Good day, ladies and gentlemen, and welcome to the Piedmont Office Realty Trust Fourth Quarter 2018 Earnings Call. All lines have been placed on a listen-only mode and the floor will be open for questions and comments following the presentation. [Operator Instructions] At this time, it is my pleasure to turn the floor over to your host, Robert Bowers. Sir, the floor is yours.

Thank you, Operator. Good morning and welcome to Piedmont's fourth quarter 2018 conference call. Last night, we published our quarterly earnings release and filed an 8-K containing our unaudited supplemental information. Both of these items are available on our website, under the Investor Relation section. On today's call, the company's prepared remarks and answers to your questions will contain forward-looking statements as defined by 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 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 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'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. Our senior management team is available today to address any questions that you may have, but first I'll review some of our quarterly financial results and 2019 guidance after Don Miller, our Chief Executive Officer, and Brent Smith, our President and Chief Investment Officer to discuss 2018 annual and fourth quarter accomplishments. Don?

Good morning, everyone and thank you for joining us on today’s call. I’m very pleased with our 2018 annual and fourth quarter results in almost every areas of business, particularly in leasing and capital allocation activities. Our 2018 leasing was active totaling approximately 1.6 million square feet with approximately 256,000 square feet of leasing executed during the fourth quarter. Leasing was spread across our portfolio and a list of leases over 10,000 square feet that were signed during the fourth quarter is detailed in the quarterly supplemental information that was filed last night and is available on our website. Perhaps the most significant leasing news in 2018 is that we grew the portfolio's overall in-service lease percentage over 3% with limited expiration exposure for the next five years. At year-end, the lease percentage was 93.3% and this increase is reflected in the continued multi-year growth in our same store cash and accrual based net operating income. Our economic occupancy meaning occupancy related to leases actually paying cash rents grew to 86.8% at year-end. That's up nearly 13 percentage points since 2014 and has led to some of the best same store cash NOI growth in the office sector in the last four years. As we begin 2019, we have approximately 667,000 square feet of leases and abatement from new tenant leases that are recently commenced and from renewals with upfront abatement periods. These abatements plus two known move outs will flatten our NOI growth during the early part of 2019, but we projected will pick up thereafter. For example, approximately 500,000 square feet of these leases will begin paying rents by the end of June 2019, and will lead to an acceleration of NOI growth in the latter half of the year. A list of the larger executed leases with…

Thank you, Don. As you should expect at this point in the real estate cycle, especially given the discounts to NAV for Piedmont and frankly most office lease trade, we continue to be a net seller in 2018. Piedmont sold a total of 15 properties in over 3.1 million square feet in 2018 with another significant asset under binding contract to sell in early 2019. With regard to approximately 590 million of disposition proceeds in 2018, we recycled a portion of these funds into three accretive strategic assets, restructured and strengthened our balance sheet and bought back our own stock of what we believe is a significant discount to net asset value. Furthermore, we exited multiple non-strategic markets and bolstered our competitive position by increasing our Class A office market share in key submarkets in Minneapolis, Orlando and Boston. Focusing on activity in the fourth quarter, we sold our last remaining West Coast asset 800 North Brand Boulevard and recycled a portion of the proceeds into two assets in our core markets 9320 Excelsior Boulevard, a value add asset in Minneapolis and 25 Burlington Mall Road in Boston. This redeployment of proceeds will result in approximately $0.03 of FFO accretion annually per share. We begin 2019 with a binding contract to sell 334,000 square foot Southwest Washington, D.C. asset, One Independence Square, for $170 million. The sale of One Independence is the number of strategic points for us, reducing our exposure to the Southwest D.C. submarket, disposing of a fully stabilized asset leased primarily to governments tenants with limited further NOI growth potential, and freeing up capital to initial reduce our leverage level and as appropriate, invest accretively in other high yielding opportunities. We expect this transaction to close during this current quarter, subject to customary closing conditions. Given the…

