Good day, ladies and gentlemen, and welcome to the Piedmont Office Realty Trust, Inc. Second Quarter 2021 Earnings Call. All lines have been placed in a listen-only mode and the floor will be open for your questions and comments following the presentation. At this time, it's my pleasure to turn the floor over to Mr. Eddie Guilbert. Please go ahead, sir.

Thank you, operator and good morning everyone. Thank you for joining us today for Piedmont Second Quarter 2021 earnings conference call. Last night, we filed our Form 10-Q in a Form 8-K that includes our earnings release and our unaudited supplemental information for the quarter ending June 30, 2021 which available on our website at piedmontri.com under the Investor Relations Section. During today's call, you'll hear from senior executives of Piedmont and they may 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 earnings release and in the supplemental financial information.

Good morning everyone and thank you for joining us on today's call as we review our second quarter financial and operating results. On the call with me this morning are George M. Wells, our Chief Operating Officer; Edward H. Guilbert, our Executive Vice President of Finance; and Treasurer and Bobby Bowers, our Chief Financial Officer, as well as other members of the senior management team. I would like to begin today by expressing our hope that all of you and your families are well. The second quarter really marked the countries re-emergence from the economic shadow COVID cast overall at all for year, along with the related concerns around the long-term outlook for the office industry. Office utilization by tenants has improved across the portfolio and fears of a continued large amounts of space being pushed out for sublease have subsided. While still nowhere near pre COVID levels can utilization of space seems to be improving, roughly 5% a month across the portfolio and this trend is expect to continue into the fall with several tenant return to office announcements coinciding with the beginning of the new school year. That said, our building utilization varies by tenant and by market with the Sunbelt markets, leading the way with several locations having over 50% utilization. The lowest utilization rates in our portfolio are generally in our few Northern markets and perhaps best described as being a couple of months behind the Sunbelt markets in recovery.

Thanks, Brent. 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. As Brent mentioned, from the second quarter of 2021, we reported $0.48 per diluted share of core FFO and our AFFO was approximately $42 million for the second quarter and $80 million year-to-date, which is well in excess of our current dividend level. Same-store NOI increased 4.8% and 4.7% on a cash and accrual basis respectively for the second quarter compared to the same quarter a year ago, primarily reflecting the burn off of abatements at certain properties and the commencement of new leases with improved economics with previously provided same-store guidance for the year in the range of 3% to 5% for both the cash and accrual basis. However, based upon completed leasing and financial operating results today, we are increasing the same-store cash guidance for the current year to 5%, 7%. Leases executed during the second quarter of 2021 for recently occupied space reflected an 18.2% in 27.4% roll up in cash and accrual rents respectively and as Brent also mentioned both metrics were influenced by the City of New York renewal, but both of those metrics would have been strong, even when excluding that sizable renewal at a 4.5% cash roll up and 15.2% accrual roll up.

And we'll take our first question from Anthony Paolone with JPMorgan.

My first question is just made for Brent, if you could walk through your portfolio pretty broadly in terms of where you're seeing the strongest rebound in activity versus which parts of the portfolio might be lagging in terms of markets?.

Sure. Good morning, Antony. Thanks for joining us. I I'll take through each of the markets, but just in general, I would say, Boston continues to be very strong and active, continued lab space, taking out competitive product and just market that's difficult to build into, there's not a lot of construction and we see a good roadway there for continued absorption from our portfolio at least add say moving down to New York obviously very challenged market continues to open up and we've seen at utilization at our building go over 30 now almost 40%. We do have some leasing activity for smaller sized users. If you recall our 60 Broad asset which is our only asset in New York has small floor plate at the top, beer floor plates to the bottom. We've done the State and we just renewed the City. So, we can accommodate two smaller users and we've seen them come back in the market. So I think that's a positive and bodes well for New York. Again we're thankful, we have very limited exposure there though. In DC, Northern Virginia continues to I'd say be behind Boston in the Sunbelt. But still pretty active and strong. We continue to see smaller tectonites active in that market needing anywhere from, call it five to 15,000 square feet and in the district, so I will say continues to be challenged, although we've seen a recent uptick in tour activity, but nothing imminent. I'd say the district itself is our most challenged market from a fundamentals and operation standpoint from leasing. Moving down into the Sunbelt in Atlanta, we continue to see robust activity across the market, but particularly with what we own around that first ring road well amenitized product and easily accessible off the highways…

Okay, great, thanks for all that. And, then just two others. One is CVS being want to just the only large expirations you have for a while here late next year, what's the mark to market on that right?

