Piedmont Realty Trust, Inc. (PDM) Q2 2026 Earnings Call Transcript

Good day, everyone. Welcome to Piedmont Realty Trust, Inc. Second Quarter 2026 Earnings Call. At this time, all participants have been placed on a listen-only mode, and the floor will be open for questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Laura Moon. Please go ahead.

Thank you, Operator, and good morning, everyone. We appreciate you joining us today for Piedmont's Second Quarter 2026 Earnings Conference Call. Last night, we filed our 10Q and an 8K that includes our earnings release and unaudited supplemental information for the second quarter of 2026. Both of these documents are available for your review on our website at piedmontreed.com under the Investor Relations section. During this call, you will hear from senior officers at Piedmont. Their prepared remarks followed by 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 of these forward-looking statements are discussed in our supplemental information as well as 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 financing, leasing, and investment activity, and the impacts of this activity on the company's financial and operational results. You should not place any undue reliance on any of these forward-looking statements, and these statements are based upon the information and estimates we have reviewed as of the date the statements are made. Also in today's call, representatives of the company may refer to certain non-GAAP financial measures, such as FFO, Core FFO, AFFO, and SameStore NOI. The definitions and reconciliations of these non-GAAP measures are contained in the Supplemental Financial Information, which was filed last night. At this time, our President and Chief Executive Officer, Brent Smith, will provide some opening comments regarding second quarter 2026 operating results.

Thanks, Laura. Good morning, and thank you for joining us today as we review our second quarter 2026 results. In addition to Laura, on the line with me this morning are George Wells and Alex Valente, our Chief Operating Officers, Chris Colmey, our EVP of Investments, and Sherry Rexroad, our Chief Financial Officer. We also have the usual full complement of our management team available to answer your questions. Piedmont had a strong quarter, beating consensus by a penny due to operational outperformance and raising our 2026 outlook for the second quarter in a row, which Sherry will touch on more in a moment. Our Piedmont places are generating meaningful earnings and cash flow growth as office-using demand continues to strengthen for high-quality, well-located amenitized assets. The U.S. office market is no longer defined by excess space, but rather by increasingly constrained supply at differentiated office buildings, driving higher occupancy, accelerating rent growth, and reducing tenant concessions. Leasing activity has reached post-pandemic highs as availability continues to decline across most major markets and is now broadening to more metros and submarkets. While the development pipeline remains at historically low levels, with demand recovering and new supply scarce, our Piedmont places are benefiting from a more favorable operating environment and meaningful pricing power. As I noted on our last earnings call, Piedmont has materially increased asking rates across a substantial portion of the portfolio, in most cases more than 15% over the past 12 to 18 months. Those rate increases, implemented across the portfolio in early 2026, are now being reflected in our quarterly lease metrics. During the quarter, we signed 460,000 square feet of leasing with rental rate increases of 14% on a cash basis and over 32% on an accrual basis. And in fact, over the last four quarters, the average rental rate increase on a cash basis has been 12%, which is representative of the rental mark-to-market and embedded growth in the portfolio. Having renovated 90% of the portfolio since 2020, our amenity-rich, hospitality-driven Piedmont places are among the best assets in their respective submarkets and are leasing at record high rental rates. During Q2, we achieved the highest quarterly average net effect of rent after CapEx in the company's history, now reaching the mid-20s per square foot, up more than 20% over the prior trailing 12-month average. Even more encouraging is that our rents still remain 35% to 40% below new construction pricing, providing further runway to increase rental rates. Additionally, Piedmont has leased over 80% of the portfolio since the pandemic Meaning the vast majority of our customers have already right-sized and upgraded their office space for the modern workforce Our average tenant size across the approximately 16 million square foot portfolio is now just under 17,000 square feet With customer and industry diversification, providing insulation against potential workforce disruption from AI implementation. Piedmont's customers, with lease expiration several years out, are also recognizing that the market for premium office space is tightening, particularly for tenants that occupy a full floor or greater. As a result, we are seeing customers approach us about renewals of their space well in advance of the expiration. In the coming quarters, we anticipate early renewal discussions with existing tenancy to accelerate, which should bolster client retention ratios above our 60-70% historical average, with the ability to reduce free rent and tenant capital concessions. At Piedmont, we recognize the most effective way to reduce capital expenditures on leases is to retain our existing customers. That's why we continue to invest in our team and technology to create the best office experience for our clients. This year, the team's hard work culminated in Piedmont being recognized by Kingsley as a top five national office platform, the highest ranking among all public office companies. For those who may not be familiar, Kingsley is a third-party research firm that conducts a national survey of office consumers to evaluate their landlord. Most of our public peers participate in the survey, so we couldn't be more proud to be recognized as a top-five world-class operator. Additionally, during the second quarter, nine projects throughout the portfolio won the Building Owners and Managers Association, or BOMA's, Outstanding Building of the Year Award in their respective size categories, a tangible testament to the quality of our product and service offering. The strategic reposition of the Piedmont portfolio, along with the substantial leasing we've accomplished over the past 12 months, is translating into improved operating metrics, including higher economic occupancy, now over 80% for our in-service portfolio, with continued improvement in the coming quarters. Same-store cash and OI growth, 10% on a cash basis for the first half of the year, and meaningful earnings growth, $0.02 for the first half of $0.26 when compared to the first half of $0.25. Further, the portfolio is approaching 90% leased, and as of June 30th, inclusive of our out-of-service portfolio, had an executed pipeline of leases that have not commenced equal to approximately $39 million of annualized cash rents. That's the equivalent of 570 basis points of occupancy that will flow into earnings over the next several quarters. The investment thesis in Piedmont is straightforward. Demand for differentiated office product is increasing while supply is shrinking. Return-to-office mandates are becoming more common and more enforceable. Companies recognize that the office is critical to the four Cs, building culture, creativity, collaboration, and connectivity. At the same time, new office construction remains near zero. Older buildings continue to be removed from inventory through conversion or demolition, and many financially constrained owners lack the capital to compete. Piedmont is uniquely positioned for success in the marketplace. We're generating the highest earnings and cash flow growth in the office sector and trade at a very compelling valuation. With net effective rents after CapEx of $25 per square foot on a stock price that equates to a gross asset value of approximately $220 per square foot. Furthermore, we currently have an outsized earnings backlog, great opportunities for occupancy absorption, 10% to 15% of embedded rental rate growth, and opportunities for accretive debt refinancings, which will all drive core FFO higher in the near term. With that, I'll hand it over to George for further details on second quarter operational performance. George?