Thank you, Brent. I'll discuss some of our financial highlights for the quarter, I again encourage you to please review the earnings release and supplemental financial information that's filed last night for more complete details. For the fourth quarter of 2018, we reported FFO and core FFO of $0.45 per diluted share, that's a $0.03 per share increase compared to the fourth quarter of 2017, despite significant net disposition activity during 2018. This earnings growth per share can be attributable to higher occupancy levels which Don referred and to continue growth in our overall rental rates, which now averaged approximately $36 per square foot in our portfolio. This earnings increase is also attributable to fewer company shares being outstanding as a result of our stock repurchase program. During 2019, company the repurchased 16.5 million shares of stock. AFFO was approximately $41 million for the fourth quarter and $171 million for the year, well in excess of our current dividend level. Same-store NOI was up approximately 9.2% on a cash basis for the fourth quarter of 2018 and up 6.5% for the year. On a GAAP basis, same-store NOI was at 5.2% for the fourth quarter and up 2.9% for the year. While individual quarters very great in terms of a number of leases and the size of those leases completed, almost one million square feet of leasing was executed in 2018 from previously leased space. And cash for rents for this space increased on average 2.4%. And GAAP based rents increased 9.1%. Over 600,000 square feet of leasing was completed during the year for vacant space and was the primary contributor to the growth in the reported leased percentage increase to 93.3%. Our average net debt to core EBITDA ratio for the fourth quarter of 2018 was 5.8 times. And…

Thank you. [Operator Instructions] Our first question comes from Barry with D.A. Davidson. Please state your question.

When it comes to leasing and anybody can jump in to take this question. Maybe if there is a little more color on the New York State lease? And then also, if you could provide a little color on the SunTrust releasing of that building where we stand there?

Hi, Barry, this is Brent. Appreciate your time today. As you know, the New York State is resides the 60 Broad, which is our 1 million square foot Class A asset in lower Manhattan just 1 block from the New York Stock Exchange, it's really a unique building with wedding take design and produces an amazing outdoor space and 360 degrees views, three distinct lobbies, it really creates a unique situation. In that, the lowest portion of the building 2 through 11 do have New York State, but we continue to work through a detailed lease documentation and design of their space and immediately it’s been a protracted process. But I'd say it's not anything out of the ordinary for a GSA customers and tenants. But keep in mind, there are 7 agencies and a multitude of stakeholders located both at the building and Albany and a lot of planning that goes into a lease and build-out of its scale. Both PDM and the OGS receive the agencies are working diligently complete the lease before the end of March. And I'd reiterate the transaction is not wavered from what we’ve discussed in the past. We're looking at 15 years of lease term not includes of a renovation periods of the building, market level PIs very limited free rent. And as we noted before, a slight cash flow down and a meaningful GAAP rollout.

Right, got you.

Barry, on the SunTrust situation, a lot of news in the marketplace about what maybe happening there, we have not contributed any of that because we don't have any thing ready to announce yet. We do in our planning on doing a fair amount of renovation to the building, obviously, the buildings -- the most iconic building in downtown but we feel like we can do some pretty creative things to take that even to the next level. Our plans are being finalized as we speak, but we're still little way away till we announced those. And we have some leasing activities as the building is pretty promising, but too early to get into whether that's going to come to completion or not yet.

Great, great. And then, switching gears, last question. When we look at the Washington, D.C. asset for $170 million. And then we look at the fact that you brought back to 2.2 million shares in the $17 range, $17.13, is it fair to say that the use of those proceeds should your share price go back down to the 17 levels? Is it fair to say that we could, could see rise back in the market?

Well, so yes, we bought -- obviously bought 2.2 million shares in the fourth quarter. The fact that we're continuing to dispose the properties and proving out the value of our NAV towards every time we make another transaction, it does give us more confidence to be buyer of our own shares just because we're seeing a vast disparity between what we think our underlying real estate value is and what the shares are trading at. So, not unlike a number of our peers, we're doing the same thing right now. We're just seeing dramatic value in our own shares. We feel like that can be a good use of proceeds upon disposition. And just would remind you that we're not going to lever off to buy back shares. We'd only do it through the use of disposition proceeds.

