Greetings, and welcome to Piedmont Office Realty Trust Second Quarter Earnings Conference Call. At this time all participants are in a listen-only mode. A 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, Chief Financial Officer. Thank you, sir, you may begin.

Thank you, Operator. Good morning, and welcome to Piedmont's second quarter 2018 conference call. Last night, we filed a Form 10-Q and an 8-K that includes our earnings release and our unaudited supplemental information for the second quarter. All of this information 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 discuss today. Examples of forward-looking statements include those related to Piedmont Office Realty Trust's future revenues, operating income, dividends 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 important detailed discussion related to risk associated with forward-looking statements contained in the company's filings with the SEC. In addition, during the quarter, we'll report in 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 our recent financial results after Don Miller, our Chief Executive Officer, discusses some of the quarter's operational highlights. Don?

Good morning, everyone, and thank you for joining us on today's call. Each quarter, I typically review with you our major capital transaction activity along with our leasing results. After completing the sales of portfolio 14 assets during the first quarter, our second quarter was a bit unusual in that no major capital transactions closed. However, that does not mean we have not been busy. We have a handful of large assets in nonstrategic locations that we began to market during the quarter. The anticipated proceeds from these forecasted dispositions may be significant and we'll be thoughtful in how they are used. We're deploying them in a manner that will, in our opinion, most benefit our investors over the long term. The funds from the sales over the next few quarters could be invested accretively either into assets in our core operating markets or by buying back shares should the opportunity arise and/or used to pay down debt. From an acquisition standpoint, values continue to be rich and anything you do see us do will be highly strategic and synergistic in nature. And as for stock repurchases in the second quarter, we were able to repurchase almost 2 million shares at an average price of $17.67 per share. As of June 30th, we had over $123 million in board-authorized capacity remaining under this repurchase program. On the leasing front, we were pleased to see an increase in prospective leasing activity across all of our strategic markets during the second quarter and are hopeful that this activity will translate into the lease-up of currently available space during the last half of the year. Given that our only sizable expiration over the next several quarters is the New York State lease of 60 Broad during the first half of 2019, any success…

Thanks, Don. I'll discuss a few of the financial highlights for the quarter, but as Don recommended, I also encourage our listeners to please review last night's filings for more complete details. Our second quarter of 2018 results are the first full quarter reflecting the net disposition activity completed since June of 2017, including the sales of 17 properties. And the loss of it combined over $50 million of annualized NOI. The impact on reported per share results attributable to the loss of operating income from these sales is partially offset by the reduction in our share count as a result of using disposition proceeds to repurchase over 17 million shares of our stock during the last three quarters. For the second quarter of 2018, both FFO and core FFO were $0.41 per diluted share as compared to $0.46 a year ago. In addition to the second quarter typically being the highest quarter for G&A expenses due primarily to annual stock awards being traditionally made during the quarter, the quarter's total operating results also reflect a little less than $0.01 per share of additional estimated incentive expense associated with our stock-based compensation plans as a result of the company's superior relative stock performance in the first half of 2018. As well as increased Chicago property tax assessments that we released at the end of the second quarter. AFFO was approximately $39.4 million for the second quarter 2018, well in excess of our regular $27 million quarterly dividend. Our overall lease percentage and weighted average lease term remained in statistics continue to hover around 91% level and 6.7 years, respectively. With no major expirations of leases for the remainder of the year, we anticipate our lease percentage for our same-store portfolio will be around 92% by the end of the year,…

[Operator Instructions] Our first question is coming from the line of Michael Lewis with SunTrust Robinson Humphrey.

Don, in your comments, you said there is not much concrete info to share on New York State, but I'm going to try to pry a little. It sounds like from the release and just the passage of time that maybe renewals becoming more likely. Is there anything that you could say on how much space they might get back? What the economic impact might be? And then I was also wondering, on a long-term renewal like this, to call it a government tenant, is there more CapEx associated with the renewal on a lease like than maybe a typical renewal?