Well, Antony, they do occupy our 750 West John Carpenter Freeway asset in Las Colinas, a great building about a half a mile from the music factory, great a monetized area there. It's a little early in the process, but we have had dialog with them as they continue to figure out their space needs. But, I think we continue to feel very positive about where that's headed. As you point out, we have very little expiring do there are only tenant that is greater than 1% of ALR that expires between now and the end of 22. So, I think we feel like that should pan out well as the teams are giving me the exact market to market. But I'd say it's roughly in line with our portfolio, which is about 5% to 10% below. So, have a nice roll up assuming they renew.

And then just last question, just, you have a few parcels of land and I'm just curious with some of the corporate relocation activity that you've talked about and new entrants in some of these markets. Any shot of any of that getting activated anytime soon like maybe just seemed like parcel adjacent in that stuff like that?.

We have had some dialog with a number of larger user groups that would kick off a development in both Atlanta and Orlando and so I think we continue to be optimistic on that front. But, there is nothing imminent I would say in that regard. We continue to lean in right now on redevelopment. We've got a number of interesting projects and feel like that's a great way to continue to have covered cash flow and enhance our assets, whether it be 25 Mall Road in Boston or our campus done in Downtown Orlando and of course the Galleria in Atlanta. But, we have a number of sites that will on the development front, keep active on and maybe in 22 to have some positive things to share on that front.

We'll go next to Dave Rodgers with Baird.

Brent, maybe start with you. And we can, we're way around, but from an economic perspective, it seems like you're pretty bullish on kind of the rents really haven't moved much, net effective rents since the pandemic or even through the pandemic and your numbers showed that a little this quarter. I guess what is your view on net effective rents and the impact on economics that COVID had an sublease space has had, you have a view going to for the portfolio overall?.

I think, Dave and thanks for joining us today. I think you've got to take it really market by market almost submarket by submarket when it comes to competitive subleased space, I think in regards to sublease overall, we found that it's kind of going into the direction companies or taking it off the market and where it's been leased. So, we're not competing heavily against that. But maybe in one or maybe two locations and we've continue to beat them out when we have had competitive deals and kept those tenants and so overall, I don't really see sublease space being too competitive when it comes to the, as you reference, I think we would characterize it's really face rates have held up very well, but then any ours have eroded depending on the market in the Sunbelt and say, Boston, I'd say it's pretty limited, but it's there. 0% to 5% in our other markets, though, I think it's probably closer to 5 to 10 and maybe DC in New York and Downtown Minneapolis, but the suburbs of many of continue to hold well, and that's really been because of additional TI right and just people feeling, they need a COVID discount and with the increase in commodity pricing for construction space, that's where they're looking to take the buyout of the landlords hide if you will. So, we do have seen a little bit of erosion in yards. The good news is we're our vacancy stands today, whether it's in Dallas, Atlanta or Orlando, those are the markets where we've seen the least amount of erosion and we've been able to continue to manage that in portfolio, you will see this quarter, we had about $5 per square feet per year. On the capital side, which is kind of in line with the trend we've had pre-pandemic almost. So, we feel pretty good about our ability to continue to hold any.

Yes, that is helpful. I appreciate that Brent. Now maybe one for Bobby, just, can you talk about kind of where deferrals are today?. How much you've collected?, what the plan is there? and then also looking for a trend in your parking and ancillary income from a dollar basis perspective and kind of how that's contributing in the first half, second quarter and the expectation and guidance?

Along your deferrals, you might remember, we had a limited number of deferrals, we gave and they were primarily to our retail customers that were total of about 70 agreements that we entered into and we had about $6 million of deferrals with over a third of that collected last year and the remaining portion to be paid this year. Our cash, same-store NOI numbers included in our original forecast about a 3% to 5%. It was about 1% related to those workouts. We've collected most of that, we still have some of outstanding and to be honest, I've got reserves against all the remaining balances it they're right dollar. Does that answer your question?.

That does on the deferrals. And then maybe on parking and ancillary income, what are you seeing in terms of the improvement sequentially from the first quarter and is that helping out the guidance for the second half of the year as well?