Right, got you. All right, I’ll leave the floor. Thanks so much guys.

Thanks, Barry.

Okay. Our next question comes from Michael Lewis with SunTrust. Please state your question.

Great. Thank you. In terms of non-move outside roll you talked about New York State and SunTrust. Could you also provide if there's any update on RVs I think Siemens has an expiration at the end of the year. And if there's anything else on the radar we should be aware of which will help us kind of with the cadence of the NOI growth for the year?

Yes. I think RV I would say is in a very similar situation to SunTrust, we have a much more modest renovation going on at that building that we'll just update some things, including we have a spectacular business center in the basement of that building and we're refreshing that. And a little bit work in the lobby, but the leasing activity has actually been very strong there as well. And so I'd say, although it's too early to announce anything, we're optimistic we should have some good follow-on things to talk about in the coming quarters given our activity level. On the situation in Minneapolis, that lease expires at the end of the year. And we're optimistic that it will have a good outcome there. We've been engaged with the tenant for quite some time. And we believe we have a really good chance to keeping that in a majority of that space. There could be a downsize there, but we don't think it would be a dramatic one.

And then Michael, I add looking into '20, early '20 to get to the New York City, as you know, that comprises floors 12 through 23 in the 60 Broad State and that lease will expire in April of 2020. And the New York City process like the New York State takes time, but there's one bit of good news is this envelope only has three agencies so there is a few less parties to coordinate with. And while it's still in the process, I think, we are incrementally more positive on our retain New York City, the customer tenant 60 Broad. There's not a lot of detail we can go into right now. But as we've said in the past, we're talking to them about 20 years of term, not includes renovation periods of the building, market level CIs, limited free rent. And I noted again meaningful cash and GAAP rollout related to that lease. So we hope that more details to share with you around the City later in the year.

Thanks. And as far as your comments about being a net seller in 2019, obviously, there's some -- there's a couple of properties left at this other bucket, one in Phili and two in Houston. You've got one property in Chicago. What kind of -- what do you think for putting stuff on the market? And how much could you really sell -- does a lot of just depend on use of proceeds and kind of thinking about how much you're willing to shrink the company additionally as well?

Yes, Michael, I think, you just properly characterized the challenge we deal with every day when we're thinking about various aspects of what we might sell and what we might hold. Obviously, there's tax consideration, there's use of proceeds considerations, there's just business strategy considerations. So all of those go into each individual decision. You'll see, I think, as the year unfolds, the decisions we're making as we speak right now in terms of what we're going to bringing to the market, we're not prepared to announce what those are right now. But we're trying to signal that we expect it'll be likely selling more than we're buying this year just because it's still a relatively challenging environment for acquisition. And we do have several things we like to try to bring to market for sale, but to comment, I know quite yet would be little bit premature.

I think I would add, we do see a little bit more promising of a pipeline for acquisition even marketed or off market that we could redeploy into very strategic we think some assets that will come to market should provide a nice opportunity to continue with our strategy and continue to gain concentration within specific submarkets. So please stay tuned as we progress through the year, and we'll give you more detail.

Great. And kind of part B to that question. I'm curious how you're thinking about New York and maybe it's a year to still too early to talk about this, but you have some New Jersey assets and then you got 60 Broad. Assuming you resign the state and the city, you talked about maximizing the value that building with long-term 15-year leases on it, maybe that becomes a sales candidate. And then do you keep a toehold in New York? Or do you think since that's, obviously, one of your markets with a lot of competition from REITs and sophisticated investors, do you think New York sale a long-term market for you guys?

