Greetings. Welcome to the Piedmont Office Realty Trust Second Quarter 2017 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce Robert Bowers. Thank you. You may begin.

Thank you, operator. Good morning, and welcome to Piedmont's Second Quarter 2017 Conference Call. Last night, we filed our Form 10-Q and an 8-K that includes our earnings release and our unaudited supplemental information for the second quarter. All of this is available on our website, 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 discussed today. Examples of forward-looking statements include those related to Piedmont Office Realty Trust 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 this call, we'll refer to non-GAAP financial measures such as FFO, core FFO, AFFO and same-store NOI. The definitions and reconciliations of our non-GAAP measures are contained in the supplemental financial information available on the company's website. I'll review some of the quarterly financial results after Don Miller, our Chief Executive Officer, discusses some of the quarter's operational highlights. In addition, we're also 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'll now turn the call over to Don.

Good morning, everyone, and thank you for joining us as we review this quarter's financial and operating -- operational results. Ironically, perhaps the most notable event that we will cover with you this morning is an important capital transaction, which was completed immediately following the quarter close. That is the sale of our Two Independence Square asset in Washington, D.C. On July 5, we completed the sale of the 606,000 square foot Class A building for nearly $600 per square foot, generating $352 million in net sale proceeds. This particular transaction was important for 2 reasons. First, it is indicative of one of our core disciplines here at Piedmont. When we believe we've maximized the value of an asset, we will look to sell it and redeploy the proceeds. As we've shown in the past with Aon Center in Chicago, among others, no matter how big or small a property it is, we will continue to be driven by the singular focus of delivering results for the shareholders. Second, the transaction afford us the opportunity to strengthen our balance sheet. With the proceeds of the Two Independence sale, we paid down the entire $210 million balance on our $500 million unsecured revolver and then earmarked the remaining dollars to repay $140 million mortgage on August 1, with no penalty for early repayment. This sale will likely lead to a meaningful special dividend around year-end given the $100 million plus taxable gain on the property. Bobby will further outline the pro forma balance sheet during his remarks, but I will simply say that while we still expect to be net sellers in 2017, our balance sheet is well positioned and we have ample access to capital should opportunities arise. Other recent disposition activity includes the sale of Sarasota Commerce Center for…

Thanks, Don. While I'll discuss some of the highlights of the financial results 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 second quarter of 2017, we reported FFO and core FFO of $0.46 per diluted share. That's up $0.06 over the same metrics last year, primarily attributable to new leases commencing and net acquisition activity over the last year. AFFO was approximately $51 million, which is comparable to the second quarter of last year and well in excess of our second quarter dividend. Our overall reported occupancy ticked down slightly year-over-year, while our same-store reported occupancy increased. Looking ahead, our outlook for overall lease percentage by year-end is being adjusted to 90% to 91% due to the sale of almost 900,000 square feet of nearly fully leased assets as well as our slower year-to-date vacant space leasing. This estimate may fluctuate marginally dependent upon the stand of our acquisition and disposition activity for the rest of the year. Same-store cash NOI for the second quarter of 2017 was up over 9% compared to the second quarter of the previous year. This increase is primarily driven by the commencement of new leases and the expiration of rental abatements. With a review of our leasing pipeline and the schedule of upcoming expirations of abatements of which the significant outstanding ones are detailed on Page 8 of our financial supplement, we believe same-store cash NOI will increase 9% to 10% for the year, and we reiterate same-store GAAP NOI will be in the range of 5% to 7%. Additionally, we anticipate approximately a 1% further narrowing of the gap between our currently reported occupancy and economic occupancy in the upcoming two quarters. For completed…

[Operator Instructions] Our first question comes from Jed Reagan with Green Street Advisors. Please proceed, your line is live.

You mentioned in the press release that the year-to-date leasing has been a little sluggish. I mean, what do you chalk that up to? And I guess, what's changed in the second half velocity that it looks more promising at this point? And I guess, where are you seeing the best activity as we sit here?

