Ladies and gentlemen, hello and thank you for joining today's Piedmont Office Realty Trust, Inc. Fourth Quarter 2019 Earnings Conference Call. All participants are in a listen-only mode, but you will be given an opportunity to ask questions after today’s prepared remarks. And as a friendly reminder, today’s session is being recorded.With that, I am pleased to turn the floor over to your host.

Thank you, operator. Good morning, and thank you for joining us for Piedmont's Fourth Quarter 2019 Earnings call. Last night, we filed an 8-K containing our quarterly earnings release and 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 that we anticipate and 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 this call, we'll refer to certain non-GAAP financial measurements 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 website. 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 fourth quarter's results and accomplishments. Brett?

Thank you, Bobby. Good morning, everyone. We very much appreciate you joining us on today's call. In our last two earnings call, I reported that Piedmont was experiencing solid momentum across all aspects of our business, and more specifically, with the strong leasing, operations and capital markets activity, the company was generating would carry throughout the remainder of 2019, while positioning Piedmont for meaningful earnings growth in 2020. I believe the results for the fourth quarter of 2019 and now our outlook for 2020 confirm this previous guidance.Our optimism is centered around the following, continued strong leasing activity in most of our targeted submarkets, along with the realization of the benefits from further concentration of our portfolio in unique, mixed-use of many rich submarkets that are in close proximity to major education centers and transportation nodes, and capitalizing on the earnings growth strategy from the disposition of non-core assets and the subsequent accretive redeployment of proceeds into select assets within our targeted submarkets that generate higher cash and accrual based yields with greater growth in cash flow projected over time from a far more cohesive portfolio.We were pleased with our fourth quarter results. Specifically, the positive leasing and transaction momentum that we continue to experience across the portfolio were the most of our core office submarkets, particularly those in Boston, Dallas, Atlanta and Orlando, where job growth is strong, and in Minneapolis in the RB Corridor, where the outlook continues to improve.As we announced previously, during fourth quarter, we sold 500 West Monroe Street, a 46-storey, approximately 967,000 square foot, 100% leased trophy office building located in the West Loop submarket of downtown Chicago for a gross sales price of $412 million or $426 per square foot.500 West Monroe was a phenomenal round-trip investment for Piedmont. Acquired in 2011 for…

Thanks, Brent. As always, while I 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 fourth quarter of 2019, we reported $0.46 per diluted share of core FFO, $0.01 ahead of SNL's consensus and $0.01 over the fourth quarter of 2018. Despite the disposition of two almost fully leased assets during 2019 and the expiration of leases at 200 South Orange and 1155 Perimeter Center West, these losses of income were more than offset by accretive acquisitions in Atlanta as well as by the commencement and roll-ups of several leases including the 301,000 square foot lease commencement with Transocean at Enclave Place in Houston and the 520,000 square foot lease roll up with New York State and 60 Broad, both of which occurred late in 2019, and by the growth in rents that occurred throughout the portfolio during the year.I will note that while the reported quarterly G&A expense was flat when compared with the fourth quarter of 2018, total G&A expense was higher for the year than original forecast due to over $8 million of higher accruals related almost equally to two items, non-cash accruals resulting from the company's top quartile stock performance in a one, two and three year basis, and due to certain retirement and termination costs associated with the senior management transition that took place on June 30, 2019.AFFO was approximately $36 million for the fourth quarter, which is well in excess of our current $26 million quarterly dividend level. As detailed in our quarterly supplemental information, same-store NOI was up over 8% on a cash basis for the fourth quarter of 2019 and up almost 6% for the year.On a GAAP basis,…

Very good. Thank you. [Operator Instructions] We'll take our first question from Nick Thillman with Baird.

Hey, guys. Nick Thillman here with Dave Rodgers. I was wondering if we could go over the One Pierce asset, in particular. Just wondering what you guys have for like leasing activity there?

Hi, Nick, Dave. This is Brent. Appreciate you joining us this morning. I think you're referencing our Two Pierce asset, which is our loan asset in Chicago and suburbs of Chicago. Admittedly, that's been a difficult market. We just completed the renovation of the project. It will go into service this quarter, as Bobby mentioned in his prepared remarks. And as I also mentioned in our prepared remarks, we did about a 13,000 square foot lease with Conoco Minolta there.So we're getting more than our fair share, but I will admit that, that is probably the most difficult submarket within our portfolio with high vacancy rates. The good news is, we've got, like I said, building has been repositioned and is best in the market to garner more than its fair share of leasing.We do think, as I noted also in my prepared remarks, that's likely to be a disposition candidate over the next 12 to 24 months, and that will remove the capital out of Chicago entirely for the company at this point in time.

Okay. And then, like, looking on your market positioning, I know you mentioned some of the development parcels that you've seen activity. Do you guys see some of these development starts potentially happening later in this year in Lake Mary or Atlanta?

