Greetings, and welcome to the Piedmont Office Realty Trust Second Quarter 2019 Earnings Conference Call. [Operator instructions] As a reminder, this conference is being recorded. I'd now like to turn the conference over to your host, Robert Bowers, Chief Financial Officer. Thank you. You may begin.

Thank you, operator. Good morning, and thank you for joining us for Piedmont's second quarter 2019 conference call. Last night, we published our Form 10-Q and we filed an 8-K containing our quarterly earnings release and unaudited supplemental information. These items are available on our website under the Investor Relations section for your review.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 we anticipate and 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 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 certain non-GAAP financial measures such as FFO, core FFO, AFFO and same-store NOI. The definitions and reconciliations of these non-GAAP measures are contained in the supplemental financial information available on the company's Web site.After our prepared comments are made, our senior management team will be available to address any questions that you may have. At this time, our Chief Executive Officer, Brent Smith, will provide some opening comments and discuss our second quarter results and accomplishments. Brent?

Thank you, Bobby. Good morning, everyone, and welcome to today's call. Before starting my prepared remarks, I would like to take a moment and thank my predecessor, Don Miller, as well as the entire Piedmont team for their unwavering efforts over the last 10 years to transform, improve and focus the portfolio in the strategic mark submarkets that leverage our platform and our repositioning expertise.And on my first earnings call as CEO for the company, let me add that I'm honored to have the opportunity to lead such a fine organization of talented real estate professionals, and I take great comfort knowing I'm supported by such a hard-working team, proficient managers, veteran executives and a phenomenal Board of Directors. And you have the entire company's ongoing commitment to provide unmatched service to our tenants, stockholders and professional constituents.On today's call, I'd like to review the company's strategy followed by a summary of our leasing and capital market achievements for the second quarter. Finally, Bobby Bowers, our Chief Financial Officer, will provide an overview of our quarterly financial performance and review our 2019 guidance.Since the announcement of Piedmont's CEO transition, I've been asked several times what I will do differently than my predecessor. While I regretfully admit to having a severely diminished golf game by comparison, I'm pleased to note that nothing material will change in our corporate strategy. As many of you know, I've been deeply involved in the evolution of Piedmont will change in our corporate strategy. As many of you know, been deeply involved in the evolution of Piedmont, from focusing our operating footprint from 16 markets to the eight core cities we operate in today, to the approach to broaden our retail platform, placing boots in the ground in all our markets, enabling us to build meaningful…

Thanks, Brent. As always, while I'll discuss some of our financial highlights for the quarter, I encourage you to please review the earnings release and supplemental financial information, which we filed last night, for more complete details.For the second quarter of 2019, we reported $0.43 per diluted share core FFO after adding back approximately $3.2 million related primarily to onetime retirement and separation expenses associated with senior management changes that took place during the quarter. The $0.43 was up $0.02 per share as compared to the same period a year ago with the increase primarily attributable to rental rate growth and higher occupancy across the portfolio. We would have reported $0.01 higher core FFO results except for our $1.2 million increase in expenses related to higher accruals for our equity-based compensation plans as a result of our stock's relative outperformance during the first half of the year.Looking forward, with the organizational restructuring, we anticipate lower recurring G&A expenses in the second half of the year with approximately $6 million to $6.5 million of G&A cost per quarter. AFFO was approximately $42 million for the second quarter, well in excess of our current $26 million quarterly dividend level. Now despite known downtimes between certain expiring leases and the related commencement of new replacement leases and the delay in the New York State lease renewal that Brent discussed, we are pleased the same-store NOI was up approximately 5.8% on a cash basis and 1.9% on an accrual basis for the second quarter.Our annual guidance in 2019 for same-store cash NOI growth has been revised upwards to between 2.5% and 4.5%. And looking ahead, once already executed replacement and expansion leases begin later this year and in 2020, such as the Transocean lease in Houston, the Gartner expansion in Dallas, WeWork in Orlando…

[Operator instructions] Our first question here is from Dave Rodgers from Robert W. Baird. Please go ahead.

Brent, I'll start with development if we could. It sounds like your take on kind of development in the land parcel you have might need to be a little bit more aggressive on that front. So I was wondering kind of how far along the path you might be to kind of developing some relationships in that area, if that's not been historically something you do. And how quickly you think you can move on that and how you think about pre-leasing, et cetera.

