Greetings and welcome to the Piedmont Office Realty Trust Second Quarter 2016 Earnings call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Robert Bowers, CFO.

Thank you, Operator. Good morning and welcome to Piedmont’s second quarter 2016 earnings call. Last night, we filed our Form 10-Q and an 8-K that includes our earnings release and our unaudited supplemental financial information for the second quarter of 2016. This information is also available on our Web site, piedmontreit.com, under the investor relations section. On today’s call, the company’s prepared remarks and answers to your questions will contain forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements address matters which are subject to risks and uncertainties that may cause the actual results to differ from those we discuss today. Examples of forward-looking statements include those related to Piedmont Office Realty Trust’s future revenues, operating income, and financial guidance, as well as future leasing and investment activity. You should not place any undue reliance on any of these forward-looking statements, and these statements speak only as of the date they are made. We encourage all of our listeners to review the more detailed discussion related to risks associated with forward-looking statements contained in the company’s filings with the SEC. In addition, during the call we will refer to non-GAAP financial measures, such as FFO, core FFO, AFFO, and same-store NOI. The definitions and reconciliations of our non-cash measures are contained in the supplemental financial information available on the company’s Web site. I will review our recent financial results after Don Miller, our Chief Executive Officer, discusses some of the quarter’s operational highlights. In addition, we will also be joined today by various members of our management team, all of whom can provide additional perspective during the question-and-answer portion of the call. I will now turn the call over to Don.

Good morning, everyone, and thank you for joining us as we review our second quarter financial and operational results. As you have seen in our filings last night, during the second quarter we continued our steady financial growth in earnings and cash flow and we were particularly pleased with the important strategic advances we have made so far this year toward our property portfolio refinement objectives, as well as on the execution of a few significant long-term anchor tenant renewals and expansions. Looking first at our leasing activity for the quarter, we completed almost 600,000 square feet of leasing, with approximately two-thirds related to new tenants or expansions. The largest lease for the quarter was the renewal and expansion by Demandware, a Salesforce company, at 5 Wall Street in the Burlington submarket of Boston. The new, expanded 12-year-plus lease covers just over 180,000 square feet, which includes the renewal of the original 30,000 square feet leased by Demandware. This was a particularly complicated transaction and one that we think showcases the creativity and diligence of our internal leasing team, as they worked with two other existing tenants in the building to create a path for Salesforce to expand over the next few years with no downtime and no free rent on any of the space. The end result is a long-term, stabilized occupancy for the building with a creditworthy tenant on attractive economics. Another large transaction during the quarter was also in Boston, in the Cambridge submarket, with the President and Fellows of Harvard College. The lease actually involves two separate properties with an approximately 59,000-square-foot renewal and expansion at One Brattle Square and an approximately 50,000 square foot renewal at the nearby 1414 Massachusetts Avenue building. Both leases are for 15 years, commencing in 2017 and 2018, respectively, and…

Thanks, Don. I will briefly discuss some of the second quarter and year-to-date financial highlights. I again remind you and encourage you to please review the 10-Q, the earnings release, and our supplemental financial information, which was filed last night, for more complete details. For the second quarter of 2016, we reported FFO and core FFO of $0.40 per diluted share, $0.01 higher than those same metrics in the same second quarter of 2015. This improvement is due to better overall economic terms for leases commencing during the quarter and due to our share repurchase program. I’ll remind you that there were 8 million shares reduction in our weighted average shares outstanding at quarter end when compared to a year ago. The average repurchase price under the program is $17.17 per share and that no shares were repurchased during the second quarter of 2016. We believe this continued growth in earnings performance share is significant, given the loss in earnings that we have had to overcome with over $700 million in net dispositions in the last six quarters, with an average GAAP NOI yield of 5.7% for those dispositions, and at the same time we have continued to strengthen our balance sheet. Since a year ago, we have reduced our total outstanding debt by approximately $425 million. Specifically during the first two quarters of this year, disposition proceeds were used to pay off a $125 million maturing mortgage and pay down our $500 million line of credit. As of June 30, we had nothing outstanding on the line. As a result, our net debt to core EBITDA ratio has continued to improve to an annualized 6.3 times ratio as of the end of the second quarter. Subsequent to quarter end, we collected almost $90 million from the sales of 150…

[Operator Instructions] Our first question comes from Michael Lewis, SunTrust. Please go ahead.