Michael, I'm going to turn it over to Brent Smith, who obviously is day-to-day more [Indiscernible] with it. But I guess what I'd say is obviously, in any large lease like this one of the things we're a bit reluctant to go into too much detail is for competitors and other reasons to -- before things are finalized. And so Brent, will probably try to give you a little more color without diving too deep and putting ourselves in an awkward position. So I'll turn it over to him and let him give it a shot.

As we noted we are in advanced discussions in this. We've been talking about this now for over a year and working with the state to come to a resolution on renewal. We're very optimistic that we'll continue to proceed down a path that will have a great outcome for us. And we did note that there was a modest contraction in that and really, what we're working with the state is an important component of their requirement is to continue to operate and have the individual lobby and elevator bank. And that's a key component to them. And we're, obviously, in negotiation that they would want to keep that. So it's a pretty and modest minimal amount of space that we would get back in terms of the contraction. So it's positive in that regard. In terms of your comment on is it a government tenant, require additional PI, I'd say the answer is no. They're like no different than any other tenant, but I would note that they've been in the space now for about 20 years and it is rather dated. So it will be not a full remodel, but it will be a substantial upgrade to what they have today and it'll be commensurate in terms of capital required to do that. But I would say, by no means is it a level of a new deal in the marketplace. And then in terms of pre-rent, I think we're doing a little bit better than I'd say maybe the market is in terms of levels for a deal at this term, again a 15 year term with that tenant. And then I'd also add, we are in early negotiations with New York City for that additional 320,000 square feet that sits above New York State. And I reiterate that, that will be a substantial cash roll-up, when we get a chance to hopefully renew that tenant. If it's not the city, then it would be potentially some other tenant with a nice economic outcome.

I appreciate the color. I realize it's a sensitive topic. For my second question, I wanted to shift to Washington D.C. Obviously, you look at the occupancy rates across your markets and it's been a tough market, but there is opportunity there as well. And it looks like you only have about 20,000 square feet expiring there over the next year. What's kind of your level of optimism on getting some leasing done there? And kind of thoughts on the market in general as well?

Mike, I'm going to continue to play traffic cop and ask Bob Wiberg to jump in, but I will say that we haven't released, but I'm comfortable saying it. Bob and his team have already signed over 50,000 feet of vacant space new leasing in the third quarter in Washington DC. So we're off to a really quick start in the third quarter. And, I think that's commensurate with the fact that we're seeing a lot more activity there. So Bob, let me throw it to you, now that I've stolen your thunder and let you add any color on there.

Yes, I think in a broad context, the good news for the D.C. market in general, is that absorption is going to eclipse cumulative feet this year, which is the most since 2010. The largest and strongest part of that market is Northern Virginia. It has the most job creation, it's got more dynamic aspects. And importantly, it is more of the technology and DOD focus, which is really where a lot of the money is coming today. So Northern Virginia is about 1.2 million feet of absorption year-to-date, which is again strongest number in years. Now as I mentioned, really the technology sector is probably the sector that we see the most number of tours from, but in terms of actual deals signed, we've done a number of deals with associations, general business types as well as the tech folks, so broad-based, a pretty strong section. I think metro stops are where all the action is, which is where we are. So that's been fortunate. So I think the Northern Virginia market is looking better and actually looking pretty good. Downtown is clearly a slower growth kind of animal. The law firms aren't growing anymore, the growth in downtown is really been more of the tech side and the co-working. In our buildings, we're seeing a lot of association action. But I would say in Northern Virginia, we've actually signed a bunch of leases. However, in the district, we have more activity now than I'd say we've had in the past year or 2. But we can't predict how many of those will convert to actual leases.

Michael, importantly, I think, the thing that you pointed is the thing that we're excited about with D.C., which is virtually everything we do on a new leasing front these days is additive because we've got so little rollover in the next 3 or 4, 5 years in D.C. So the good news is Bob can make some nice progress on that occupancy level in D.C. over the next year or 2.