Thanks, Brent, and good morning, everyone. The operating environment for high-quality office remains constructive, and the PMO platform continued to perform well during the second quarter. Leasing velocity continued at a strong pace with 42 transactions completed for approximately 460,000 square feet. New business activity was slightly more than half of that volume, with a large portion of that expected to translate into 2027 gap rent recognition. Average new deal size was approximately 11,000 square feet, reflecting a good mix of small, medium, and large clients. And the weighted average lease term for new transactions was approximately 11 years, reflecting continued customer commitment to high-quality workplace environments. For the ninth consecutive quarter, expansions exceeded contractions in the portfolio. That is an important signal. It shows that our customers are not simply maintaining space, but many are expanding to support growth, return to office requirements, and a renewed focus on collaboration. During the quarter, we completed nine expansions for 22,000 square feet with no contractions. Lease economics remained strong. As Brent noted, cash rents of space vacated one year or less increased by 14%, while accrual rents increased by 32%. Overall, weighted average starting cash rent of $43.79 per square foot rose 5% from last quarter's $41.59 per square foot, and we anticipate more rental increases in the near term. Leasing capital spend for the quarter was stable at $5.83 per square foot per year, and in line with our trailing 12-month average of $5.97 per square foot. Tightening conditions for high-quality space are leading to stronger pricing powers. Net effective rent surged this quarter to $25.56 per square foot, up over 20% from the prior 12-month average, and we anticipate maintaining NERs in the mid-20s per square foot or higher, supported by persistent demand for high-quality space and little to no new development in our submarkets. equally impressive the portfolio generated nine percent same-store cash noi growth driven by both burn off of free rent and higher rental rates we believe these very encouraging second quarter metrics will likely continue into the second half of the year in northern virginia the rbc corridor has been experiencing an uptick in demand over the past few months with the defense sector leading the way our local team captured the company's largest new deal of the quarter with a defense contractor for 73,000 square feet at our 4250 North Fairfax building. This 12-year deal commences as soon as the space can be built and boasts a healthy annualized NER of $27 per square foot. Our NOVA assets are well located within dense, highly amenitized walkable environments and sit adjacent to metro rail stations. The portfolio here is currently 80% lease and we're projecting strong net positive occupancy and FFO growth over the near term. Atlanta was our most active market with 11 deals for 130,000 square feet. A majority of that was new business and landed in each of our three vibrant submarkets of Central Perimeter, Cumberland, and Midtown. Most noteworthy, we signed a 57,000 square foot 15-year new lease at 1155 Perimeter Center West, preemptively backfilling a large portion of the Broadcom space. We continue to experience strong customer interest in our remaining central perimeter space. Our Dallas team closed eight deals for 107,000 square feet, with Epsilon's 11-year extension driving most of that deal flow and yielded a hefty cash roll-up of 42%. Our pipeline for backfill and the balance of that space and pushing rate is deep, with multiple tenants competing at improving rents. Over in the lower tollway sub-market, the Dallas Mavericks announced plans to develop a multi-billion dollar arena and entertainment district at the 100 acre valley view site which sits a half a mile from a galleria project as we've experienced with the braze battery development atlanta being adjacent to such a massive entertainment venue will likely see private public and reinvestments toward the neighborhood's infrastructure and elevates the desirability of an already healthy office sub market today galleria towers asking net rent is 50 per square foot up 40 percent from just two years ago when we completed the renovation and we're excited for this 1.4 million square foot asset trajectory and future earnings growth. At 60 Broad we previously announced that we had agreed to terms with the new administration of the city of New York for substantially all of the space and that a lease of this size will require other internal city reviews and a public hearing process before the transaction can be fully executed. The city is steadily progressing to conclude the lease renewal. However, it is likely the process will not be wrapped up until the fourth quarter. Our redevelopment projects posted another strong quarter deal flow with over 60,000 square feet of new transactions signed, increasing the out-of-service lease percentage from 76% to 83%. During the second quarter, we placed 222 Orange Avenue back into service, and we're confident that the remainder of the out-of-service portfolio will re-stabilization around the end of 2026. Looking ahead, our leasing pipeline remains stout and now has over 700,000 square feet in a legal stage for the third quarter. Outstanding proposals continue to hold steady at approximately 2 million square feet. Our supplemental report shows 927,000 square feet or 6% of our operating portfolio expiring in the second half of 2026, which is very manageable and even less exposure when you back out the pending New York City extension. Assuming a typical run rate of 175,000 square feet of new transactions in each quarter and concluding known renewals, we're on a path to achieve our previously released guidance with overall lease volume projected to reach the high end of that range or 2 million square feet. We've never been more excited about the outlook for our business. Tennis are choosing PEMOP because our buildings provide the right combination of location, amenities, service, and value that today's dynamic companies require. Our formula is working, and we believe it will continue to drive leasing, rent growth, and occupancy gains. I'll now turn the call over to Chris Comey for investment activity. Chris?