So, Don, you mentioned in your comments the leasing capital was down. How much of that was mix in terms of how much was DC leasing? And then, what are you seeing in DC, because it looks like the leased percentage fell a little bit sequentially?

Yes, so I would say that given the capital per square foot per year lease term was down significantly in the quarter, I would say some of that was absolutely the mix of geography in the quarter. We had a fair amount of the leasing, as you saw, in the Demandware and Harvard deals that were in Boston, which, of course, is one of our lower capital per square foot per year lease term markets. However, we did have a fairly sizable deal in the Amazon deal that was in DC. So, I would say, but the mix clearly contributed to a reasonable portion of that. DC, I would say, continues to, as some of our competitors have said over the course of their calls, it just continues to bump along the bottom. We are getting some deals done. We are making incremental progress. It is two steps forward, one step back. Fortunately, we don't have a lot of lease rollover going on this year. We do have some next year, and then virtually none for several years thereafter. So, I would say, Bob Wiberg is on the phone. If he thinks it would make some sense to comment, he is welcome to do so, but I would tell you that we are not seeing a significant pickup there at this point. Bob, was there anything you would add to that?

No, I think that's accurate. Compared to last year, the leasing activity is off, but I think at the same time we are signing a fair number of leases, and this week was a good week for tour activity. So, who knows why it works that way? Overall, the market is slow, but we have pockets of good activity.

Okay, thanks. And then, my second question, it sounds like you're going to be a net seller. You talked about possibly being a net seller again next year. And I was hoping you could comment on use of proceeds. You have, I guess you could call it, a high class problem of the buybacks not being quite as attractive anymore. You mentioned debt and I think that was the only thing you mentioned. So, how does repaying debt fit in with acquisition opportunities? And then, how much debt is there, maybe, that you could get at in the near term?

Michael, I think we continue to believe we will be a net seller this year. Obviously, some of that will depend on achievement of pricing on deals that we are bringing to market over the next few months. But we still believe that will be the case. We do have some acquisition activity. What Ray is fond of saying is very strategic acquisition activity that would probably be very much in line with what you would expect to see us do in markets where we already have a big presence and in submarkets in which we have made a commitment. And so, we do have some activity going along those lines we think will take up some of that sales activity. And then, of course, we have 140 million of debt coming due next year that we can pay down and, of course, we could always early pay if we chose to do so some of our bank facilities as well. But at this point in time, I would say the best use of proceeds right now that we are seeing is there is just enough dislocation in the markets out there that some deals are trading very aggressively and some aren't, and those that aren't that fit into our strategy are a nice use of proceeds for us.

Thank you. Our next question comes from Anthony Paolone with JP Morgan. Please proceed.

Okay. Thanks and good morning. Don, I think on the last point, I think at NAREIT you had talked about really focusing in on some of the markets where there is just not as much intensity and competition, perhaps like an Orlando. Is that what to expect in terms of this deal flow you alluded to? And should we think about other markets, like when I think about Orlando, I think about Tampa or Jacksonville or other places? Where should we think about Piedmont going here?