The next question is coming from the line of Jed Reagan with Green Street Advisors.

Can you give any more color on the potential dispositions you're looking at in the coming quarters? Just curious, how many buildings are in the mix, how much the sales could total dollars wise. And with that, have you exiting an incremental market or is that just trimming core markets?

Yes. So, Jed, it's -- probably none of this will be a surprise to you of the things that either fall outside of our core 8 markets. So that would be, probably at the top of that list would be either California or Pennsylvania. There are also some other assets that we've been talking about marketing, including One Independence Square in Washington, D.C. There's timing issues on a handful of those. I would say, right now, we're -- it's because several of those projects are $150 million plus, we're having to think about how we schedule the timing and try to match it up with use of proceeds and things like that. But I would say that one that may be farthest along is California. And we're working on that right now. One Independence Square is also near the top of the list, and then I would say, down the list a little further are some other things that you would -- we would all look at our portfolio and quickly include the nonstrategic, but to comment too much further, given where we are in the negotiation process, I'd prefer not to do yet.

I seem to recall with California, there is -- you sort of paused on that market process a couple of years ago, waiting for some things to kind of come together in that area. So I gather, those things have come together in terms of sort of the locality, or is it just you feel like the capital markets are strong, that, that's really kind of driving the move to market that today?

Well, you often are wrong when you try to make these projections, but I think we were optimistic that the Glendale market in particular was going to continue to improve, notwithstanding the fact that next day they announced their departure. And so we wanted to try to take that through to a higher rental rate process and be able to market it off of a higher rental rate and then also hopefully, capture some wraparound leases on the Nestlé deal, which is in fact happening as we speak. So some of those kinds of things, I think, are helping us get to the -- to a number that we're more satisfied with on the sale price.

And do these sales have a 1031 requirement you need to be mindful of? And I guess, could we expect you to buy a building or two here in the back half of the year?

We could, John, but I don't know that we will. We have actually a fair amount of tax flexibility in 2018 at the moment anyway, unless we were to move another acquisition in to -- sorry, disposition into '18 that had a big gain. Right now, we've got fair amount of gain capacity, if you will. And so as a result, we're not under any gun to do anything on the acquisition side. Having said that, the thing I think is most attractive about where we sit today as a company, and we talked about this a lot at NAREIT was that a number of these dispositions we're working on right now are very low-yielding assets, which under any scenario whether it's buyback of shares or redeployment of capital into other properties, should be pretty nicely accretive. That's a pretty unusual story as we all know in REIT land because usually capital reallocation programs mean you're going from higher cap property to lower cap property. So in this case, at least for the foreseeable future we feel like we're going the other way. So it's a nice accretive part of our story that I'm not sure we've told as well as we should yet.

And maybe just last one from me, congrats on the Schlumberger leasing Houston and the supplemental, you mentioned that the tenant has some extension rights for the remaining technic space. Can you give any more color on that and are there any ongoing conversations for Schlumberger to take the rest of that space?

There're not specific ongoing conversations. I think Schlumberger was smart to just sort of say hey, we probably would like to control that building longer term, now we'll need to have the deeper space to do so. So they have a limited period of time in which they can control the remainder of the building and after that, then we have a right to go ahead and market it. It's a fairly short period of time. And based on where oil prices are headed and the like, we may have some optimism that they'll take that because I think they really like that location and we've still got a very good relationship with them nationally. Having said that, the other thing I commented on in the comments about Houston with oil prices going up, we're seeing a lot more big tenant activity out in West Houston quarter right now. And I don't want to get ahead of ourselves and make any promises by any stretch of the imagination, but we see -- we're seeing multiple big-building tenants -- full-building tenants to our location recently and have some massive activity with some of them. So it's pretty exciting. Whether that will actually come to fruition or not, we don't know. I don't -- I'm taking one step towards -- in the past, I've told you don't underwrite anything. I'm taking one step towards, we've got a shot at getting some things done now for the first time in a while. And so we're excited about that.

