Good day, ladies and gentlemen, and welcome to the Piedmont Office Realty Trust, Inc. Second 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's my pleasure to turn the floor over to Mr. Eddie Guilbert. Please go ahead, sir.

Thank you, operator, and good morning everyone. Thank you for joining us today for Piedmont's Second Quarter 2021 earnings conference call. Last night, we filed our Form 10-Q in a Form 8-K that includes our earnings release and our unaudited supplemental information for the quarter ending June 30, 2021, which is available on our website at piedmontri.com under the Investor Relations Section. During today's call, you'll hear from senior executives of Piedmont, and they may 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.

Good morning everyone and thank you for joining us on today's call as we review our second quarter financial and operating results. On the call with me this morning are George M. Wells, our Chief Operating Officer; Edward H. Guilbert, 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. I would like to begin today by expressing our hope that all of you and your families are well. The second quarter really marked the country's re-emergence from the economic shadow COVID cast overall at all for the year, along with the related concerns around the long-term outlook for the office industry. Office utilization by tenants has improved across the portfolio and fears of a continued large amount of space being pushed out for sublease have subsided. While still nowhere near pre-COVID levels, tenant utilization of space seems to be improving, roughly 5% a month across the portfolio, and this trend is expected to continue into the fall with several tenant return-to-office announcements coinciding with the beginning of the new school year. That said, our building utilization varies by tenant and by market, with the Sunbelt markets leading the way, with several locations having over 50% utilization. The lowest utilization rates in our portfolio are generally in our few Northern markets and might be best described as being a couple of months behind the Sunbelt markets in recovery.

Thanks, Brent. I will 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. As Brent mentioned, for the second quarter of 2021, we reported $0.48 per diluted share of core FFO, and our AFFO was approximately $42 million for the second quarter and $80 million year-to-date, which is well in excess of our current dividend level. Same-store NOI increased 4.8% and 4.7% on a cash and accrual basis respectively for the second quarter compared to the same quarter a year ago, primarily reflecting the burn-off of abatements at certain properties and the commencement of new leases with improved economics, with previously provided same-store guidance for the year in the range of 3% to 5% for both the cash and accrual basis. However, based upon completed leasing and financial operating results today, we are increasing the same-store cash guidance for the current year to 5% to 7%. Leases executed during the second quarter of 2021 for recently occupied space reflected an 18.2% and 27.4% roll-up in cash and accrual rents respectively, influenced by the City of New York renewal. Both of those metrics would have been strong even when excluding that sizable renewal at a 4.5% cash roll-up and 15.2% accrual roll-up.

And we'll take our first question from Anthony Paolone with JPMorgan.

My first question is just made for Brent, if you could walk through your portfolio pretty broadly in terms of where you're seeing the strongest rebound in activity versus which parts of the portfolio might be lagging in terms of markets?