This is Brent, Michael. It's a good and fair point. At that point when we and if we are fortunate enough to accomplish sign both the City and the State, we'll definitely evaluate if it is the right time to monetize, whether that's a full stay, partial stay, ground lease, fee hold, everything in between. You rest assured, we'll look for the best way to monetize value for shareholders. Now longer term, there actually are no other REITs to play in the lower Manhattan, which would be our focus. But there are, as you noted, other larger private landlords, and we'll take that into consideration as we evaluate the long-term strategy for New York. But overall, we've had very positive returns and very good success there and would like to continue that at least through the New York State and New York City deals and we can probably evaluate further.

Great. Thank you.

Okay. Our next question comes from Dave Rodgers with Baird. Please state your question.

Good morning, guys. I don't know this is for Don or Bob, but maybe just going back to D.C. leasing activity prospects in the market and can you dive in as that just been slow down since the government shutdown or kind of throughout the quarter, what are you seeing between the RV core and kind of the B quality assets that you have in the district itself?

Bob, you want to take that?

Sure. I would characterize the market has really been down here in the sense -- absorption in 2018 was the highest level since 2010. So generally, I think, it's positive. And in Virginia, even more so. I think the challenge in D.C. is really with the new supply coming on, which is pushing vacancy rate and making it a very challenging market. On the Virginia side, I think, it's much more bullish. I think, there's good size of continued growth across the market, which will continue to see. And so I think, there's continuing amount of activity that's pretty good in our Arlington Holdings in Virginia. And I think we'll expect to see that continue to grow. Amazon will have some peripheral effect, probably to the positive on that. But Downtown does remain challenged and with law firms continuing to contract and the federal government moving into their own space and making that much harder. So we like to see more activity. We'd like to see less competition, but we're day-to-day slugging it out in the market to fill the buildings.

Great. And maybe for…

Just a slightly distinguish, I think you're asking about our comments in the prepared remarks, we're really getting sort of a very short-term trend movements in terms of leasing. We have some really good activity second, third quarter of last year. It seemed to slow down later in the year. Then, I think, with the government shutdown just sort of shutdown for a couple of weeks for fund. And then Bob is really talking about longer term. The other thing we like to point out and we mentioned in the prepared remarks is just the good news is, although we may not be adding to our occupancies put these we like to in D.C. all the time, we've got nothing going out in the backdoor because there's very little lease rollover so next 5 years in D.C. for us. So the good news is, we haven't got any loss at the backdoor.

Great. Thanks. And then, maybe second question either Don or Brent to tackle this. Can you just kind of talk about overall lease economics in your portfolio and the leases that you've been signing? And can have those economics are trending both at the base rate as well as kind of the net economics on the deals?

Yes. And obviously, every quarter is a little bit different for us. And some of its lumpiness. Some of its just a matter of where the lease is going to get signed. Fourth quarter, the mark-to-markets were worse than we've seen in quite some time, largely because of the relatively small quarter from a total leasing standpoint and the two largest leases that we did that fell into the same-store pool, if you will, one within Houston and one within Washington. So obviously, two of the weakest markets that we deal in. And so the numbers were not as attractive. Having said that, when we look at our portfolio more broadly, I think, we're still forecasting as rents move up in some places that we're still around 5 -- a little bit north of 5% on a mark-to-market basis across the portfolio. That doesn't mean there's going to be a substantial amount of lumpiness on a cash mark-to-market basis going forward quarter-to-quarter.

Great. Appreciate the color. Thank you.

Okay. Our next question comes from Daniel Ismail with Green Street Advisors. Please state your question.

Great. Thanks guys. Good morning. Just curious as you guys continue to shrink, are there any tax implications of the upcoming sale or future sales down the road?

There are no tax implications thus far, obviously, other than the one special dividend we made at the end of last year -- I think, we ended first quarter of 2018. That was -- that special dividend was made because we obviously had a gain that was in excess of we need to distribute. That thing could happen again to us if we're unable to deploy proceeds back into 10.31s or otherwise. We do have some assets that have some very large gains in them. The good news is that usually we made a pretty good round-trip transaction. So it's not -- it's a high-class problem, but it's a problem nonetheless. And so it'll either be forces into 10.31 assets or doing special distributions. I'd say we prefer the former to the latter.