Thank you, George. From an investment perspective, our focus remains on optimizing the portfolio, preserving capital discipline, and positioning Piedmont to benefit from strengthening liquidity in the transaction market. The office investment market is improving, driven by the steady increase in leasing demand coupled with a dwindling supply of high-quality space. That said, buyers remain cautious, and we see only limited institutional investors in the market. The majority of transactions are being awarded to local operators, family offices, and private capital with a focus on transactions less than $80 million. With limited, well-capitalized operators in the market. Piedmont is well-positioned to compete for value-add acquisitions. We're focused on opportunities within our existing markets, which are accretive to our earnings and growth trajectory. A quick update on dispositions and process, specifically the two land parcels that we have mentioned previously. Our Royal Lane land parcel in Dallas remains under contract, and we're feeling optimistic that it will close during the third quarter, generating approximately $12 million in net sale proceeds. The plan development will provide about 20,000 square feet of retail directly adjacent to our connection drive assets. The other land parcel in Orlando continues to move forward, albeit slowly, as rezoning takes time and will likely be amid 2027 closing. Similarly, the land will be redeveloped into a mixed-use project containing multifamily, over 40,000 square feet of retail space, as well as several restaurants, all of which will benefit the environment next door at our town park assets in Lake Mary. Aside from those two known sales, we continue to actively weigh the disposition of mature and or non-core assets, which lack the growth profile of the balance of our portfolio. In short, Piedmont's opportunity to recycle capital is improving as liquidity returns to the sector, and our capital allocation priorities remain focused on high-return leasing capital, improving balance sheet flexibility, and acquisitions which improve our portfolio quality, are accretive, and are consistent with our long-term growth strategy. With that, I'll pass it over to Sherry to cover our financial results.

