Please standby, we are about to begin. Ladies and gentlemen, thank you for joining today’s Piedmont Office Realty Trust, Inc. Second Quarter 2020 Earnings Call. All phone lines are in a listen-only mode. But after today’s prepared remarks, you will be given the opportunity to ask questions. To get us started, I am pleased to turn the floor over to Eddie Guilbert. Mr. Guilbert, good morning.

Thank you, Operator. Good morning, everyone. We thank you for joining us today for Piedmont’s second quarter 2020 earnings conference call. Last night, we filed our 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 at piedmontreit.com under the Investor Relations section. During this call, we will refer to certain non-GAAP financial measures, such as FFO, core FFO, AFFO, same-store NOI. The definitions and reconciliations of these non-GAAP measures are contained in the earnings release and in the supplemental financial information. 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. These forward-looking statements address matters which are subject to risks and uncertainties, and therefore, actual results may differ from those we anticipate and discuss today. The risks and uncertainties of these forward-looking statements are discussed in detail in our press release, as well as our SEC filings. We encourage everyone to review the more detailed discussion related to risks associated with forward-looking statements in our SEC filings. Examples of forward-looking statements include those related to Piedmont’s future revenues, operating income, dividends and financial guidance, future leasing and investment activity. And an important factor for today’s call is the potential adverse effects associated with the COVID-19 pandemic on the company’s financial and operational results. The extent to which COVID-19 pandemic impacts us and our customers will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the depth, duration and severity of the pandemic and the related economic disruption. You should not place any undue reliance on any of the forward-looking statements and these statements speak only as of the date they are made. At this time, our President and Chief Executive Officer, Brent Smith, will provide some opening comments and discuss our second quarter results and accomplishments. Brent?

Thank you, Eddie, and good morning, everyone. We appreciate all of you taking the time to join us today for Piedmont’s second quarter earnings call. In summary, our financial results for the quarter were strong and we made significant progress on a number of our strategic objectives. Of note, we completed a strategic asset recycling transaction at the end of the quarter and we executed some important leasing, all despite the unprecedented disruption from the Coronavirus pandemic on both the national and global economies, which had operational and financial consequences for our tenants and Piedmont. In light of the challenging economic environment, we are very fortunate that most of our tenants are investment grade quality and subject to long-term leases, with an approximately six-year weighted average lease term remaining and with very low expirations over the next two years. The strength of our tenant base is demonstrated in the fact that we collected approximately 99% of the cash rents due for the second quarter of 2020 based on current contractual lease terms. However, I would point out that this collection data is net of approximately $3.6 million of second quarter cash rents that have been deferred. We have entered into lease modification agreements with approximately 50 of our tenants as a result of the pandemic. These agreements typically deferred an average of three months of rent to be paid later in 2020 or in some cases in 2021 with interest. Most of these workout agreements are with our retail tenants that represent approximately 1% of our annual revenues. More importantly, during the second quarter, we continue to partner with our tenants to refine our operational procedures, cleaning standards and health protocols in all of our buildings to protect the safety and well-being of all those working at or visiting Piedmont…

Thanks, Brent. While I will discuss some of our financial highlights for the quarter, I encourage you to please review the earnings release and supplemental financial information, which were filed last night for more complete details. For the second quarter of 2020, we reported $0.49 per diluted share of core FFO, a 14% increase compared to the second quarter of 2019, reflecting rental rate growth throughout the portfolio and accretive capital recycling activity since the second quarter of last year. AFFO was approximately $45 million for the second quarter, well in excess of our second quarter dividend. And same-store NOI was up approximately 2% on a cash basis and up over 5% on an accrual basis for the second quarter of 2020 before deducting an approximate $5 million general reserve. Our general and administrative expenses decreased $6.5 million during the second quarter of 2020, when compared to the same period in 2019. This decrease is due to lower accruals for stock-based compensation in the current year and $3.2 million of retirement expenses included in 2019’s results related to the senior management transition that occurred on June 30, 2019. Turning to the balance sheet, our average net debt to core EBITDA ratio for the second quarter of 2020 was slightly elevated at 6.2 times because of the increased balance on the company’s line of credit due to the purchase of the Dallas Galleria Office Towers during the first quarter of 2020. This metric is anticipated to return to a more normalized range of around 5.6 times in the third quarter, benefiting from a full quarter’s impact of the sale of 1901 Market Street and the resulting pay down of debt. Our debt-to-gross asset ratio was approximately 34% at the end of the quarter. As the duration and severity of the COVID-19…

