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 first quarter financial and operating results.

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's 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 in transient parking and retail revenues as a result of the lingering effects of the pandemic and by a 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%. 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 to 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.

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 really 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 as 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 thousands 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 in my prepared remarks that medium-sized enterprises that take 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 in terms of new leasing activity. I think until the third or 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 to the workplace which we are seeing, I think to really see full activity get back to where it was. If you want to think about market by market, though we still see good activity in 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 that 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 focus on landlords to 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 WeWork being the more notable drag, but then the positives to get to the 87, 88 just being a little more spread out. Is that a 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 at this point?

Yes, let me take a moment to reflect on our interest in that market from ten years ago. We were drawn to the dynamics in Burlington, and Woburn was a nearby market where we were establishing a platform. We recognized an opportunity to acquire an asset that we believed would generate value, leveraging our knowledge and platform while focusing on building our core operations in Burlington. We successfully negotiated with Raytheon, allowing us to enter the market effectively, which we believe could add significant value, possibly around 125 to 150 basis points. In Cambridge, we hold valuable assets and maintain a strong relationship with Harvard, which means we're not in a hurry to sell, especially since that market remains robust. The tenant is well-known, and we view those buildings as a reserve for the right time to capitalize. We are firmly committed to the Boston market, as we see great opportunities to offer desirable office space, especially since competitive office spaces are shifting towards different uses. This shift is leading to increased demand for tenants looking for more space at reasonable rates outside of urban centers, which we view positively. Additionally, there may be an upgrade in credit for one of our noteworthy tenants in that area, which is potentially being acquired by Microsoft, adding value to our holdings. However, we plan to retain our core assets in Burlington rather than dispose of them, while with Raytheon, we saw an opportunity to maximize the value we've generated and moved forward with that.

Got it. That's helpful. And then just last question, the industrious lease. Is that a straight lease that you saw in there or 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 quality operators we think being primarily industrious and WeWork 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 of 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 note 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, etc. 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 a 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 submarkets. 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 are 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 1031 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 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. Let's take a moment to discuss the New York City process and the lease as a whole. The progress we are seeing in New York City's reopening is beneficial for the state and the nation. Employees will start returning next week, and the city is opening up fully on July 1, which is a positive development. However, this process has taken longer than we expected, which is understandable considering the challenges the region faced during the pandemic. As I mentioned earlier, all government leases require us to sign first, which we have done, and then we must coordinate with the various agencies involved. The next step involves a Citywide hearing, and this will be scheduled soon. The mayor's office will need to apply, which means there are still a few more steps before completion. We anticipate executing that interim lease by the end of June. The purpose of this initial lease is to allow time for the necessary design plans for the swing space and to cover the construction period. Once construction is completed, the longer-term 20-year lease that we are currently negotiating will begin. Both Piedmont and the city are involved in discussions regarding that lease. In terms of the economic implications, we view the current rate they pay, which is on holdover, as market rate for unimproved space. The interim lease reflects that market rate with a slight annual increase expected, and there is minimal capital tied to it. Significant build-out will commence once the 20-year lease is finalized, and we are actively working towards that. We required some time, and both parties preferred not to remain in a holdover status.

I appreciate all the color.

Thank you for joining us today. The first quarter was positive for Piedmont. We look forward to continuing our conversation next quarter as we aim to build our pipeline and maintain the momentum we've gained this year. We remain optimistic about how the year will unfold and are excited to speak with you next. If you would like to meet with the company during NAREIT in June, please contact Eddie or Justin Caudill; their information is in the supplemental materials. 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.