Yes, when we got those numbers here on the parking obviously that is tied closely to our utilization. When we originally budgeted this year, we took a fairly conservative view on that. But if you want to comment specifically on how much was parking.

Yes. We basically sort of troughed out and ending part of 2020. We've started to increase here in 21. We, of our parking income, which is a little bit more than 1% of our annual revenue about 70% of that is contractual meaning is embedded in leases and 30% of that historically have been transient parking and obviously it is really the transient parking, they got hit we did see an increase over the first two quarters, and let's just call it about $200,000 increase, and we would expect to come back to at least currently our thought is that by the beginning of 2022 that will be back to more normalized levels. So we would expect to see an increase in Q3 and in Q4.

But, parking really is a relatively small number in our of our revenue. Dave.

Yes, now, that's fair. Just a good indicator of people getting back to work. So, thank you. And then last, maybe I don't know Brent or Christopher to take this one just on the acquisitions, you talked about trying to find a strategic Sunbelt acquisitions sounds like you're looking at something specifically, I guess, can you talk about the acquisition market, broadly? Are you finding discounts and opportunities out there or have interest rates, cap rates really stabilized and not really providing, maybe a substantial discount opportunities?

Yes. Dave, this is Brent again. We're looking to recycle obviously with Raytheon proceeds coming towards the end of the year. But likely 200 to 400 million in the next 12 months or so and we continue to focus on those markets where we do see the most leasing velocity and that would be in Sunbelt in Boston and we're always having off market discussions, there is nothing imminent, but we do feel like something might come to fruition. And that would be a good opportunity to recycle into. The deals we're looking at to again would be existing market potentially a new submarket, but would follow our strategy of a well located amenitized assets that are slightly older vintage but have great bones in a means by which we can enhance value. So, I think we'll continue to keep the market abreast of that, but nothing imminent at this point, I could point to and say, we're going to get that one in the door, but from a pricing perspective, I think you're going to see in the strong markets where you're still having activity and growth, pricing is down modestly 0.5%. I think what we see as a benefit, right now is we're just limited competition and maybe more is coming, and now might be the time to strike. And in our Northern markets, we're not really heavily looking at, I'd say, values have been impaired, maybe a little bit more, but to your point, interest rates have held and frankly Walt is held really well as our Raytheon disposition exemplifies having 10 years of term on that deal and others that we see in the market of similar profile have continue to price frankly almost through COVID levels, but I'd say Sunbelt down 0.5% in some of these other markets, New York, Minneapolis maybe let five to 15 plus if you go to the West Coast in San Francisco et cetera, but obviously we don't operate there. Is that helpful?.

We'll take our next question from with Truist.

Good morning everyone, and thanks for taking the questions. First of all, are you able to disclose the cap rate to the recently announced in transaction?

We don't give specific cap rates, but thank you for joining this morning job. I can give you a range, and so we would say that's in the mid to high fives cap rate.

And then just secondly, the sort of piggybacking on the earlier expiration question as it relates to CVS U.S. bank , do you have like in early sense of whether those tenants will stay and would that 5% to 10% mark to market you mentioned earlier, Brent, would that apply to all for the properties?

Well, let's say 5% to 10% we referenced is really the portfolio is a whole, in terms of our mark to market. There was a specific question around the CVS lease which I said also kind of fell within that range in parameter, but we don't usually provide mark to markets for specific assets or tenants generally. But that's kind of the range for CVS as we think about the overall other tenancy that you mentioned, it's a little early to say engage on some of those given there beyond 22 and so we'll continue to, as we always do have regular dialog with our tenancy, helping them to meet their needs, whatever it may be as they return to work. If there are a larger corporation and havening already, but at this point, it's a little early to speculate, but we still always feel good about kind of our relationship with those firms and they're using their space, and I wouldn't see any reason to be concerned at this point and we will keep you apprised as we continue to have more dialog with those that are further out again beyond 22.

Okay, thanks Brent. And then lastly, have you seen any changes in how tenants want to utilize our space?. Have you seen much in the way of space reconfiguration request coming?.