Thank you, Chris. While we will be discussing some of this quarter's financial highlights today, please review the earnings release and accompanying supplemental financial information, which were filed yesterday, for more complete details. Core FFO per diluted share for the second quarter of 2026 was $0.38 per diluted share, a penny ahead of consensus and $0.02 ahead of the second quarter of 2025. Growth was largely driven by higher rental rates and higher economic occupancy, partially offset by the sale of one project during the 12 months ending June 30, 2026. ASFO generated during the second quarter of 26 was approximately $31 million. Turning to the balance sheet, I'm pleased to report that during the second quarter, we successfully refinanced our term loan that was scheduled to mature in January of 27. We increased the principal from $325 million to $400 million, pushed out the maturity to May of 2031 and tightened the spread by 15 basis points. So we are very pleased with this execution. We used the net proceeds from the increase in principle to pay off the balance outstanding under our line of credit. Consequently, we had the full $600 million capacity under the line, as well as around $17 million in cash, available as of June 30. As we've highlighted previously, we currently have no debt maturities until 2028, and our maturity ladder is now very smooth at roughly 20% per year from 2028 to 2033. Our overall weighted average cost of debt continues to decrease and is now at 5.5%. It's important to note that as the impact of the team's leasing success over the last 12 months ramps up in the second half of this year, our net debt to EBITDA ratio will trend below seven times by the end of the year. This trend will continue in 2027 as the balance of the nearly 900,000 square feet, or $39 million of lease revenue, commences. The current 570 basis point spread between leased and commenced occupancy will also compress to approximately 400 basis points by year end. We continue to think creatively as we evaluate balance sheet management options and look for opportunities to further reduce our interest costs and or extend our maturity ladder. As Brent noted in his remarks, with year-to-date performance and visibility into second-half lease commencements, we are increasing our 2026 annual core FFO guidance to a range of $1.50 to $1.55 per diluted share, an increase of 2.5 cents per share at the midpoint when compared to our original 2026 guidance and equating to an earnings growth rate of over 8%. We are also increasing our same-store NOI, cash-end gap guidance range to 5% to 8%, a 200 basis point increase from original 2026 guidance. Please note that, consistent with our standard practice, this guidance does not include any speculative acquisitions, dispositions, or refinancing activity. We will adjust guidance if and when those types of transactions occur. The most important financial takeaway is that Piedmont's leasing activity is now converting into earnings and cash flow growth. The $39 million of lease revenue still to commence that we discussed earlier will support higher same-store NOI, higher core FFO, lower net debt to EBITDA, and continued progress toward a more normalized economic occupancy level. With that, I will turn the call back over to Brent for closing comments.