Yes, I'm not sure that we can give you clarity on why it's been a little slower in the first half of the year. I would say mostly it's because there has been a lot of large tenant activity out there. And so a lot of the things that we're seeing, the five, the 10s, the 15s on the new vacant space leasing activity. And then of course, we have very little renewal activity right now because it's just in a period of low lease expiration. So I think the combination of those two is probably why we've been a little slower. Why it's picked up, it probably is no more satisfying than the answer about why it's been slower, which is we're just seeing more particularly larger tenant activity, and then we're also getting engaged as we mentioned before on some of those forward renewals in 2019, where we have fairly good size number of larger tenants, all of which look reasonably promising right now. So that's what's exciting for us. We're also seeing a couple larger vacant tenant deals looking at our buildings that we're getting very promising on. So I'm not sure that I can give you a really good clarity on why. It just makes [indiscernible] one of those timing kind of issues, Jed.

So not the case that larger corporates are sort of sitting on the sidelines waiting to see what's going to come out of D.C., things like that?

I think there may be some of that relative to two years ago. But I don't -- we're not hearing that from our corporate real estate contacts and executives that there's a slowdown or a pullback or lack of hiring for that matter. So I would say on all fronts, I think it's just been a function of the fact that it's been a little slower in our portfolio. I mean, we've seen some of our peer groups have some of the same issues. But in certain markets, it's actually been relatively strong. We've seen a lot of activity in Dallas, a lot of activity in Atlanta. Some of the other markets have been pretty steady and then D.C. has been slower. Houston continues to be slow, of course, and then suburban Chicago has been slow.

And then just on the adjustment to the occupancy guidance, I mean, can you ballpark how much of that change was attributable to the slower leasing you've been seeing? And then, I guess, just over time I mean how much higher do you think you could push occupancy before it kind of hits stabilized or fictional levels?

Let me see if I can sort of reconcile all that. So we said probably late last year that we thought we were -- or maybe at the beginning of this year, we thought we can get to 92%, 92.5% by end of the year. I would say if you take out the $400 million of activity -- of sales activity that's virtually fully leased, that takes about a half a point out of that. So that takes us down into the guidance into the upper 91s. And then so we're taking sort of kind of full 100 basis points off of that. In our world, that's 200,000 square feet of vacant space leasing that left that we're going to do that we thought we were going to do this year. Having said that, the interesting news is we have done a fair amount of restructuring of leases and extension of leases and tenants coming in and taking space but other tenant didn't want, and some of that has had some roll up of activity and some restructuring fees associated with it. So if you look out to 2018, our core sort of NOI is about the same as we would have though it was 6 months ago, but at about 1% less occupancy, which is kind of an interesting dynamic. It shows you that there's really good underlying strength in what is leased and maybe even a little more upside in the fact that we've got more vacancy in the portfolio than we thought we're going to have. So I'm not trying to spin it into a positive per se, but at the same time, there really isn't anything negative coming out of all that other than the fact that we've got some more space to lease.

Okay, that's helpful. And maybe just last one from me. Yes, I realize there's probably not much you can say on the portfolio you have out in the market. Any -- can you give any indication of potential timing on that? Could any of that stuff close this year? Or is that more of an '18 event potentially?

Jed, it's a couple of things, I would say. We probably won't have a good handle on giving you guidance until call it early September will be my best guess. And even then, that could float around a little bit. And I say guidance, I really mean we will have good information on it by then. We may not be able to communicate it to you by then, which probably means that we're no earlier than late in the year before we would do anything meaningful. So I don't think we look at it as really a '17 adjustment in any way, shape or form. And in fact, depending on which properties sell at what prices, there could be some timing issues, which would motivate us to push it into '18 or on the contrary leave it in '17 depending on what we think our strategy is for special dividend and taxable gains and all those kinds of things. So that's why one of the benefits of bringing something out this time of year gives a little more flexibility in how you try to structure it.

Our next question comes from Richard Schiller with Robert W. Baird.

Quick question on the acquisition front. You guys net sellers appreciate throughout the year. You have $400 million of sales, no completed acquisitions so far. Have you guys taken swings at assets so far this year? And if you're looking, what markets would you be most comfortable in deploying your capital in?