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

Don, want to just parse through some of the comments with respect to asset fills and then what you would do with the proceeds. So, obviously, you're exiting what you consider to be noncore market still and that's a good thing, but when you look at kind of the redeployment, you're talking about leasing activity in many of the markets that you're then picking up. Yet you seem very reluctant to buy assets into those markets even though they would be accretive trades in the growing markets. So what's kind of your sense on how you would redeploy those? What you wouldn't want to do with those? And relative to the size of the company, you talked about it before, but it just seems like your comments today make it sound like a billion of asset sales will go into debt and equity. And again, shrinking the company further.

Well, if that's what you interpreted, that's not probably where we were trying to head with that conversation. I think the -- very much like we've had in the past, Dave, where we had sort of -- this is sort of the fourth iteration of chunky asset sales that we've been able to accomplish. If you think about it, 2015 and the sale of Aon Center, we were probably as nervous as anybody about the use of those proceeds and we're fortunate enough in some respects to have our stock price down at that point in time, we were able to be very accretive in our purchase of shares. And then we also were lucky enough to stumble into the Orlando and Atlanta transaction that allow us to place a sizable portion of proceeds and then pay down a little bit of debt. As of the -- sort of the next wave, which was the sale of One -- Two Independence, sorry, in Washington D.C. last year, again, stock price was in a position where we were able to acquire shares back on a very accretive basis. And then, again, here at the end of last year, we were able to do the $400 million portfolio sale and were able to deploy back into both shares $60 million worth of highly accretive acquisitions and then a little bit of debt paydown. So fortunately or strategically, whatever you want to call it, we've been able to sop up those sources of proceeds pretty consistently over the last few years. I think, we'll have another opportunity to do that and whether that will be share repurchase, obviously, that will be depended on whether we think the discount to NAV is great enough, or it's redeployment of money into acquisitions, which Brent is working on a fair number of them right now. And I'll let him comment in just a moment a little bit more of what we're looking at. And then, obviously, debt paydown, which, I think, everybody always feels like there's a good use of proceeds, especially late in the economic cycle. So that's hopefully a little better way of how we're thinking about it and I'll let Brent comment on the acquisition side.

Yes, Dave, I think I would add it's always, generally our preference to be able to find high-quality assets. And as Don noted before, what's kind of unique about what stands before us is that these will be lower-yielding assets. So we'll always take into account what our stock trades and that will include how we deploy that capital, but I think we've reiterate that -- and make the point that when we are looking at it on the asset side will be accretive to what we're trying to accomplish, but on a NAV basis hopefully, and on an earnings basis, more importantly. So we're looking at a number of off-market deals. Admittedly, the transaction volume across most of our market is down precipitously, meaningfully, even more so for the quality of assets that we've won and what is coming to market is highly competitive. But what that's done is push us more towards -- a bit towards off-market deals and looking for opportunities to find neighboring assets that are synergistic with additional product that we own within that market and submarket. We are seeing opportunities that would exist up in the Northeast, primarily in the Sunbelt, but there are things across all 8 of our markets that interest us and we continue to use the team from a capital-markets standpoint to go further down and bring them in.

It appears we have no additional questions at this time. So I'd like to pass the floor back over to Mr. Miller, for any additional concluding comments.

Thank you, operator. We -- I don't know that we have a lot to say other than hopefully you can sense our optimism in the latter half of the year. We're always a little reluctant to get -- be too optimistic on calls because you never know when things can go back the other direction and things do ebb and flow quite a bit, but we're probably as optimistic as we've been in sometime about the leasing activity we're seeing, particularly, in vacant space and, particularly, in markets where we haven't had as much success recently. And so that's a nice turnaround for us. And then the other markets where we have continued success seem to continue to move along. So we're very excited about the second half of the year and we look forward to working with you all on it. Thank you very much.

Ladies and gentlemen, this does conclude today's teleconference. We thank you for your participation. And you may disconnect your lines at this time.