Gentlemen, thank you for your remarks. [Operator Instructions] We will hear first from Anthony Paolone with JP Morgan. Please go ahead.

Okay. Thank you. I guess, first question is for Bobby just to maybe help with a little bit of a walk on the NOI in some of these write-offs and reserves. So if we think about what you recorded for 2Q and think about rolling that into 3Q, I want to make sure I understand this, so the $1.8 million, that effectively took either a tenant or a variety of tenants to cash based recognition, it would seem, and so, I guess, make an assumption as to what happens from here. But then the $5 million, is that just a general straight line write-off where we add that back as we start to roll into 3Q?

Tony, thanks for the question and let me see if I can address it. First, let me sort of give you a little background. We have had very little losses for the last as long as I have been here, maybe a few thousand dollars a year related to any sort of bad debt. But certainly, we are living in a period of time that’s very different right now. And so for the second quarter, our tenant reserves consisted of really two components. You mentioned the first one. It’s a specific reserve of $1.8 million and that is recorded, as you have indicated, against individual tenant accounts. That was done after a thorough review of all of our tenant billings and it includes related balance sheet accounts. I think this is a piece many people don’t realize, it includes the write-off of straight line rent receivables and tangibles, and yes, it does take it to a cash basis. There was a second component that we have typically never done that was included in the second quarter this year. And I will tell you what was driving it, obviously, we don’t know fully all the impacts of the pandemic on the balances that we have on our balance sheet, that includes straight line rents again and intangibles as it relates to every tenant. That’s including those tenants that are currently or presently current on their payables and those tenants that have been granted deferrals. So I think the uncertainty that’s there is what’s the impact that the pandemic is going to have and the duration on all of these tenants and nobody knows that. And I will tell you this, after a lot of discussion, we believe it’s prudent to establish, and I would say, an adequate second general reserve for these potential and yet unidentified losses. The question is how do you get there when you don’t have a historical perspective on how do you estimate this. In our particular case, we have a very clear trend of 99% of our tenants have been paying their bill receivables. Therefore we just simply reported a 1% reserve of this annualized lease revenues that we have, that was approximately $5 million and that equates to a $0.04 impact that ran through our financials in the second quarter. Again, we think it was a conservative prudent thing to do. Now I can’t assure you that, that reserve will be entirely used later, but I do believe it’s unrealistic to assume that all potential losses on our balance sheet are known and have been identified at this time and I think that’s true for anyone. Does that address your question, Tony?

Yeah. I think that’s really helpful context in terms of how you got there and all just from like a short-term, just quarter-to-quarter basis, if nothing really happened in the third quarter, you wouldn’t -- that $5 million comes back, right, like you have reserved for it already and so you -- if there were some incremental losses in, say, the third quarter, you could tap into that $5 million and use some of that I guess. And so in that regard, like, when we think about the run rate, we would just add the $5 million back as we roll into 3Q?

Absolutely correct. Any unused balance will come back to benefit us.

Okay. Got it. And then on WeWork in Orlando, as they kind of push out the completion of that, does it change when actual cash rent is due on that space or is the cash rent due whenever they construct like whenever the lease actually commences and so that gets pushed out too?

Tony, I appreciate you taking the time with us today. This is Brent. So, I guess, on the topic of WeWork. First, let us say, that we have they are current on all their rental obligations and they continue to be a great-performing tenant. On the specific location in Orlando, as we have noted previously, they have pushed back construction given some of the issues first initially around fire code and now around COVID. But we do still believe that, that will be a 2021 commencement. As we have noted before, we did not include any of that income in our 2020 numbers. But when it comes to specifics in the lease, we don’t like to get too much in detail. But there is a firm date in which rent payments will have to begin and so we feel like we are protected and that just continuing to get kicked further and further out.