Tony, I don’t think you’ll see us expand to other markets in which we don’t already have a presence. Orlando seemed to be a really good opportunity for us, given that we have been able to buy a number of properties off market there and, in this case, get the best-quality property in the marketplace. And in a story that, I would encourage everyone to go look at the piece we put out on our Web site last night, entitled Orlando CBD Strategic Expansion. It walks you through the rationale for the CNL towers deal, and I would tell you that is particularly, that has been a particularly compelling market for us because, on Page 3 of that presentation, for example, we talk about the fact that Orlando has got the highest job growth in the country over the last 12 months, some of the highest net absorption in the country on an availability of square footage basis, and virtually no new construction, with rents well below what new construction rents are. And when we can see that in a marketplace and be able to take advantage of that, then we get very attracted to that. We continue to see those opportunities in Atlanta, to a lesser degree, and then a couple of other markets as well, but remember, we are always looking at markets where we think there is a great business environment, good discount to replacement cost, good basis in the assets, but I don’t think, in answer to your original question, I don’t think you’ll see us expand to a Jacksonville or a Tampa. Although some of those qualities are in place in those markets, not nearly to the degree we saw in Orlando, for example.

Okay, thanks. And then, just a follow-up on the leasing capital side, you talked about the mix a bit. But I understand the lengthening of lease length and on a per square foot per year basis, it looks a lot better. Just thinking, in terms of the outlook, what we should expect over the balance of the year and into 2017 in terms of as you lease up new space and so forth. What should just the blended per square foot TI leasing commission package look like?

I think, to Mike’s point earlier, a lot of that is going to depend on the mix of markets in which we are doing new deals. Obviously, if we are doing deals in Chicago and Washington, you’re going to see a lot more per square foot per year lease term; that's going to look more like a couple of the quarters we have produced in the past, which might get it in the $5 to $6 range. And then when we are doing a lot of renewals or deals in markets where there is lower cost of capital, you might see quarters like you saw this quarter with us. But, on average, it should be a blend of those two over the course of time.

[Operator Instructions] Our next question comes from John Guinee with Stifel. Please proceed.

Great, great. A couple questions. Good quarter, by the way. Refresh my memory, when was it that Leo Wells walked away and you guys gained control? What year was that? And what was the strategy coming out of the box then and what is the strategy now?

So we, the management company internalized in April 2007, so almost moving on the 10-year mark on that. And the strategy initially, of course, as we were heading into a downturn, it probably changed things a little bit on a timing basis, but was to transition from being a single tenant net lease 38 market company to a company that is largely multitenant, largely focused on a handful of markets in which we believe we can take advantage of our capabilities and strengths, i.e., corporate relationships, boots on the ground, and capabilities of, and bringing a cost of capital to the table in places where there is not a lot of other REIT competition. So that has been the focus, John. And we have made, obviously, an enormous amount of progress on that, but we have also had really five years to execute that or six years to execute that as 2007, 2008, and 2009 didn't give you a lot of opportunities to do something like that.

Got you. And then, refresh my memory. A while ago, my recollection, and I'm just guessing, but your focus was Washington, DC, Boston, LA, Dallas, maybe Chicago, I can't remember exactly, but I am sure you know. And what do you think are the half dozen markets today?

John, fair question. I think the, when we initially came public, we were using some terminology that you might be thinking of called concentration markets, where we were trying to build our presence in places like Boston, New York, Washington, LA, to a lesser degree secondary markets. And as a result of what we saw was increasing pricing and what we thought was overpricing in some of those places, coupled with the fact that we didn't see the same rental growth that we are seeing in some of these markets that are now coming off the bottom, we have adjusted to try to find better value, and that better value so far, at least recently, has been more like Burlington and Washington, Burlington in the Boston market, Dallas, Atlanta, and Orlando. So, I would say there has been some modification of that strategy as a result of just finding better value, but obviously that is always, the beauty has always been in the eye of the beholder.

Okay, and then putting on my shareholder fiduciary hat and, again, I'm just looking at this from 50,000 feet and I'm sure you have got much more detail, but it looks to me as if over the last three years, your Company went from maybe 18 million square feet to, I'm sorry, 21 million square feet to 18 million square feet, decreased maybe down from over 70 to under 70 assets. Yet it looks like G&A is up almost 50% over the last three years. Any comment on that?