Thank you, George, Chris, and Sherry. To summarize, Piedmont is entering the next phase of the office cycle from a position of increasing strength. The portfolio has been repositioned. Leasing demand remains broad and durable. Signed leases are converting into cash flow. Rents are moving higher with more room to run. New supply is limited, and leasing success will start to improve our balance sheet, providing the flexibility to efficiently recycle capital in an improving transactions market. We recognize that the office sector continues to face skepticism, but the data in our portfolio tells a different story. Companies are returning to the office. They are prioritizing high-quality amenitized environments and making long-term leasing commitments. They're choosing Piedmont because our buildings offer the experience and service they demand at a compelling value relative to new construction. Our focus for the remainder of the year is to grow occupancy, increase rents, convert our leasing pipeline into cash flow, and continue to optimize the portfolio. If we execute on these priorities, Piedmont is positioned to generate consistent organic FFO and cash flow growth for the remainder of 2026 and beyond. With that, I will now ask the operator to provide our listeners with instructions on how they can submit their questions. Operator?

Certainly. The floor is now open for questions. If you have any questions or comments, please press star 1 on your phone at this time. We ask that while posing your question, you please pick up your handset, if listening on a speakerphone, to provide optimum sound quality. Please hold for just a few moments while we pull for questions. Your first question is coming from Dylan Brzezinski with Green Street. Please pose your question. Your line is live.

Hey, guys. Thanks for taking the question. Maybe if you can just sort of talk a little bit or expand a little bit on the demand environment. Obviously, things continue to remain strong, evidenced by, you know, TQ leasing and leasing the date in July. Maybe you can just talk about sort of, in your guys' mind, what is sort of causing this to continue to accelerate here, given the sort of, I would say, more uncertainty over the macro backdrop.

Good morning, Dylan. This is George. Thank you for joining us. us.

Listen, I think the easing engine really continues to fire in all cylinders, right? And employers don't want to move into a more compelling and it's really...

That's very helpful. Thanks, guys. Maybe just one more, if I could. Sherry, you mentioned getting to that sort of sub-seven times net debt to EBITDA range here shortly. Do you guys sort of have a longer term leverage target goal in mind as you sort of think about 27, 28 and beyond? Great. That's it for me. Thanks so much.

Your next question is coming from Daniela D'Armas Rosales with J.P. Morgan. Please pose your question. Your line is live.

Hi, it's Daniela here. Thank you for taking my question. On the demand pickup in Northern Virginia, how competitive is it to get deals done there, and do you think the activity there will persist?

Good morning, Daniela. Thank you for joining us. As you point out, NOVA has seen an uptick in transactional activity. We did complete a larger, about $70,000 tenant.

Thank you. That's really helpful insight. And I guess that's a second question from me. On the acquisition side, what opportunities are you guys seeing there, and what did those deals look like?

Great question. We continue to canvas the market for off-market transactions. There have been a few assets brought to market as well, in the focus areas that we'd like to grow the business, that being primarily as we've talked about.

So much, that's it for me.

Your next question is coming from Michael Lewis with Truist. Please pose your question. Your line is live.

Thank you. So you just answered a question about acquisition pricing for the types of assets you're looking at. I wanted to ask about dispositions and, you know, So are the improving fundamentals causing any changes in pricing? I know, you know, the New York asset is reliant on a lease but may still have some upside on some upper floors. I saw, you know, the Enclave won a Toby Award. I saw two assets in Minnesota did as well. You know, any change there on potential disposition pricing?

Good morning, Michael. Thanks for joining us. This is Brent. Great question, and as I think Chris alluded to and has prepared remarks, we are continuing to see more debt availability in the market, as well as good leasing to get better underwriting on thaw, if you will. So if you think about our dispositions and what we think about in a framework around that, as we've always said, we really want to call kind of the most mature top 10% of our assets, as well as what we would consider the bottom 10% in terms of quality, continuing to harvest value and continuing to grow the overall growth profile. Our dispositions, you know, because those are two different buckets, they'll vary, but somewhere between probably the 8- to 10-cap range seems reasonable for most of those. The overall, the Sun Belt. In terms of pricing, we would say it's probably more stabilized pricing and just getting more transactional activity. I don't think we've seen a material movement over our markets, but with more transactions, we can start to recycle $300 million to $400 million of recycling. I don't think that's...