Okay. Got it. And then just last question on D.C., just generally, where you have a bit more vacancy and I know things are slow. But is it a matter of you need a certain size tenant and that’s not where the market is or the traffic is just not there, just wondering if you can give some color on just the environment there and prospects for addressing some of that vacancy?

Yeah. So, I guess, as I would point out, we really headed into the year with really limited role, almost no role in D.C. for the next, call it, four years or five years, was really a great runway. And I would also say, it’s probably the best leasing pipeline we have seen there in probably three years from a number of different, whether it be government, defense and/or technology related as we were starting to see some of the benefit of the Amazon effect if you will. As we headed into the pandemic, I’d say D.C., a market held up actually the pipeline of activity, the best out of all of our markets and we do hope to have good news to share on that front as we kind of head through the rest of the year and I think that will prove -- the durability of that market will prove out. And so as we have now alluded to in the prepared remarks, we started to see the pipeline build across the portfolio. D.C. is one of those markets that it wasn’t beat up as bad and the pipeline is also starting to grow a little bit more in the RB Corridor than the district in that front, and again, that’s generally been contractor and technology related. So we are seeing a pickup in activity there and I think we are hopeful that it will become as robust as it was pre-COVID crisis, where we had a number of kind of 15,000 square foot deals that were -- we were -- we thought we had a really good chance of landing. So I’d say its picking back up, not quite as much as our Atlanta and Dallas markets where we are seeing really good activity but still starting to rebuild that pipeline, and I’d say, we are still constructive, particularly in our RB positions.

Great. Thank you for the color.

Thank you, Anthony. Next, we will hear from Dave Rodgers at Baird.

Yeah. Good morning, everybody. Brent, I think, in the comment that you have made earlier in the press release you talked about walkable amenities, non-public transit oriented locations really starting to see a pickup in demand. And I think you guys also quoted about 30% utilization of office overall kind of back up from where it had been. I am wondering if you can give us maybe some anecdotal information on these kind of walkable and non-public transit oriented assets, that’s what you own, obviously. But the demand that you are starting to see, the conversations you are having, is that from tenants wanting to leave, Buckhead for instance is that from tenants that are looking to establish new presence in the suburbs and closer to the employee base? Any color that you can have and I realize it’s early it would be really helpful though?

Yeah. Dave, I appreciate you taking the time joining us this morning. I think as we think about it and see some of the activity around demand that we noted before really seeing good activity in Dallas and Atlanta and D.C. to some extent. I think when it comes to this concept of the hub and spoke, which you have heard discussed a lot, there’s a thesis that it may be within market and a firm takes a location we will use Atlanta as an example. And Midtown, they have had a millennial workforce. They are used to that young kind of walk, sorry, a newer walkable urban environment with mixed use. Those -- that age cohort as we have seen, is now at the precipice of family formation. Their children are starting to go to school. The first millennials are really now reaching 40 and that is driving a suburban push, but also a push out of California and the Northeast to these lower cost markets a little bit of higher quality life. You layer on the effects of this all, which we think will continue to drive a secular shift in the American population towards more of these lower cost high quality of life markets, which do predominantly exist in the Sunbelt, but do include other cities within the middle of the U.S. as well. And so as that focus comes into play, we are seeing some of our tenants within a market think about this hub and spoke concept and maybe they have a location in Atlanta and they decide to take a location in the Galleria, because it is a dense walkable environment with the Battery to a Braves game, and what all the lunch and dinner options that are available at the base of that…

And maybe just a follow-up on that point. Yeah.

Yeah.

So real quick on that point, is it more of a, I guess, a long-term trend, I guess, I am trying to gauge maybe how much of that’s been driven by COVID and how much of this resume activity that you are seeing is COVID related versus just the continuation of the long-term trend?