Richard, this is Brent. As we probably talked about in the past, we really see the acquisition as a very challenging environment with some pretty intense competition from both foreign and levered buyers. But with that said, as disciplined investors, we're focused on basis and the best risk-adjusted return for our shareholders. And we are seeing really in a number of our markets now valuations outpacing fundamentals. But if we think about where do we see the best relative value, that's really been in the more highly amenitized urban infill and suburban some markets from which we already operate, and that's in cities like Atlanta, Dallas, Orlando and Boston. So we continue to look at both off market and market deals in those markets but really across all our 8 markets. That's just where we probably think right now is the best risk-adjusted return.

Great. And maybe a question for Bob. Is there any idea of a range for the special dividend potential in the fourth quarter?

Yes, thanks for the question. Certainly, with the size of transaction the Two Independence was and the size of gain that came there, there's a highlight we heard of a special dividend, but that will be largely dependent on the transaction activity that takes place here in the last half of the year. So I expect the board will be deciding that in the fourth quarter, and we'll add more insight at that time.

[Operator Instructions] Our next question comes from Anthony Paolone with J. P. Morgan.

Can you comment on some of the activity levels in sort of the Goldman space and Dallas, you mentioned Dallas being one of the stronger markets. I just want to understand what the backfilling prospects like there?

Yet. So I say the 2 -- obviously, there's the 2 that we're losing this year and then 2 that we're losing early next year that we've been reporting on for a while. I would say the Dallas situation is probably the most optimistic. We got a lot of activity there. And I would tell you that we're pretty optimistic that some good news will come out of that in the coming months. I would say D.C., we're seeing much slower activity. And maybe I'll throw it to Bob Wiberg for just a moment to comment, but we're seeing much slower activity in those 2 particular vacancies than we'd like to see at National Park Service, at 1201 Eye Street and the Towers Watson Street at 901 North Glebe. We are seeing some good 5,000 to 10,000 square foot activity at both Glebe and at 3100 Clarendon that we hope we'll be able to convert in the next couple of quarters. But overall, D.C. remains slower than we'd like to see. And so although we've had some great success at One Independence and at 4250 North Fairfax for whatever reason, the other 3 buildings which are all great buildings, great locations, on metro, et cetera, et cetera, it's just been a little slower. And then finally, I would say Gallagher, the Gallagher space in Chicago at Two Pierce, we're going through a full reamenitization of the building and all that [apparently] for early next year. And I would say, activity, there's some activity, but it doesn't begin to backfill big chunks of that space yet. So Bob, would you comment on Washington real quickly for Tony?

Sure. I think, as you said, Don, that the most activity we've seen now is in that smaller to midsize tenant range. That's about 20,000 feet. And I'd say the activity in the RB Corridor has actually increased from last quarter. So I think we're seeing certainly more tours there. Now we have to convert those into leasing, but we are seeing a pickup in activity in that sector downtown, probably slower than it was last quarter.

Okay. Is there a number that in the aggregate there's 4 key move outs that you have in terms of like mark-to-market?

In aggregate on those 4, let me -- I can probably think through that and give you a ballpark, Tony. I don't think we have a number in front of us. But Gallagher is above market. National Park Service is in the range of market. Towers Watson, Bob, I don't remember. Do you remember where that stands relative to the market, slightly above?

I think it -- I don't recall the exact number, but I think slightly above is right.

And then I think, Goldman would've been slightly below. The more interesting part of the story, not to redirect here, but the more interesting part of the story is lot of our '19 expirations are at least flat or fairly large cash roll ups and many of them are very big GAAP roll ups. And so that's the more interesting opportunity for us as we move forward to the bigger chunk of our lease rollover in the near term. And then of course, after '19, we have very little rollover in '20, '21 and '22. So that's why we're sort of so excited about the growth story is we got a little more occupancy to fill, which should grow earnings. We think some nice roll ups out of our '19 lease expirations schedule and then we got very little rollover there after. So it's kind of a nice -- we think it's setting up nicely for us.

Got it, okay. And then just with the big portfolio out in the market, is there anything else like outside of that, that you'd potentially sell this year? Or is it just all everything on the sales side as part of that initiative?