Sure. Good morning, Anthony. Thanks for joining us. I'll take you through each of the markets, but just in general, I would say, Boston continues to be very strong and active. Continued lab space is taking out competitive product in a market that's difficult to build into; there's not a lot of construction, and we see a good roadway there for continued absorption from our portfolio. Moving down to New York, it’s a very challenged market. We've seen utilization at our building go over 30%, now almost 40%. We do have some leasing activity for smaller-sized users. If you recall our 60 Broad asset, which is our only asset in New York, it has small floor plates at the top and bigger floor plates at the bottom. We've done the State, and we just renewed the City. So, we can accommodate two smaller users, and we've seen them come back into the market, which I think is a positive sign for New York. Again, we have very limited exposure there though. In DC, Northern Virginia is still behind Boston and the Sunbelt but remains pretty active and strong. We continue to see smaller tenants active in that market needing anywhere from about five to 15,000 square feet. In the District, it continues to be challenged, although we've seen a recent uptick in tour activity, but nothing imminent. I’d say the District itself is our most challenged market from a fundamentals and operational standpoint. Moving down to the Sunbelt in Atlanta, we continue to see robust activity across the market, particularly with what we own around that first ring road—well-amenitized products and easily accessible off the highways. In Orlando, we've seen a pickup in activity downtown, which bodes well, and Lake Mary is well leased at the moment. In Dallas, it’s one of our strongest markets, particularly due to the amount of corporate relocations coming into that market. Although those users are being pragmatic in their approach, it's a new market for them, so they're taking their time and looking at options. However, we still see good activity in our portfolio there. We signed a large user this quarter in that market, as well as in Orlando for more than 40,000 square feet. In Minneapolis, the suburbs have picked up in activity, with a number of tours and ongoing proposals for that part of the portfolio. We're well-leased in the CBD, which is a relief because that area of the market has been more challenging. Overall, I'd say we've definitely seen activity pick up. We currently have 75 proposals outstanding and have been averaging about 20 deals a quarter during the pandemic; we did 44 in the second quarter. As schools start back in the Sunbelt this month and in the North in September, we believe that will continue to bode well for ongoing utilization and hopefully translate into tenants making decisions.

Okay, great, thanks for all that. And, then just two others. One is CVS being one of the only large expirations you have for a while here late next year, what's the mark-to-market on that right?

Well, Anthony, they occupy our 750 West John Carpenter Freeway asset in Las Colinas, a great building about half a mile from the music factory in a great monetized area. It's a little early in the process, but we have had dialogue with them as they figure out their space needs. We feel very positive about where that's headed. As you point out, we have very little expiring; they are the only tenant that is greater than 1% of ALR that expires between now and the end of 2022. So, I think we feel like that should pan out well, as the teams are giving me the exact market-to-market. But I'd say it's roughly in line with our portfolio, which is about 5% to 10% below. We'll have a nice roll-up assuming they renew.

And then just last question, you have a few parcels of land and I'm just curious with some of the corporate relocation activity that you've talked about and new entrants in some of these markets. Any shot of any of that getting activated anytime soon, like maybe just seemed like parcel adjacent and stuff like that?

We have had some dialogue with a number of larger user groups that would kick off a development in both Atlanta and Orlando, so I think we continue to be optimistic on that front. But, there is nothing imminent in that regard. We continue to lean in right now on redevelopment. We've got a number of interesting projects and feel like that's a great way to continue to generate cash flow and enhance our assets, whether it be 25 Mall Road in Boston or our campus down in Downtown Orlando and of course the Galleria in Atlanta. We have a number of sites we are keeping active on for development and could potentially have some positive developments to share in 2022.

We'll go next to Dave Rodgers with Baird.

Brent, maybe start with you. From an economic perspective, it seems like you're pretty bullish on kind of the rents really haven't moved much, net effective rents since the pandemic or even through the pandemic and your numbers showed that a little this quarter. I guess what is your view on net effective rents and the impact on economics that COVID had on sublease space, have you a view going forward for the portfolio overall?

I think, Dave, and thanks for joining us today. I think you've got to take it really market by market, submarket by submarket when it comes to competitive subleased space. Regarding sublease overall, we found that it's kind of going in the direction of companies taking it off the market and where it's been leased. We're not competing heavily against that, maybe in one or two locations and we've continued to beat them out when we have had competitive deals. Overall, I don't really see sublease space being too competitive for us. As you reference, we would characterize that face rates have held up very well, but rents have eroded depending on the market. In the Sunbelt and say, Boston, I'd say it's pretty limited, but it's there at 0% to 5%. In our other markets, though, I think it’s probably closer to 5% to 10%, and maybe DC in New York and Downtown Minneapolis, but the suburbs have continued to hold well. That has really been because of additional tenant improvements right, and just people feeling they need a COVID discount. With the increase in commodity pricing for construction space, that's where they're looking to take the buyout of landlords, if you will. We have seen a little bit of erosion in rents, but the good news is that our vacancy stands today, whether it’s in Dallas, Atlanta, or Orlando—those are the markets where we've seen the least amount of erosion, and we’ve been able to continue to manage that. This quarter, we had about $5 per square foot per year on the capital side, which is in line with the trend we've had pre-pandemic almost. So, we feel pretty good about our ability to hold this.

