Greetings and welcome to Piedmont Office Realty Trust First Quarter 2018 Earnings Call. [Operator Instructions]. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Robert Bowers, Chief Financial Officer for Piedmont Office Realty Trust. Thank you. You may begin.

Thank you, operator. Good morning and welcome to Piedmont's first quarter 2018 conference call. Last night, we filed our Form 10-Q as well as an 8-K that includes our earnings release and our unaudited supplemental information for the first quarter. All this information is 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 actual results to differ from those expectations we discuss 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 the call today, 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-GAAP 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. Don?

Thank you, Bobby. Good morning everyone and thank you for joining us on today' call. As it is no surprise, anyone following the REIT sector in general, or more specifically, the office REIT sector, we are incredibly frustrated with the share price of our stock. Currently, we are trading at a huge discount to our estimated real estate value and the lowest earning multiple in years. We have consistently undertaken the approach to selling select assets at private market pricing and buying back our shares at a big discount, as value added to the company and our shareholders. Although, the market has not recently rewarded that philosophy, we remain committed to increasing the net asset value of our shares going forward. Therefore, during the current quarter, we completed the disposition of a portfolio of 14 non-core properties. As of the closing date of the sale in January, the total gross sales proceeds were $426 million, while we realized an additional $4.5 million in sale earnout proceeds later in the quarter due to the completion of 150,000 square foot lease at one of the sold properties. These additional proceeds increased the total gain on the sale to approximately $45 million during the first quarter. After initially paying down over $470 million in near term debt maturities, with the disposition proceeds in line of credit, we ultimately used a little bit more than a half of the sale proceeds, to repurchase approximately 12.5 million shares of our common stock during the first quarter, at an average price of approximately $18.50 per share. Since we began this program in 2011, we have repurchased over 25% of our outstanding common stock, almost 44 million shares at an average price of $17.74 per share. In fact, we would encourage all of you to revisit your…

Thanks Don. While 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. For the first quarter of 2018, we reported net income of $0.42 per diluted share. FFO of $0.41 per share, and core FFO of $0.43 per share. FFO and core FFO were $0.45 per diluted share a year ago, with the decrease in the current year being the result of the sale of 17 properties or over $50 million of annualized NOI since June of 2017. These sales included the portfolio sale in January of this year, as well as the sale of one of our then largest assets, a 600,000 square foot Two Independence Square building in Washington D.C. during the third quarter of 2017. AFFO was approximately $46 million in the first quarter of 2018, well in excess of our regular $27 million quarterly dividend. Overall lease percentage improved to 91.3%, primarily as a result of the sale of the 76% lease 14 property portfolio and the transfer of our two Pierce Place property into redevelopment status, as it undergoes a $14 million renovation, with approximately half of that already incurred. We anticipate our reported lease percentage for our same store portfolio, exclusive of the redevelopment project will move above 92% by the end of the year, absent any further significant transactional activity. During the quarter, our same store cash NOI improved approximately 4%, and we continue to believe that we will end the year around the slow single digit growth rate. From a balance sheet perspective, our quarter end leverage ratio remained at approximately the same leverage, as we ended the previous year. Although it is higher than we originally budgeted…

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

Hey, good morning guys. Bobby, you mentioned low single digit cash same store NOI growth for 2018. I think last time, you had signaled 2% to 5%, should we read that as unchanged guidance or do you think you end up closer to maybe one or the other end of that range?

I think 2% to 5%.

Okay. You guys also disclosed a potential moveout in Houston with Technip. I am just curious, if you have any visibility on the other tenants plans in that building at this point. I believe it's Schlumberger? And I think they had a 2020 expiration themselves for that building. So just curious how you see that all kind of playing out?

Jed hey, it's Don. I think we have known this. Obviously, Technip was a full building tenant in that building for many years. They had actually subleased the majority of the building to Schlumberger. We ended a direct lease with Schlumberger beyond the end of 2018 for two more years on about half of the building, and then Schlumberger still subleases, in addition to the space they went direct on with us, another 65,000 or 70,000 feet from Technip through the end of this year. We are in discussions with them. I think, as I said in the supplement right now to potentially extend all of that space for a long term, but those negotiations are not concluded at this point.

Okay. Thanks. And any traction on the building next door, the recent development?

Yeah. I will lead in, and Joe Pangburn is on the line, I will let him give a little more color commentary. But interestingly, we have seen a lot more activity there recently. I am not sure either Joe or I would tell you, that means, we think there is imminent activity coming, but at the same time, I think we are more bullish than we have been, but it's still a very difficult market. So Joe, do you want to dive in a little bit deeper, if you don't mind?

Yeah, I will just add a little bit, that at this point, we have probably seen more activity out there in the energy corridor than we have since the building has completed. Part of that is large corporate tenants sort of well ahead of their lease expirations, sort of perceiving the value that the amount they will get in doing transactions. So that's another way of saying, there might be a long leadtime between now and when those leases could start. But again, we are encouraged by the level of activity they have at the moment.