We do see a lot of interest in those assets and those parcels, rather. But I think that's a little hopeful to be able to get something into the ground and get going this year. It takes time for these types of transactions, even if we're able to bring in a tenant, there's a lot of work that has to go on in the background and preparation.So unfortunately, no, nothing this year that will be able to put a shovel on the ground, but we're hopeful for 2021, and we continue to entertain a number of opportunities around, particularly, as I mentioned, Galleria and Lake Mary.

And then lastly, on your guidance numbers, how much would you attribute to the purchase in Dallas and then the sale of the Philly asset?

Yes, Nick, it's always complicated when you think about buys, sales and capital structure impacts, and particularly given the Dallas deal is not closed yet. So we want to be very mindful of what we can and cannot say around that at this point. We're very excited to share what we can, when we can upon closing.But I think to give you a rough ballpark, we think that's probably net between the two transactions, about $0.06 to $0.07 on an annualized basis.

All right. Thank you.

And we look forward to giving you more details again later this quarter on that round-trip potential.

All right, perfect.

Next, we'll hear from Green Street Advisers and the line of Daniel Ismail. Please go ahead. Your line is open.

Great. Thank you. Good morning, everyone. Just a question on share buybacks and where they fit in the equation these days. Is it fair to say that given that the discount NAV has shrunk recently, that you're finding better opportunities for your capital elsewhere than your current shift been repurchasing shares?

Hi, Danny. Appreciate you joining us this morning. I think we - I've always said that we look at the ability to buy back stock not mutually exclusive from assets. In other words, you can be doing both at the same time. And we've shown that propensity, having bought back almost $800 million of our stock over a decade since we've listed.That said, as you point out, at this point in time, where we trade, we see a number of opportunities to continue to build positions within our core markets, accretive in nature, accretive from our dispositions, but also at this point, as you point out, accretive to our stock.Although there is no anticipation to need to issue equity at this time, we still find a lot of opportunity to recycle assets, continue to grow our earnings in that manner, and we see a good pipeline to continue that process into 2020.

And then just last one for me. The pace of concession growth across your markets, can you just maybe frame how TIs have trended over the last 12 months, 12 months across your major markets?

From a concession basis, just focusing on TI, I think, is a somewhat incomplete picture. I think the phenomenon we've continued to see is free rent has continued to come in. And as a result, TIs are also growing. I think we benefit from focusing on tenancy that does longer-term leases. So putting out that higher TI capital is a little bit more palatable.I think if you look at our - in our supplemental, we've continued to kind of be averaging around a total of, call it, capital per square foot per year on the TI side of, call it, in the mid $4 per square foot per year. And we think that's a good basis for the portfolio.Now that said, we have continued to see construction costs trending up really across the United States, probably more so in our markets of New York and D.C., but less so in Boston, Atlanta, Orlando, Dallas and Minneapolis, where they're just a little bit right now, more powerful for landlords in terms of TI capital required.

And are you guys expecting a relatively steady state for those type of leasing economics in your markets?

I think at this point, yes. It does vary by market. But that trend, I think we're going to continue to see elevated. I think that's one of the reasons why you've continued to see the office sector trade at a difficult discount to NAV is because the construction costs have become elevated. And as an industry, we need to figure out how to begin to rein that in. And I think the onus is on us to continue to be creative around construction.We continue to look at also creative ways to reduce costs. And one of the benefits of scale on some of these larger projects that we've talked about, the Atlanta Galleria is an example, is to be able to spread high capital costs at a base building level across a large portfolio of assets.

Okay, great. Thanks, guys.

Thank you for your question Daniel. Next we'll move to John Guinee with Stifel or Stifel, rather, I apologize, I misspoke. Mr. Guinee, your line is open.

Great. Thank you. Have you guys announced - I mean, I think you're buying Galleria Towers in Dallas. Can you talk a little bit about that?

I'm not familiar with that description, John. At this point in time, I can't go into any details as to what we might be acquiring in Dallas. As we did note, we do have a purchase under contract, the $400 million. It is in the city of Dallas. We're excited about that. It would become our second largest market, should we consummate that transaction.And we think given the job growth, population growth, the education center, the amenity base of these assets, we're pretty excited about what we can accomplish. But at this point in time, I can't go into any more detail than that.

Great. Okay, great. A couple of sort of detailed questions. First, it looks to me like your city lease, 313,000 square feet at 60 Broad, maybe $36 or $37 full service, is it safe to say that the deal you would do there would be similar to the state maybe in the 50-plus or minus full service, I think, about $140 total per square foot total spend long-term lease?And then the second question regarding both the state and the city. What sort of tax reset - I'm sorry, operating expense and tax reset do you get? And what's the resulting increase or decrease in net rents?