Yes, that is helpful. I appreciate that, Brent. Now maybe one for Bobby, just can you talk about where deferrals are today? How much you've collected? What the plan is there? And then also looking for a trend in your parking and ancillary income from a dollar basis perspective and kind of how that's contributing in the first half, second quarter and the expectation and guidance?

Along your deferrals, you might remember, we had a limited number of deferrals, and those were primarily to our retail customers—a total of about 70 agreements that we entered into, totaling about $6 million of deferrals, with over a third of that collected last year, and the remaining portion to be paid this year. Our cash, same-store NOI numbers included in our original forecast about 3% to 5%, and roughly 1% was related to those workouts. We've collected most of that; we still have some outstanding, and to be honest, I've got reserves against all the remaining balances.

That does address deferrals. And then maybe on parking and ancillary income, what are you seeing in terms of improvement sequentially from the first quarter, and is that helping out the guidance for the second half of the year as well?

Yes, we took a fairly conservative view initially on parking income, which is tied closely to utilization. We are expecting that to increase. In terms of parking income, which is a little bit more than 1% of our annual revenue, about 70% of that is contractual, meaning it is embedded in leases, and 30% of that historically has been transient parking, which was hit hard. We did see an increase over the first two quarters and would expect to come back to at least our thought is that by the beginning of 2022, it will be back to more normalized levels. So, we would expect to see an increase in Q3 and Q4.

Yes. We basically troughed out in the ending part of 2020. We've started to increase here in 2021. We need to get back to those normalized levels, but parking is really a relatively small number in our overall revenue.

Yes, now that's fair. Just a good indicator of people getting back to work. Thank you. And then lastly, maybe I don't know Brent or Christopher to take this one just on the acquisitions, you talked about trying to find strategic Sunbelt acquisitions sounds like you're looking at something specifically. Can you talk about the acquisition market broadly? Are you finding discounts and opportunities out there, or have interest rates and cap rates really stabilized and not providing, maybe a substantial discount opportunities?

Yes, Dave, this is Brent again. We're looking to recycle obviously with Raytheon proceeds coming towards the end of the year. We are likely to invest $200 to 400 million in the next 12 months or so and will continue to focus on those markets where we see the most leasing velocity. That would be in the Sunbelt and Boston. We are always having off-market discussions. There is nothing imminent, but we feel like something might come to fruition. The deals we're looking at would be existing markets, and potentially new submarkets but follow our strategy of well-located, amenitized assets that are slightly older but have great bones, allowing us to enhance their value. From a pricing perspective, I think you're going to see strong markets where you continue to experience activity and growth—pricing is down modestly, maybe 0.5%. The strong Northern markets have been impaired even more, with values ranging from about 5% to 15% less. That is a good summary of where we are now.

We'll take our next question.

Good morning everyone, and thanks for taking the questions. First of all, are you able to disclose the cap rate to the recently announced transaction?

We don't give specific cap rates, but thank you for joining this morning. I can give you a range, and so we would say that's in the mid to high fives cap rate.

And then just second, piggybacking on the earlier expiration question as it relates to CVS and U.S. Bank, do you have an early sense of whether those tenants will stay? Would that 5% to 10% mark-to-market you mentioned earlier, Brent, apply to all properties?

What we referenced as 5% to 10% is really for the portfolio as a whole in terms of our mark-to-market. The CVS lease also kind of falls within that range, but we don’t usually provide mark-to-markets for specific assets or tenants. It's a bit early to speculate on those that are beyond 2022, but we still feel good about our relationships with those firms; I wouldn’t see any reason to be concerned at this point. We'll keep you apprised as we continue having more dialogue with those that are further out.