Yes, I would say, Tony, that everything that we're thinking about selling right now for the most is in that portfolio. There is one or two buildings there's a chance we could bring separately, but I don't think that's a focus of our attention at the moment because there's some leasing activity or whatever that we want to try to accomplish first. But if the portfolio didn't sell as a group as a whole, there's a decent chance that we could parse a lot, a handful of the buildings in that portfolio. Interestingly, it's funny how Murphy's Law plays into these things. The minute we put the portfolio on the market, we start getting quite a bit more leasing activity in some of those buildings, which complicates the process to some degree, but it also may end up encouraging us to potentially spin off some of those buildings individually rather than trying to put them into portfolio. So we'll have to think through that as we get our bids in and calibrate where the pricing is coming in and individually break out the pricing in the asset. So it's always art, not science on these things.

Okay. And just last question. We've heard about strength in Dallas just general level of office leasing there being pretty good from a few different folks. You have a little bit of land. Is anything at a level where you think you can contemplate development in that market?

Yes, I would tell you, given how strong it's been in Dallas, it would be -- and how late we think we feel like we're getting in the cycle, I think we'll be very reluctant to do anything there on anything other than a fully leased basis. We -- frankly, having that land and the flexibility it provides us with the Goldman vacancy coming up across the street could tie us into maybe doing a larger deal where somebody want to take a build-to-suit plus that building or something like that, and we've lowered the average basis for them by doing a cheaper deal in the existing building and then obviously the build-to-suit pricing. So it's sort of plays together with some synergistic aspects to the existing buildings that we have there. And so we're trying to make sure we be cognizant to try and take full advantage of that if it was available to us.

[Operator Instructions] Our next question comes from Jed Reagan with Green Street Advisors.

Maybe just a follow-up to Tony's question, I guess, just you mentioned 2019. Looking ahead at the expirations in 2019, I guess, maybe 12% or so the portfolio. Is it too early to give a read on the larger blocks in there that may be known move outs or likely move outs? And I believe the state of New York is one of the larger ones in there?

Yes, I would tell you right now. There's handful of very large leases in that grouping in '19. It's, in fact, the only really big leases we have coming due in our portfolio in the next four or five years are all sort of concentrated in 2019. So it's New York State, it's Raytheon, it's Arby's in Atlanta, Suntrust in Orlando, Chrysler in Detroit. There's a lease, a seaman's lease in Minneapolis. And I will tell you right now, of all those leases, not one of those do we believe or have we been informed that they're vacating. And in fact, we're in conversations with all of them at this point in time. Whether any of or all of them can get converted right away, let's wait and see. But we're pretty optimistic that a couple of those will come to fruition this year, and we'll continue to work on the rest of those going into next year. But usually, by now, you start to get an indication that somebody may be heading out the door and we haven't gotten that indication in any of these, but it doesn't mean we'll keep them all, but it does mean that I think we got a shot at keeping them all, which is all you can ask.

And, I guess, just looking ahead to the '18 term loan expiration, $170 million note, any -- sorry if I missed this, but any ready on your plans for that note?

Probably a little too early to tell because a lot of it will depend on what happens with the portfolio sale. Obviously, the portfolio sale gets consummated this year. That's the first use of proceeds to probably to pay down that loan early. Beyond that, it's probably a refinance in the bank market. It could be combined with some other things we had some use of proceeds to do something more in the bond market as well but all that will start to play out as to what happens in the next six months or so.

Ladies and gentlemen, we've reached the end of our Q&A session. I would now like to turn the floor back over to Mr. Miller for closing comments.

We always appreciate everyone's interest and activity in the firm. We feel like we had another good quarter, but we're mindful of the fact that we got some more leasing to do and we're hard at work in trying to make sure that happens. That's the first and foremost thing on our mind at the moment and the best news is we're starting to see some more activity again. But that's the thing that I think we're most focused on, and we encourage you to keep us -- keep holding our feet to the fire on that issue because it's important to us and we know it's important to you. Thanks, everybody, for participating, and we'll look forward to seeing you and following up with you after the call.

Thank you. Ladies and gentlemen, this concludes today's conference. You may disconnect your lines at this time. Thank you all for your participation.