A number of parts to that. So again, you're talking about a potential lease that we have not completed. So I want to be very clear that I can't give you any specifics around that dialogue.What I can share with you is, as you point out, the state metrics, roughly a $50 rent that state space is below the New York City space within the building. So I would say the New York City space is a little bit better located. But in terms of a capital requirement, I think it's maybe a little bit more favorable, but generally in line with what you're describing that occurred with the New York State.In terms of OpEx resets, any time you had a long-term lease, you're going to reset the base year. So that is occurring with the New York State. I can't comment on the city at this point. But that will occur, and the net effective rents are still going to be very, very strong at the asset, although they will diminish a little bit initially, they will be climbing considerably given the rent bumps and the term of that lease.

So does - just I think on either cash or GAAP basis then just focusing on the state lease, does your net - and does your cap - sorry, does your cash and GAAP net rent after OpEx reset, tax reset, does it go up or down? What happens there?

Well, you've got - you're getting to a lot of details, but on a GAAP, obviously, you're getting the benefit of the significant GAAP roll up that we've shared with the Street in the high 20% level. As we've noted on a cash basis, there's a slight roll down from the holdover rate, but meaningful cash roll up over time because of the bumps inherent in the lease.The net effect of rents on those, on a GAAP basis, therefore, are up considerably. And on a cash basis, initially, slightly down from the holdover rate.

Net rents. Thank you very much.

Yes.

[Operator Instructions] We'll move next to Tony Paolone with JPMorgan.

Thanks. Apologies for jumping on late, and so I may have missed this. But can you spend a minute on just how to think through cash flow through the course of this year and source of uses, just given the pre-rent, some outsized checks that will be written over time relating to the state lease and just other factors that will probably make AFFO bit less smooth compared to your FFO this year?

Hey, Tony. It's Bobby. Thanks for the question. There certainly are a number of moving parts that impact the cash NOI this year. As you know, the start of the Transocean lease and the New York State lease really have a dramatic impact on the GAAP side, where you've got a nice roll-up. But we're really projecting there are flat cash NOI this year.If you look specifically, for example, the benefits from that Transocean lease, remember it's in abatement. And not only is it in abatement, the operating expenses associated with that will be in abatement. So we'll get a negative impact on cash simply because we're covering those OpEx costs throughout this year.There are a number of downtimes that are outstanding or abatements as well throughout our portfolio. I'll point out a couple of assets, then we can go through this in more detail with you individually, but for the benefit of most of the people on the phone.At 1155 Perimeter Center West, remember, we had a vacate of 125,000 square feet that's been leased back up. As those leases commence, you'll pick up the cash or I'll go into abatement at that time with VMWare and with WeWorks. We've got downtimes associated at 1430 Enclave, where there's 50,000 square feet between the Technip lease and the starting of the Schlumberger lease. You've got 200 South Orange with vacate of 125,000 square feet from SunTrust, but starting later this year with the lease I think, in the fourth quarter with WeWorks. Also at 6031, we've got 55,000 square feet that's in abatement there.All those things combined put a dampener this year on our cash projection, but you get a significant roll up in cash taking place next year, probably on the same scale that you're seeing, the GAAP roll ups this year. Eddie, did you have anything you wanted to add?

I think that covered it.

Okay. With due respect, by the way, to cover from the AFFO standpoint.

That we - I think Bobby was saying, a final point, we will be covering AFFO with the - covering dividend with AFFO.

Okay. And remind me, the $100 foot per state and then perhaps, depending on how the city lease works out, will all of that capital be deducted when you think of your AFFO? Will some of that just be considered a bit of more redevelopment costs that won't be in AFFO and then also likely timing of that spend?

Yes. We'll include what would be deemed the non-incremental component as we have always, but there will be a small component, there always is, that's deemed incremental, but it would be kind of regular way business de minimis for the most part.

Okay. Do you think that spending though will happen mostly this year? Or do you think that drags out for a few years. Do we see that hitting it?

Well, it is 8 agencies at the state, 520,000 square feet. It's a construction project that will span multiple years, likely 2, 2.5 years.

Okay…

So it will be spread out, not all this year.

Okay.

And ladies and gentlemen, thank you all for your questions as well as your participation today. With no questions remaining in the queue, I'll turn it back to Mr. Brent Smith for any additional or closing remarks.

Thank you. I appreciate everyone taking the time to join us today. I appreciate - I also just want to give a special thank you to our investors and analysts for giving us your time and support. We had a great year in 2019, providing investors with over a 35% total return. I'm very proud of what the team at Piedmont has accomplished, and we look forward to an exciting 2020. Thank you, everyone, for joining. Take care.

Ladies and gentlemen, this does conclude today's teleconference. We thank you all for your participation. You may now disconnect your lines, and we hope that you enjoy the rest of your day.