Dave, thanks for joining the call today. Really appreciate you taking the time with us. On the development front, I think we've continued to take a pragmatic approach to both what I think are more near-term opportunities in both our Atlanta and Atlanta markets. We would generally consider having the asset at least 60%-plus pre-leased before putting a shovel into the ground. So we do take kind of probably a more conservative approach in that regard.I would say, though, that we do continue to see good activity again both in Atlanta and Orlando. But as construction pricing has crept up, I think that has provided a little bit of a headwind overall to all the markets that we operate in. We'll continue to evaluate the economics of those opportunities as well as the inflow of tenancy that we see.A lot in Orlando is from tenants that are both in the market and looking to come and add and expand within Orlando given its high-quality airport, its educated workforce and really kind of a great environment for business. In Atlanta, you can probably echo a lot of the same reasons why we continue to see good traction on our GH 3, our Glenridge Highlands Three parcel, here in just the north part of Buckhead in the Central Perimeter.

Second question for me. On the asset sale plan, I think you had very early in your comments said you're planning to accelerate that activity. I think you had 500 West Monroe in that market. Can you give us an update on that and kind of what accelerate means in your mind in terms of 1901 and Enclave?

Yes. And sorry, one thing I didn't probably show in the development in terms of yield, and I think that will be important to kind of lay out. We would expect getting development yields north of 7.5%, 8% level. In regards to asset sales, we continue to evaluate a number of assets, as we've noted, that are both mature and noncore in nature. The 500 West Monroe is one of those assets. It's currently being marketed as we've discussed before.Given that it is in that process, I don't want to go into too much detail, and we generally don't give protracted information around that. But it has been a process where we've had an opportunity, where one of the significant tenants in the building has come to us for a potential to restructure their lease. We think that probably enhances the creditworthiness of the building and probably improves the debt execution for a potential buyer. And so that has probably delayed, if you will, or protracted what we will hope to be ultimately consummating a sale of the asset.So we still think that is a possibility this year. As well, as you noted, our 1901 Market asset in Philly, we think that is, would be very well received in the capital markets given its over 14-year lease, CBD nature and single-tenant structure on the lease. So our hope is that we will be able to monetize that asset as well within, call it, say, the next 12 months. And that really is somewhat impacted on the amount of deal flow we see on the acquisition side. I think the good news is we continue to see very strategic, accretive acquisitions.So we think that we can continue to recycle the capital in both those assets as well as a few others that we deem noncore, and of course, we will always evaluate for mature assets that have high occupancy and long-weighted average lease term for monetization. And so that gives us probably the hope or the objective over the next 12 to 24 months to really refine the portfolio and focus in on those nodes where you're already seeing us to gain significant market share and to continue to do so. We are very enthused by the traction that we're seeing on that strategy, and we'll continue to implement it and try to do it in a more rapid fashion and continue to concentrate in those areas.

Lastly, for Brent. With you in the captain's chair, do you have a different view maybe or maybe give us your view, please, on how you deleverage -- leverage in the company and the portfolio?

Yes, Dave. I think we operate generally on a model that is not as development-intensive as some of our peers, so I think we feel pretty comfortable being in the range of, call it, 30% to 35% of debt to gross assets. Given we're more focused on redevelopment opportunities that are already generating cash flow, we don't have as much we feel like at risk in terms of the overall capitalization of the company. So call it, 30% to 35%, debt to gross assets, around 6x debt-to-EBITDA. There would be maybe potentially situations where we would trickle up higher than those levels, but that would just be in kind of normal course transactional flow, and we would anticipate dispositions or recycled capital to reduce us back into that 30% to 35% target zone over time.

Our next question here is from John Guinee from Stifel.

Welcome aboard. So essentially, the recycling strategy appears to be by vacancy, by near-term rollover, so core assets with a longer in-place income stream so the core buyers can underwrite it more aggressively. Talk about 100 Galleria. You paid that -- you paid $221 a square for that. What sort of value creation opportunity do you have within the lease structure there?

Well, as you know, we actually have about 90-ish-percent occupancy at that building. We actually already did an extension of an existing lease with the asset. That deal came in the door after we closed the deal -- the transaction for 100 Galleria. That was about a 50,000 square foot lease. So we're already starting to see some of that fruit. The other components of the opportunity really is the fact that the leases are fairly below market. We continue to have the opportunity to have leases roll off in that $26 to $28 range. And we're seeing activity now in the park well in excess of $30, $31, depending on the location of the space.On top of that, we think there's an opportunity, as we continue to gain market share within that micro market, to be able to leverage that to push rate frankly. It's a very unique mixed-use node within Atlanta and somewhat underappreciated. It is next to Vinings and Smyrna, which are some of the fastest-growing millennial areas in the city. And so we think the dynamic and the opportunity to really push rate is strong. In our minds, there's no reason why we shouldn't be achieving the similar rent levels that we do here at our Central Perimeter asset at $35, $36 a square foot in that location given its high-quality, again, mixed-use environment.

And then, Bobby, $3.2 million charge. Usually, that's accrued. Why is it a one-timer? And why is it deducted from FFO to get to core FFO? Can you give us some details on that?