And curious, as you look at disposition -- potential disposition candidates, how is pricing in your own underwriting than, say, year-over-year for those types of assets you guys have been looking to dispose of?

So Daniel, you're just asking me of the portfolio of noncore how does that valuing today versus, say, 12 months ago?

Yes. Have you guys noticed either one of you guys underwriting these or going out looking at the markets yourself, have you guys noticed any of these assets perform better or worse in your expectations? And just how pricing is going to your point?

Got you. I guess I'll bifurcate into two areas. The noncore that we have in Phil and Houston are single-tenant long-term lease deals. So that's not really probably something that we're generally looking to acquire. And I think pricing in that type of environment still is highly credit focused and is somewhat interest rate independent. So it's been good. The rates kind of comeback in over the last 6 months. And I'd say it's probably pricing would continue to our firm our view of NAV for those assets, whether it was 12 months ago or today. So I wouldn't any deterioration there. In terms of a multi-tenant deals, which is generally what we're chasing, I'd say bidding pools have been depending on the market and depending on whether or not the asset is go down the fairway or a little bit of. And so I think those that are down fairway smaller bidding pools but pricing are generally held things with here on I think, we've seen maybe backup on pricing not dramatic, but I'd have to say in 2% to 5% range unless there's really something problematic that it can't get financed. But with the market to loss with capital and debt financing being very readily, I think, our own values has been affirmed overall for our view. If you look at 800 North Brand and one [indiscernible] most recent, I think, that's right in line with where we expect a transaction to occur.

Great. Thanks guys.

Okay. Our next question comes from Anthony Paolone with JPMorgan. Please state your question.

Thanks. Just a couple of detailed ones here, maybe for Bobby. Can you give us sense us to CapEx budget for 2019 given potentially doing something in the State of New York and you talked about Orlando CapEx in the past?

Tony, I'll try to start. Bobby is looking through some papers, well to see if we can give more specificity. But I think, the easiest way to try to project the capital budget is just that we expect a similar amount of CapEx per square foot for year of lease term on the leases we're doing today. And what I mean by that is, you’d say some renewal activity, et cetera, on a blended basis that we would have seen over the last several years. So obviously, we range from the upper 4s to mid 6s on a total leasing commission and CI per square foot for your lease term. If you add all that up, I think, we're going to be in that same range. So a lot of question becomes how much leasing you’ve get done? The simple answer is, again, we New York State we strongly believe it's going to be New York State. And then how much more do you get done and once you factor that in that gets you pretty close to what you should expect our CapEx spend to be for the year.

Okay. And just -- where the year-end occupancy guidance is for that 93 to 94 range that's pretty consistent. So effectively, roughly 1.7 million square feet that expires in 2019. That should be roughly about the level of activity you're kind of expecting for this year to keep occupancy pretty flat, is that fair?

That's a good way of looking at it. Yes. That’s pretty clever, yes.

Okay. And then just to understand the economics on the One Independence sale. You mentioned $10 million of GAAP NOI in calendar year, I guess, 2018. Just trying to get sense what the run rate or stabilized cash looks like on that specific in the back of it sounds like the actual economic NOI at the moment is a bit lower than where the we straight is.

That's right, Tony. We've done a couple of leases at the asset. So there's a little bit of free rent still within the asset itself, One Independence. We haven't disclosed what the cap rate or imply cap rate would be for the year. But if I were to say be a mid to low 5, similar to an 800 North Brand was, very stable asset. We're approaching over 95% lease on that. And unique situation where given the government and GSA tenants, there's not a lot of cash flow growth from an NOI perspective. So given all those factors and the way lease term of over eight years you said, now we've created a much value as we probably could and there's time to push that one of the door. We thought we are getting great execution.