You mean, higher oil prices have sort of played into more optimism down there?

Certainly doesn't hurt. It's hard to say there is a direct correlation really at this point. It's more -- people have real estate needs, and they reassess sort of what they want to do, where they want to be, I think, more than it is, the level of oil prices, at least at the moment.

Okay. And maybe just another one for me; are you guys on the market with any potential dispositions at this point, and can you discuss, maybe in general, updated plans for sales, acquisitions and buybacks for the rest of the year?

Hi Jed, it's Brent. We continue to evaluate our portfolio right now, as you know. We do have a few things that we either have in the market or intend to put into the market for sale, at probably regular course business. I would generally say again that either are mature assets or non-core in nature. We are going to continue to be opportunistic around the allocation of those proceeds, as we have been in the past, and with time, kind of evaluate where our stock trades and what the opportunities are in the market for acquisitions. As you know, it's a pretty difficult acquisition environment. That said, we do still see some opportunities and we see eight strategic markets that we are operating in and continue to find product even within the kind of specific submarkets that we are looking. Specifically within the market from a dispo side, I think we have alluded to this in the past, is our One Indy asset. That One Independence is next door to that asset we sold, just last year in the mid-summer. Two Independence [indiscernible] headquarters, bringing in roughly about $350 million of proceeds at that time. So at this point, we are going to continue to evaluate where we are in the market, with proceeds and that would be hard to characterize our capital allocation somewhat.

Okay. Thanks Brent.

Hey Jed, you didn't ask, but we are -- I think we are having a little bit of technology problem on the question queue, so I am going to go into another area. So I think more questions that came up on in some of the reports that were written last night. Obviously, we had an all time sort of record quarter from a buyback standpoint. We are obviously very excited about that, very pleased that it came to fruition. But at the same time, I think -- a lot of the people say, the next question is sort of where does the growth come from? Obviously, there was a lot of growth created just from the share buyback in terms of net asset value per share. But on top of that, I think we would say hey, let's look at the now smaller denominator of our portfolio and realize that, everything we do has a greater impact, and if you think about the fact that we have very low economic occupancy today, although it has improved dramatically over the last few quarters, we have got the vacancy we have coming or the ones we see coming back to us the next year or two, which are Atlanta or Orlando or Dallas, maybe not all the above, but some of the above, are in really good markets. We have got very limited roll or virtually no rollover in our toughest markets, i.e. Chicago and Washington, and we got below market rents and leases, 5% to 10% across the board in the portfolio, on top of that rent bumps in our larger leases, and very limited rollover through 2024. So we think we have got a really compelling growth story on a smaller denominator, and I think that gets missed sometimes when you are buying back as many shares as we have been. But I think that's part of the reason we have been so optimistic in the share buyback, is that we see really good continuing growth within the portfolio. So sorry, I think we may have worked out the question queue now, so I think we can turn that back over. Thank you.

Thank you. [Operator Instructions]. Our next question comes from the line of Dave Rodgers with Robert W. Baird. Please proceed with your question.

Hey, good morning guys. Sorry I jumped on late, so hopefully, they haven't been addressed. But Don, I think in your comments earlier, you did mention discussions with both the New York State and New York City for renewals and early renewals there. Can you dive into that a little bit more? I know New York City is quite ways out, what would give you the confidence that they are going to stay?

Hey Dave. I know that Brent -- we have not addressed that, thank you for asking and I am going to let Brent address that, since he runs the Northeast region.

Good morning Dave. As you noted, we have had pretty lengthy discussions with the New York State for some time now, for almost, I'd say a year. We are in advanced discussions, as Don mentioned in his prepared remarks. We remain cautiously optimistic, that we will be able to renew a significant portion, if not maybe all of that space. But that still remains to be seen unfortunately, with seven different agencies, as I have mentioned in the past, was in that almost 500,000 square foot envelope. There is a lot of decisionmakers that have to finally sign off on things, etcetera. So we still remain positive on that, and hopefully, we will have something to share here in the coming quarter or so. But again, the New York State moves at its own pace and we are willing to work with them on that, and we will share when we can, new information. Regarding the New York City. As you noted, that's an April 2020 expiration. That is just above where the New York State resides within the building, roughly around 315,000 to 320,000 square feet. That is a significantly below market lease. So we look forward to capturing some additional value and cash flow from that, if we were to be able to renew the city, and/or if we just went to another tenant within the marketplace. I mean, it's very early in those discussions. I would hope that they move faster than the New York State. But that may not be the case, and we are willing to work with them and any other tenant to kind of meet their case. But we still remain hopeful that we will keep that agency. Again, it's a unique building within a building, similar to the New York State. They have their own lobby, their own elevator banks, and that provides a unique environment that really is not available in too many other buildings in Manhattan. So we still remain hopeful, that we will continue those negotiations with the New York City, and have a positive outcome. But again, it's very early. That's probably about all the color I can share, is there anything else I can maybe answer?