We've seen, I'd say in general, there has been a modest de-densification and obviously a much greater focus on I think two factors, one is collaboration space and a more hospitality field to the office environment as well as outdoor space being very important to tenants that we have coming in to new tenants coming into the building. So I'd say that's been the focal point-to-date there really. Overall, I would not say I've seen a trend and really the existing tenancy, some of our larger tenants are spending their own capital to flow change your de-densified their own space, create a little bit more a collaboration space et cetera and that's an interesting phenomenon. But, I don't think it's overall dramatically changing the environment in which they already exist. And again that was on their own dime and I think as I mentioned on our last call a tenant describe that effort is making their space more like a re-work, which was an interesting comment to say that they're creating a little bit more again that hospitality feel and making it a place to be a culture, kind of building environment and I think all the more important to create those different activities, an office building that can create help companies attract and retain that talent have amenities around them, walkable et cetera.

We'll go next to Daniel Ismail with Green Street.

Regarding utilization in a return to office, any trends in terms of the returns to office by the size of tenants or the industry those tenants earn?.

I think we've seen. I wouldn't say by industry but certainly by size, Danny and thanks for joining us this morning. I would say the small tenancy of already they were back. Frankly, at the end of last year because of a lower concern for what potential lawsuit from employees concerns, but also the ability to space out more within their own environment smaller users under 5,000 square feet, typically know each other well, and they were more comfortable coming back. We saw the medium size tenancy also return and also call it middle of this year and really starting to picking up in June as we've talked about and for the most part, I think we've seen a few larger tenants, but they have continued to be out of the office overall. So, and I'd characterize them as being kind of 25,000 square feet, maybe 50,000 square feet or greater, and it also depends on just if there national firm or smaller local firm because we have several local firms, even within this building to take up 50,000 square feet and have a lot of their employees back. The Galleria is also a good example where we have some buildings that are approaching over 75% utilization and of course, we always have this mission critical facilities, no matter where they are, that have always been active during the pandemic, but I think, hopefully, that gives you a little bit of color. I think Labor Day will be a leg up and we are watching the delta variant very closely, but we have not, at least the tenants, we're engaged in their return to the work place have not backed off that September, November although there are a number of headlines. I think both of us have in you've probably seen that some of the technology companies have been a little bit more shy of returning to the office, large technology companies.

And then, Brent. You mentioned a few times growing demand in Sunbelt markets and in the past have mentioned a need to have significant pre-leasing to start developments. I'm just curious if there is any change to that thinking or perhaps a bit more of willing to take a bit more risk given the strong demand backdrop in the Sunbelt?

That's a good question, Danny. And I think our peers of the developers that we talk to are getting more bullish on the market. However, I think we're a little bit more cautiously optimistic, if you will. So, we're looking for something that pre-leasing has 50% or so. Maybe it's come down a little bit, just given the volume that we're seeing start to kick tires in these markets. But we're still going to have it be meaningfully pre-leased in that regard and would not put a shovel in the ground to accomplish that. So we'll keep an eye on other developers who seem to be implying they may go. I think one is announced here in Atlanta and maybe others in some of the Sunbelt markets, but we're going to be a little more pragmatic.

And then, last one from me. Regarding the potential acquisitions as well as future dispositions or any of those, our portfolio deals on either side of the coin being considered or should we continue to look for Piedmont or sell assets as they get stabilized and look at deploying so another single asset type deal?.

I think it's a great question, Danny. I think we're always going to be engaged in the regular blocking and tackling to harvest values, we created with well leased assets and by opportunities to create value for our shareholders and utilize the platform to do so. So, I think we're going to continue to look for everything that's out there whether it's a portfolio or single asset, we're looking in those markets. I think we described Boston in the Sunbelt as being most active right now. So, don't ever count on a portfolio opportunity and we continue to look at them as they arise. So I'd say everything's on the table at this point.

And ladies and gentlemen, that does conclude the Q&A session for today. At this time, I'd like to turn the conference back over to Mr. Brent Smith for closing remarks.

Well, I appreciate everyone joining us today. It's been productive and I appreciate. We've got a really what we think has been a great start 2021. We think that's going to carry into the latter half of this year with very little expirations, again 3% of the ALR so and very manageable debt maturities and portfolio vacancy. As I said system is more active markets of Atlanta, Dallas, Orlando and Boston, and we haven't touched on today. But really proud of our best-in-class ESG platform and we've really paired that with some high quality and amenitized environment that I think positions as well for our chances to get some corporate, larger corporate users, but I encourage the investors to check out on our website that latest ESG report that's been posted as well. Again, thank you everyone for your time and we'll reconvene in October. Thank you.

Ladies and gentlemen, this does conclude today's conference. We appreciate your participation, you may disconnect at this time and have a great day.