Yes, I am not sure that G&A is up anywhere near that percentage, John, but we could validate that one way or the other. Clearly, it is up to some degree, and part of that was because as we came public, the first few years we were public we didn't have as good a stock performance as we all would have liked, given the heavy lease rollover for the Company. And as a result, there was very little long term incentive comp paid to the management team. As the stock has performed better over the last several years, that compensation has gone up and it also catches up. There is a double component of how that hits your G&A, as you probably know. And so, as a result, that impacts you. Obviously, if we don't perform as well going forward, our G&A will come back down. The second thing that probably would have impacted G&A a little bit is the regionalization structure. Obviously, I think everyone on this call thought that was a good idea, and although we haven’t added a huge amount of G&A in the regional structure, we have added a couple or three key pieces to our puzzle in terms of people, and as a result, that probably drove G&A up slightly as well.

There are no further questions. I would like to turn the floor back over to Mr. Miller for closing comments.

Okay. Actually, I think we do have another caller on the line, Operator.

Yes, we do. Jed Reagan with Green Street Advisors. Please proceed.

It looks like I just got in there. Just as far as the Orlando disposition, it sounds like about a 7% initial yield. Would that cap rate have been any different, say, six to 12 months ago, just with the changes in the market environment, or has it been pretty steady for assets like that?

No, I think that deal probably has been, would have been fairly steady over the last 12 months. I don’t think there has been a big movement up or down in that quality of asset. Keep in mind, obviously that market because it has been so down for, had been so down for quite a while, rents just had never recovered, and so that cap rate implies some more upside, if you will, relative to new building construction. And given it is the highest, undoubtedly, the highest quality project in the marketplace, we feel like we have got a great ability to compete with new buildings if they get built down the road. So I would say, no, I don't think the pricing has probably moved much on an asset like that.

How about for some of the lower quality stuff or non-core, let’s say, for stuff you are shopping currently? Is there any signs of disruption there, changing pricing?

We are seeing a fair amount of, I will call it, dislocation. It is funny. More than any other time that I can recall, going back even 10 or 15 years, Jed, we are seeing some buildings get a lot of attention that you might not have expected would have gotten as much attention as they did, and then we are seeing buildings come to market that don’t get as much attention as we thought, and some of that has to do with the financing environment, some of that has to do with just individual attractiveness of assets. But we have had both experiences. So, for example, 150 West Jefferson, it probably exceeded our expectations. That’s a building that we held a lot longer than I think a lot of people would have wanted us to, but that’s a building that if we had sold it four or five years ago when I think most people wished we had, we would have gotten a small fraction of the price we got as a result of holding on and driving to fruition on the deal. And so, and that one got a lot of attention when you would have thought, gee, downtown Detroit, surprised that would have gotten that level of interest. But we have also brought out smaller deals in secondary markets recently where you have got some interest, but not quite the interest you thought you might get. So, I would say it is really almost a building-by-building scenario, not even a market-by-market scenario right now.

Okay, that makes sense. And then, just back on the Orlando acquisition, are there any near-term move-outs to be aware of at that asset and is there any in-place debt? It doesn’t sound like there is any. I just wanted to clarify.

Yes, there is no in-place debt. There is very little rollover in that asset. In some respects, we wish we really had more. There is about an 8.5-year average lease expiration in the building and a lot of credit, so it is a really good quality rent roll. But, frankly, if there is any downside that we saw to the deal, there just wasn’t as much upside early on in the deal because you’ve got such a stabilized rent roll for the next few years.

Okay, that makes sense. And then, I think you had mentioned on prior calls a $200 million net sales goal for the year. It sounds like you are still in the net sales range, but maybe $200 million is, maybe you don't quite get that far. Is that fair to say or maybe any comments there?