On the New York State portion, I think you said 500,000 square feet. Do you anticipate a full renewal, I mean, is that the tender [ph] of the discussions or are you not far enough to discuss that?

It's a little shy of 500,000 today. They would occupy roughly around 480,000 to be specific. I think, it's a possible outcome that they would take all. But I think it's probably reasonable to assume, that there is a potential situation, where they might be able to back a little bit of space. But I think we still remain cautiously optimistic there, as there is going to be a substantial portion with renewal [ph].

Great. I appreciate that color. Maybe Don, I heard in your comments too, you really kind of talked about the balance sheet flexibility that you have and you kind of also mentioned the $156 million of ATM capacity, but you wouldn't really use that without asset sales. So I guess, how do you use that balance sheet flexibility? In your mind, what's the right thing to do with that today?

Well, I am not sure that I would tell you, we think we have a lot of flexibility at this very moment, until we execute some more dispositions as you pointed out. We probably don't have the flexibility that we would say would give us options to do a variety of different things. As we are upward 30s now debt to gross assets and about just under six times debt-to-EBITDA, 5.4 reported at the end of the quarter. But as you can imagine, that's an average over the quarter, and so towards the end of the quarter, the number creeps up closer to 6. And so I'd say, we feel like we are sort of fully utilizing the balance sheet according to what we would be wanting to do today. But as we sell off, potentially One Independence or a couple of other things we are working on right now, I don't think that gives us that much more flexibility. At $18, we feel like the stock price is so compelling, that that would be likely used for proceeds. But having said that, Brent has also and his team here also worked on some acquisition activity. They were strategic enough and reasonably priced, then it would -- move in that direction as well.

So I get it. What I am hearing with you is that you are kind of on that borderline between what's more attractive, acquisitions or share buyback or that may not have been true where the stock was in the first quarter?

I am not sure that the stock price has changed, and obviously in the same range that we were an active buyer in the first quarter. But at the same time, we have added a lot of NAV, as we have probably commented on in this call, repeatedly, we have added a lot of NAV, as a result of all this share repurchase. I think just by quick math, in the last six months or so, we bought back up to March 31, about 15 million shares and most of that was in the first quarter. If you just knew basic math, I think you can see, we got about a 5% growth in NAV over that period of time, just from share repurchases. If our math is correct, you can imagine what that does to our internal NAV and makes our $18 share price that much more attractive, as the use of proceeds, if we were to get some more disposition activity done.

Understood. Thanks for all the added color guys.

Okay. Thank you.

Thank you. Our next question is a follow-up from the line of Jed Reagan with Green Street Advisors. Please proceed with your question.

Hey maybe just to follow-up on that; I guess, what's sort of your updated kind of comfort level in terms of your balance sheet and sort of vis-à-vis where you sit today on some of the metrics you highlighted. And if you did do future buybacks, maybe would you look to do those on a leverage neutral basis?

Yes. Jed, it's not lost on me. I think a quarter or two ago, I told you, we would not go above 35% or 36% debt to gross assets, and now here we are at 38%. Obviously, that probably implies we have a little bit of confidence that we will get some disposition activity done, that will create some more liquidity. But having said that, I think we feel like we are at the upper limits of what we would do from a leverage standpoint right now. Not that we are over-levered by any stretch. In our view, I mean, I think we are still levered below average in our sector. But at the same time, our view is that we would not fund new share repurchases without having disposition activity, if we take care of it, and it typically will be a lot more disposition activity, and there would be share repurchase, because of a map of share repurchase.

Okay. And then, just in terms of the potential timing of dispositions this year. Sorry if I missed that. And you said -- I assume we are kind of looking at back half of the year, maybe back third of year at this point, is that fair?

I'd say that there is a reasonable chance we could get something sizable done in the next few months, with the rest of it probably backdated towards end of third quarter or fourth quarter.

Okay. And still kind of net neutral on external growth over the course of the years? I think that's what you guided to last time?

You mean, the combination of acquisitions and share repurchases. Then yeah, probably right.

Okay. Great. Thanks very much.

Okay.

Thank you. Ladies and gentlemen, there are no further questions at this time. I will turn the floor back to Mr. Miller for any final comments.

Well, we had a -- we thought one of the best quarters we have had, since we turned public. Almost all of our metrics were fantastic, and so we were very excited about that. Obviously, we are very bullish about where the stock price is trading today, or we wouldn't have been such a large buyer. And we look forward telling our story further in June at NAREIT in New York. We are going to have the full team there. All five of the folks you normally are used to seeing will be there and having meetings. So if you are interested in hearing more about the story, we'd love to catch up, and so feel free to give Eddie, Gilbert or myself a call, and we will get you on the schedule and tell more about what we are thinking. So thank you very much for attending. Have a great day.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.