Sure. Well, why is it deducted? It's the first time that has happened to us, so certainly I view it as a fairly infrequent, nonrecurring item. It shouldn't be measured against our normal operations. So that's why I set it back. But now if you don't accrue all of your stock, it's usually amortized over the period that it vests. For retirement purposes and in severance, sometimes there's expenses that have to vest and you move forward. So we had a total of $3.2 million of stock and cash severance that was paid out to various members of the management team that left as a result of the transition that took place at the end of June.

I would add, Bobby, that going forward, you should expect our G&A run rate to come down pretty significantly to a, call it, $6 million to $6.5 million a quarter, which I think will also benefit shareholders as well.

[Operator Instructions] Next question here is from Daniel Ismail from Green Street Advisors. Please go ahead.

I was just wondering with the focus on bolt-on acquisitions and recycling mature assets, where buybacks have been in that equation these days.

Danny, appreciate you joining the call today. We've always viewed buybacks as never being mutually exclusive from deploying capital into assets. We are mindful of where our implied cap rate trades and what the value creation opportunities are within putting money to work in buildings. So we like to take advantage of both opportunities when we see a chance to create value for shareholders. And so we'll continue to evaluate purchasing our own stock when the right opportunity exists.Again, that would be at levels that will be meaningful discounts to NAV and within the context of where our peer set trades relative to NAV, where we think the private capital markets are pricing assets and where the liquidity of the company stands overall and then be mindful of the fact that we wouldn't lever up as well to buy back shares, again funding that as we always have with disposition proceeds. Having acquired about a little over $800 million of our own stock over the last decade, I think we've proven that you can create value through that method. And at the same time, we've purchased over $2.5 billion worth of assets. So we feel like we can do both in an efficient manner and create value for shareholders.

And any of the dispositions you mentioned will require a 1031 exchange? Or are there any tax implications in the sales?

There's always tax implications when you sell an asset, particularly if you've done well. If you recall, on the Chicago deal, we actually purchased a mezz note back in about 2010, 2011 time frame and foreclosed on that, thereby getting a very attractive basis in the asset. It was 19% leased effectively at the time and we leased it back up to over 99% practically at this point. So there is going to be an embedded gain. Now you always kind of have to evaluate what are your redeployment options.We do see a good pipeline of assets to redeploy that capital into. So I think we're hopeful that we'll be able to leverage a 1031 structure and do so tax efficiently. If that wasn't the case, if we didn't find the right opportunities that were strategic, then we would need to do a special dividend and that might be required. But of course, that has to be evaluated after we sell the building and once again opportunities set before us for redeployment.

Just last one for me. You gave a number limiting what you want co-working to be at the total portion of your revenue, but also mentioned you would limit the maximum with any specific building. I'm curious if you can share what that number is and then how you arrived at that figure?

Danny, we appreciate the question. Yes, co-working, we've continued to take a cautious approach on, but we do believe it's in the business model of corporate real estate today and going to continue to be an important part of the overall business. That 3% to 4% threshold is a level that we felt comfortable with in the portfolio. When it comes to assets, it's a little bit more anecdotal in the marketplace. There are a number of buildings that have been 100% leased to a co-working provider, a large global co-working provider, that have transacted, one in D.C. in particular. There have been others that were marketed for sale and then not successful.So I think it's still unproven as to what the market will accept. Given that, though, we do set not a formal policy but an expectation that if you were to trip up above 20% threshold for a building, that it would potentially impact its ability to either transact or be financed. And so we're mindful to play below that, in most instances well below that threshold and level for a single asset. I think we also overlay in our perception as well that given our concentration and continued concentration in specific submarkets, how much co-working is within that submarket, how much co-working is within our portfolio in that submarket as well. Continuing to be very mindful, given the historical nature of this type of product and its propensity to have credit issues, we're very, very conscious of that.

Next question here is from John Guinee from Stifel.

Quick. Leased, were there any leased term fees in the second quarter? I might have just missed it. You started to report on them, and I can't remember if you did this quarter.

No. John, I appreciate that. On an annual basis, we have about $2 million to $3 million of termination fee income. We've had that for the last 4 or 5 years but there was none during the second quarter.

This concludes the question-and-answer session. I'd like to turn the floor back to Brent Smith for any closing comments.

Thank you. I want to thank everyone for joining the call today. And I would be remiss if I didn't share with you some of the changes that we've made in the executive level. I do want to congratulate George Wells who will be our new EVP of Operations. George has been with the company for many years and I've worked with -- have the honor of working with him for now over 10.So we're excited to have him lead the helm across the portfolio and assist each of the regional EVPs in their execution of the business. And in conjunction with George's promotion, that left the Southeast region EVP spot vacant. And we're proud to announce that Alex Valente has taken that spot in place of George. So congratulations to both of those individuals. We're excited about where Piedmont is heading and we're excited about the strategy that stands before us. I want to thank again everyone for joining the call today and have a good day.

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