Great. And then my second question is a capital allocation question. So the last time you paid a quarterly dividend, it was 12.5 cents in the first quarter at 25. Your FAD this quarter was 24 cents. You haven't been below 13 cents a FAD since the fourth quarter of 2013. So even though you suspended that dividend, it's continued to be covered, but the stock has done well since you since you suspended it. So when you think about, you know, that $31 million of FAD, you know, after CapEx in the second quarter, what's the best use of that, right? You could bring the dividend back. You could, I know you still have some TIs to pay, but again, this is extra cash flow. You know, the bond repurchases, those nine and a quarter bonds now trade at like five and a half percent. Maybe that's not as attractive anymore. You could repurchase stock. I know you trade well below NAV, so I'm listed off options. But what I really want to hear is what you think the options are.

Very good question.

And so if you think about that $30 million after column, one, we're doing a- Okay, your next question is coming from Nick Fillman with Baird. Please put your question. Your line is live.

Good morning, guys. Maybe you want to just talk a little bit more on the lease pipeline. pipeline you guys highlighted the 700 000 square feet assuming that the 300 000 square feet included in that is the new york city lease maybe give the composition of that remaining like 400 000 square feet that you guys have signed and then some updates on this new york city broadly uh you guys mentioned fourth quarter i think in the past you've mentioned you're not you have they did go into hold over over at this quarter but you didn't expect to be charging holdover rate um on the near term as you work through discussion. So more clarity there and then just mixture on the remaining pipeline of sign today.

Yeah, Nick, thank you for joining us.

That's really helpful. And then Brent, you made some interesting commentary on just early renewals and potentially pushing retention above your traditional 60 to 70 percent on your in place when you're looking out to 28 and 29. And you've also mentioned the ability to push least percentage and occupancy into the low to mid 90s so as we just put those characters together maybe what you think the embedded upside is as you start locking in these renewals for 28 and 29 and then also with george's comments of what what you need to see from the new leasing for a sustainable level or bogey on a quarterly average just to continue to get to those low 90s from an occupancy standpoint great Thanks, Nick.

So in terms of the new meeting.

No, I really appreciate it. And then maybe just rounding it all out on the 27 large expiration. Sounds like you had some progress in one of the assets in Atlanta, but maybe the coverage on those assets and the remaining larger blocks that you have within the portfolio. It sounded like 100,000 square feet still in the Midtown asset at 999, half the Epsilon space, and then those two assets in Atlanta specifically.

Sure, Nick, I'll take that. I mean, I mentioned a minute ago we had 1.58.

I appreciate it all. That's it for me.

Once again, if you do have any questions or comments, please press star 1 at this time. Your next question is coming from Everest Shipper with Cantor Fitzgerald. Please pose your question. Your line is live.

Hello, thank you for taking my question. I know you guys mentioned that you wanted to reduce debt also. selling non-core assets to really reinvest in the Sunbelt. So I was wondering if you just kind of walk through your thought process there and, like, what you're prioritizing in these new assets.

I'm sorry, you filled off there again. And what we're prioritizing in terms of?

If you're reinvesting in the Sunbelt, like, what are you prioritizing in these new properties and assets that you're acquiring?

All right, which properties? So I guess in terms of capital allocation, as we've talked about, right now near term, We have the ability to pay down nine and a quarter bonds. We are very focused, and so that will afford the ability to do that most quickly. We do have some dispositions that are in process, are in the market, I would say. We hope to come. That would immediately help to go. That said, that would be accretive to the environment.

Thank you so much.

Thank you. There are no additional questions in queue at this time. I would now like to turn the floor back over to Brent Smith for any closing remarks.

Thank you, everyone, for joining us here today. I do want to thank particularly the Piedmont team and congratulate them again on achieving a King's League top five and the numerous BOMO awards. Piedmont continues to execute at a high level. Our premium Piedmont places are garnering a significant amount of demand, and we're excited about what the opportunity holds for Piedmont.

Thank you, everyone. This does conclude today's conference call. You may disconnect your phone lines at this time and have a wonderful day. Thank you for your participation.