in time, I think we're going to be continuing to focus on redevelopment, that's what we feel is a great better risk adjusted return with the right bones and what we're accomplishing in some of our larger-scale projects.

I think that's a better use of capital than ground up development. That said, we have seen more inbounding queries on the opportunities we have potentially in Atlanta and Orlando. But it all is centered around creating that right compelling environment. And right now, I think that probably going to be better done through redevelopment than ground up..

And just last one for me. How are you viewing the mark-to-market opportunity across the portfolio? I know, that's a hard question to answer where depending on certain markets.

But I'm just curious how far above or below do you think the portfolio is -- portfolio rents are these days relevant to market?.

Danny, that's a question we get regularly. And I'd say the one thing through this disruption, it has been a positive is a resiliency in face rate. Now, don't get me wrong, we've felt the pain particularly on the capital end is where most the tendency is trying to beat up their landlords if their scale and credit and not on rate.

And so that's been a positive. So rate is held for most part through our portfolio. Prior to the pandemic, we were saying we were a 5% to 10% mark-to-market. I'd say that still the range that we give and point to is specifically even this quarter ex-Raytheon, which we've explained, not a lot of capital, and so there was another lever there on rate.

But elsewhere, if you exclude that we were 8% roll off. And I think that's very indicative of where we stand today in the portfolio, and will continue for the near-term..

Great. Thanks, everyone..

Okay. Our next question comes from Dave Rodgers with Baird. Please state your questions..

And just a couple of follow-ups, maybe for Eddie and Bobby.

Three questions, specifically, one any changes in the general reserve this quarter? Two, can you give us a little more detail maybe on the sequential change in parking revenue in that component? And then lastly, the $3 million that you have left to collect from last year's deferrals? What's the timing on that?.

Hi, Dave, this is Bobby. I'll try to take the first and last one. While Eddie gets some of the information. You asked about the bad debt reserve. You might remember that we recorded a $5 million bad debt general reserve last year at the onset of a pandemic. That $5 million came from basically as seeing a reduction in collections.

So we said 1% of our annual revenues. So 500 million, 1% and 5 million. The balance is still right at $5 million for tenant receivables and related assets. And just think of that, including straight-line rents, things like that. We still have tenants, primarily retail customers that are on our watch list that we're still trying to track.

And we still have that reserve is I'm going to try to bring in the deferral answer. Outstanding of about little over $3 million related to the workout agreements that we entered. Did about 70 of them $6 million in total and deferrals collected about half of it are reserved is that as protection against that. So that's the status. I imagine.

I think you asked me a couple of quarters ago when we established this, they could some of that come back to you. Yes, I could. But I believe that that would take place over several quarters and that taste and a mouth certainly indeterminable at this point. IS that answer to the questions. And I forgot the third one..

David, as far as the marking is basically, one was in line with Q4. So continuing the trend that you're seeing, again, Q4. And so hopefully that answers that question. I think we would expect as we see more people return to the office that the latter half of the year we're going to see pretty soon..

Parking though Dave remembers only a small percentage of our revenues, I think 1%.

Got you. Yes. Thank you..

Okay. I would like to turn it back over to Mr. Smith for closing remarks..

Well, I appreciate everyone joining us today. It was a positive first quarter for Piedmont. We look forward to continuing the dialogue next quarter is hopefully continue to build -- to the pipeline build and build on the momentum that we've garnered so far this year.

We still remain optimistic on overall how the year will pan out and perform and we're excited to talk to you next. I would say if you have an interest in meeting with the company during NAREIT, and June please reach out to Eddie or Justin Caudill information is in the supplemental. Thank you, everyone..

Thank you. This concludes today's conference call. We thank you for your participation. You may disconnect lines at this time and have a great day. Transcript Provided by.