I think it’s a continuation of the long-term trend. What may be more COVID related or accelerated and I meant to add this point back to my prior remarks, is on this hub and spoke concept, we are not seeing it materialize within the market yet. I think tenants are still saying, if I am in Midtown right now, maybe I am thinking about going to the Galleria. But what we have seen in Atlanta and Dallas, in particular are locations outside of that market looking to bring 40,000 to 60,000 square feet into the market. Maybe it’s a division, maybe it’s a group. I am seeing more of that in the hub-and-spoke concept, Dallas and Atlanta being a spoke and maybe like New York or San Francisco being the hub, more so than within market right now and I will keep you abreast as we start to see that within market. But right now, I’d say, it’s more driving from some of these higher cost markets to some of our Sunbelt markets.

Okay. Great. Second question for me on the New York City negotiations, I realize they are still going on. But is there a risk or have there been any changes in scope in terms of the overall size of the requirement or how they might be moving different groups into that building?

Yeah. As we mentioned in our remarks, the pandemic has delayed things pretty considerably and like the New York State, I expect we will do a shorter term renewal, more near-term and do the longer term leases, as I mentioned, towards the latter part of next year. It is still a very unique building and is well suited for the agencies that occupy it. So we feel very good about keeping their, quote-unquote, eyes on the prize and getting a lease done and over at the goal line. The terms really still are generally in line with what we have previously shared overall from an economic standpoint. I think right now, they are still trying to decide what is the ultimate agency group that will reside in the building and that is being reviewed and so we continue to make progress overall. But again, no material change in what we previously shared. I would add that means a meaningful cash roll up to market, which right now was generally in line with where their holdover rate is, and of course, that GAAP roll-up that will be really significant. It’s not going to be realized unfortunately though, until that long-term deal is signed. But, again, everything still perceives as you would expect it, given the government agency is in the middle of a national crisis.

Great. Thank you for that. Last for me, Bobby. We talked about $10 million to $12 million NOI impact for the full year relative to initial guidance and I realize you are not giving guidance. But you had said that all of this assumes a 4Q ‘20 kind of rebound in activity and kind of the opening of the economy. What’s still at risk if that doesn’t happen is it really just parking at this point, maybe offset by some OpEx costs? How do you look at 4Q since that was your expectation for an opening?

Yeah. If you look at the guidance, Dave, that we have provided, we have indicated it was $10 million to $12 million impact, half of that was related to the bad debt charges that all ran through as a reserve here in the second quarter. Really, the other significant item is new leasing. That’s where you see the impact of COVID really taking its effect. Now executing those new leases delays the commencement of those leases and revenue recognition. So you really have two major factors. First, the reserve charge in the second quarter, and then the impact late in this year that comes from the delayed leasing. Again, the other stuff, as you have indicated, largely offsets each other, the parking, the retail offset by OpEx savings and G&A savings.

All right.

Yeah. I think -- yeah. I think that’s exactly in line with what you described, Dave.

Okay.

Yeah. Leasing -- we pushed leasing out and it will not benefit this year. It will be a 2021 impact, and of course, we won’t give guidance on 2021 until January. All right.

Anything further Mr. Rodgers.

No. It’s great. Thank you.

Thank you for your questions today, sir. [Operator Instructions] We will move next to Mr. Michael Lewis at SunTrust.

Great. Thank you. I know this is a tough question to answer now about asset pricing when there’s not a lot going on. But I wanted to ask the question about particularly between core stabilized assets that you might be selling and then the types of assets that you might still be willing to buy. So maybe it’s a longer term question about kind of what kind of risks you are willing to take at this point and then as maybe those spreads widen out even further, maybe that’s helpful if you are willing to take on some of those leasing risks and others that you have done in the past?