I think it really largely depends on one or two things that we are working on right now, Jed. There are a couple of things that we are thinking about bringing out to market that could actually make us a larger net seller than that, so it really depends. It could end up being that we don't get it all done in 2016 and it flows over into early 2017 or something like that. So, I wouldn't hold me to an exact number, but I would say we continue to believe we will be a net seller to a greater degree than we already are, and some of that, though, may flow over into 2017 and so you may have to look at it on a 13-month basis, rather than a 12-month basis or something like that.

Okay, and is it safe to assume that the two remaining Rockville assets would eventually be non-core candidates?

They are clearly non-core assets. Those may fall into a category of we are not sure when we will sell them based on market reception.

Okay. And the Austin asset, what is the game plan there? And do you lease that up yourselves or do you let someone else fight that battle?

We've still got a lot of activity there. We haven't converted as many as we would have liked as quickly as we would like, certainly, but we have had about 50,000 feet of holdover tenancy in that building. So we are roughly 25%-ish leased in the building today. But none of those are long-term deals, and so we have got the ability to put together a big block of space in Austin in a market that has got a lot of big tenants running around, and so we are hoping to convert one or more of those going forward.

Okay [indiscernible].

And then, that would likely be a sale candidate once we executed that strategy.

Okay. The rolldowns this time, were there any lumpy single or couple larger rolldowns that skewed that down? It seemed like a fairly negative print, just curious there.

It is interesting one, because two of the most exciting renewals we have done in recent years, the Demandware and Harvard renewals, on a long-term basis, no free rent, no capital or very little capital associated with either deal. But they also there was quirks in those deals. The Harvard deals were long I think they were mid 20 year deals originally and done at the peak of the market back in the early 2000s, and so they were coming off of really big rents. And so, we were still able to get GAAP roll ups on that deal, but we had cash roll down because the leases had gotten to such high cash rents at the end of those long-term leases. And then the Demandware deal was interesting because although most of the building rolled up, there was one tenant in there that we were rolling from that tenant to Demandware's lease in 2019, so still three years from now, and that tenant had just an unusually high rent for reasons that we are not even sure we are aware of, because it was done before we bought the building. And so, as a result, there was a roll down on a sizable chunk of that lease as well, starting out in 2019. So, even though those are two of the best executions we feel like we have gotten in a long time, they both had cash rolldowns and that's why you saw the number you saw there. But if you think about it, those were also two of the biggest over market rented situations we had in our entire portfolio, and now they're gone, and so it does nothing but help our mark to market across the portfolio at this point.

That's helpful. Thanks. And then just the last one for me. Any general comments about the leasing environment, I think you had mentioned earlier in the year that things had felt maybe a little bit slower and tenants taking more time making decisions. Is that still the case? And maybe just how you are feeling about your current pipeline.

I would say I think we are seeing the same thing that many of the other people that have reported already have seen, which is the market started slow in the year. We had a slow first quarter. It started picking up; we had a much better second quarter. I think we expect to have relatively consistent leasing in the third quarter to the second quarter, but it almost depends week by week. Like Bob was telling you, he’s starting to see some more deal activity in Washington, DC, but I can tell you there is two or three other markets that have gone really quiet recently on us. So, I would say it is reflecting lately, and it doesn’t always do this, but it seems like it is reflecting lately growth in jobs across the country and growth in GDP, and it is almost as if the market is trailing that very closely. And as a result, when we see the activity in the GDP, in job growth categories pick up, we seem to see activity in the leasing side pick up and vice versa. So I would say it is okay. It is not as good as we would like it to be, but it is not terrible, either.

Mr. Miller, the floor is yours.

Again, we always appreciate everyone calling in and the interest in the company. We continue to execute on exactly what we hoped you have heard us tell you we were going to do, and we continue to plan on doing that over the course of the rest of the year. So we are very excited about where we are and we hope that we continue to attract you and your capital going forward. Thank you very much for your time.

This concludes today’s teleconference. You may disconnect your lines at this time and thank you for your participation.