Okay, thanks Brent. Lastly, have you seen any changes in how tenants want to utilize our space? Have you seen much in the way of space reconfiguration requests coming?

In general, we have seen a modest de-densification coupled with a greater focus on collaboration space and a more hospitality feel to the office environment. Outdoor space has become very important to the tenants we have coming in. I wouldn’t say there’s an overall trend in the existing tenancy; some of our larger tenants are spending their own capital to change their de-densification, create a bit more collaboration space, etc. It’s an interesting phenomenon. At this point, I don’t think it’s dramatically changing the environments in which they already exist. And again, that’s on their own dime; as I mentioned on our last call, a tenant described that effort as making their space more like a re-work, which I find to be an interesting comment.

We'll go next to Daniel Ismail with Green Street.

Regarding utilization and a return to the office, any trends in returns to office by the size of tenants or the industries those tenants are in?

I'd say we haven't seen any significant change by industry, but certainly by size. I'd say the smaller tenants were already back by the end of last year due in part to lower concerns about potential lawsuits from employees but also because they can space out more within their own environment. Smaller users under 5,000 square feet know each other well and were more comfortable coming back. We've seen some medium-sized tenants return, especially around mid-year, beginning around June. For the most part, we have seen larger tenants still having challenges returning. I’d categorize those as 25,000 square feet or greater; a lot of it depends on whether it's for a national firm or a smaller local firm. For instance, we have some local firms within this building that occupy about 50,000 square feet and have brought back many of their employees. The Galleria is approaching over 75% utilization. We've been closely monitoring how the Delta variant affects these trends. However, the tenants engaged in returning to work have not backed away from plans to do so in September and November, despite headlines suggesting otherwise.

Brent, you've mentioned growing demand in Sunbelt markets. In the past, you've mentioned a need for significant pre-leasing to start developments. I'm curious if there’s been any change to that thinking or perhaps a willingness to take on a bit more risk given the strong demand backdrop in the Sunbelt?

That’s a good question, Danny. I believe our peers and the developers we talk to are becoming more bullish on the market; however, we are a bit more cautiously optimistic. We are looking for pre-leasing of around 50% or so; maybe it’s come down slightly due to volume in these markets. Still, we want it to be meaningfully pre-leased and won't put a shovel in the ground until we've achieved that. We are watching other developers who seem to indicate they may go ahead, but we’ll remain pragmatic.

Last question from me regarding potential acquisitions and future dispositions. Are there any portfolio deals on either side of the coin being considered or should we continue to look for Piedmont to sell assets as they get stabilized and look at deploying into another single asset type deal?

That’s a great question, Danny. We will continue to be engaged in blocking and tackling to harvest value from well-leased assets and look for opportunities to create value for our shareholders. We will keep an eye out for everything in the market, whether it’s a portfolio or a single asset. We are particularly focused on the most active markets, namely Boston and the Sunbelt. We will never overlook a portfolio opportunity as they present themselves.

And, ladies and gentlemen, that does conclude the Q&A session for today. At this time, I'd like to turn the conference back over to Mr. Brent Smith for closing remarks.

I appreciate everyone joining us today. It has been productive. We think we've had a great start to 2021, and we believe that will carry into the latter half of this year with very little expirations, again, at 3% of the ALR, and manageable debt maturities and portfolio vacancies. As I mentioned earlier, we are more active in the markets of Atlanta, Dallas, Orlando, and Boston. We are proud of our best-in-class ESG platform paired with high-quality, amenitized environments that position us well for attracting larger corporate users. I encourage investors to check out our latest ESG report that's been posted on our website. Again, thank you everyone for your time, and we'll reconvene in October. Thank you.

Ladies and gentlemen, this does conclude today's conference. We appreciate your participation; you may disconnect at this time and have a great day.