Okay. So sounds like low 5s once the cash is all up and running their. And on a GAAP basis for modeling purposes, the $10 million divided by the 1.70, so I got 5.9 cap to take it out of our numbers?

That's generally in line, maybe a smidge high.

Okay, great. That’s all I have. Thank you.

Thanks, Tony.

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

Great. Very nice quarter guys. Congratulations. Talk through just where you think besides the City of New York, where do you think you can get, say cash rent bump over 10% in the major markets in which you operate?

Obviously, that's a dramatic example of one. The problem, I think, John in giving you an easy answer on that is that it's really depends on when the last round of leasing was done and what level of rents that was done at. There's a number of our leases on a portfolio that we'll see greater than 10% cash rollouts, but that's more unique to the situation of that lease than it is the market rent. And I think we would share -- I think, the bigger question you're asking is, if you have 2% to 2.5% step in your leases and once rent grow by at least amount or more plus something, you're not going to be getting a big step up in cash rents. I think guilty as charge. Yes, that's true in the office space business, fairly broadly. And so typically, we're not getting 10%, plus cash rollouts on deals unless there's a unique situation that are coming before and that's pretty universal across the office space industry with maybe the odds difference of opinion on West Coast market or the occasional situation on Midtown South or something like that. So, I don't think there's many places where you tend to see that very often.

I would add John, though, across the portfolio, again, approximately roll-ups of 5% to 10% when you blend it through the whole portfolio. So we'll have some that are above that and a few that are below that. But net-net, we should be continuing that trend line.

The only thing I'd add to that John, sorry, you may -- one another question. The only thing I want to add the two places we are seeing it right now, frankly, is in Boston and in Atlanta, I think, we made comments on that in the prepared remarks where we're seeing very, very strong roll-ups in rents in the last few years and our central perimeter submarket in Atlanta and in Burlington in Boston. And so those two places we're seeing a number of leases get 10-plus percent cash roll-ups on deals. But I can't tell you that's across the board, across the 60 million square foot portfolio.

Got you. And then Bob, your building in Philadelphia, that Blue Cross Blue Shield, I can't remember, how many years left on that lease? And when does that go-to-market?

That lease expires in 2033, so we still have 14.5 years or so left of lease term. And as we sort of thrust and parried on that question for a number of years now, that's a building that we just feel like there's no reason to move it to market as long as it has 10 years plus of lease term until and unless it makes sense for us strategically to do so, because, frankly, as with two-plus percent steps in that rent and a fantastic location and long-term lease with good credit, we're not exactly losing value on that asset at this point in time until it's something that will continue to monitor and what we think the time is right even if it's got a humongous gain on it. We'll have to be thoughtful about when we bring it to market, but the answer is there is not immediate plan to do so.

I'd add, John, with that building, CBD location, the way Blue Cross Blue Shield has created a campus there an urban campus that asset will be highly liquid and sought after credit rated or credit liked entity so we feel pretty good about the liquidity. And we'll monetize it at the right time and re-put as proceeds.

Makes a lot of sense. Okay, thanks.

Okay. Seeing no further questions, I'd now like to turn the call back over to Don Miller for closing remarks.

Thank you, operator. Just to ramp up, I think, I mentioned something in the call that I'd like to reiterate that is that we're seeing a lot of really good leasing activity across our portfolio right now. Obviously, you never know whether those things will translate into confirmed and signed leases, but obviously, State City in New York is a big chunk of square footage. But overall, we're working on 1.5 million to 2 million square feet of either letters of intent or active negotiations. Much of that could follow hard still, but the answer is we're really excited about how much is got going. And when you combined that with the amount of vacant space leasing we did last year, and I think that's why you're seeing some still embedded growth in the portfolio despite the fact that we're net sellers. And so we continue to remain very optimistic and very positive about the platforms for the company going forward. And thank you for joining us today.

Thank you. This concludes today's conference call. We thank you for your participation. You may disconnect your lines at this time, and have a great day.