Yeah. Hi, Michael. This is Brent. Appreciate you taking the time joining us today. We have been very effective at continuing to recycle capital prior to the pandemic, obviously, given the slowdown in the capital markets that’s going to be a little muted here in more near term. But we still feel like we have got a nice, quote-unquote, pipeline of potential disposition candidates through our regular way business. Now that -- I am very happy, we are 96% now in our core markets and it’s just regular way recycling and continuing to enhance what we have within the market. And so we have got a number of candidates that we think we could push into the market that are well leased, long-term, good credit and that could be sold. We could also get creative and look at an opportunity to sell something that was maybe really we felt was long-term lease, high credit and doesn’t require a significant mortgage or if it does, it’s easy to put on to the asset. So those would be what we think we could sell. In terms of the buys and taking more risk. I think we view it as a neat time to be patient. If it’s a logical strategic bolt-on, you would see us do it. But really I find this as an opportunity to maybe find something that is very high quality but might have a value-add component to it, so in some regards, it’s risky because it has that value-add. But we think it’s of such high quality that fits well within our pipeline and upgrade the overall portfolio. I don’t see anything right now in the pipeline that fits that, and again, we will be patient. We are fortunate to have $30 million of cash on the balance sheet and the full line of credit available. We are talking to various parties as well, given the -- since the disruption may be coming, whether it be other groups, if there were a larger opportunity that we could take down something with and/or get creative, we needed to raise additional capital quickly, but we felt like our stock price might not afford that. So we are, quote-unquote, being creative about building a war chest. But you are going to continue to see us leverage that kind of 200 basis point spread between the buys and the sells for the foreseeable future. I just hope that that -- now that spread will garner us something that’s of even higher quality than it would have before if that helps put it into context.

Yeah. That’s great. And then my second question, I kind of circled three themes I wanted to ask you about. One was the hub and spoke, which you already gave good detail on and was helpful. The second, I wanted to ask, if you have had any tenants suggest significant work-from-home where they might be reducing their space materially, because they are shifting to -- they think they might do this long-term. And then the third one was, the opposite of that I suppose, which would be the need to social distance, are there any tenants that are coming to you and saying, we need more space or we need to do this differently and kind of go the other way?

So, I guess, first, on the absorption side and social distancing. We have seen a number of tenants who have either -- we approached them and they occupy, say, 90% of a floor. There’s a vacant suite and we go to them and say, wouldn’t you like to control all the floor, take the last remaining kind of portion of the floor, have your own bathrooms, et cetera, in your environment? We have seen a few of those. In addition, we have seen a number of tenants who anticipated pre-pandemic to downsize by, say, maybe 15%, 20% and go 180 and renew on the full amount. So we have seen the social distancing effect lead to some absorption. On the significant work-from-home, pulling tenancy out on a few select situations where the tenancy was a pretty small tenant and could basically kind of pick up their things and not come back to the office. We have had maybe one or two of those instances with a 2,000-type square foot tenant who basically said, I can’t structure my business and pay for real estate anymore. I am taking my entire company and everybody is working from home. But we have not really seen that widespread, and again, it’s been a very limited number of cases. So for most part, for our type of tenancy, that work-from-home is now more of, I think, a situation where every 10 years, 15 years, the concept of how an office is used to create that collaboration and culture is reevaluated and redesigned and it keeps a lot of people and the American economy going, construction and design, et cetera. And I think we are at the precipice of one of those situations where companies are now just trying to they feel like they have stabilized the shift from the reaction of the pandemic and now they are just starting to evaluate the real commercial real estate needs. And what that means for the future? I think you are going to continue to see them utilize roughly the same amount of space but reconfigure it overall. And so the work-from-home component will play into that. But I think it will be offset by the densification and you are going to see offices really be more focused for that collaboration, teamwork and culture-building components.

Great. Thank you.

Indeed de-densification will still kind of offset that work from home. That’s our view at least.

Got it. Thanks.

And with no further questions in the queue, I will turn it back to Mr. Brent Smith for any additional or closing remarks.

Thank you. Appreciate everyone giving us the time today. We look forward to continuing the dialogue. Hopefully, we will get a chance to meet many of you at NAREIT in November. But if we don’t have a chance to connect, again wish everybody a great rest of the summer. Appreciate the time. Have a good day.