Good day ladies and gentlemen and welcome to the Piedmont Office Realty Trust Second Quarter 2022 Earnings Call. At this time, all participants have been placed on a listen-only mode. And we will open up the floor for questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Eddie Guilbert. Sir, the floor is yours.

Thank you, operator, and good morning, everyone. We appreciate you joining us today for Piedmont's second quarter 2022 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 is available for your review on our website at piedmontreit.com under the Investor Relations section. During this call you'll hear from senior officers at Piedmont their prepared remarks followed by 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 our press release, as well as our SEC filings. I 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 and operating income, dividends and financial guidance, future leasing and investment activity and the impact of this activity on the company's financial and operational results. You should not place any undue reliance on any of these forward-looking statements and these statements speak as of the date they are made. Also on today's call representatives of the company 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 which were filed last night. At this time, our President and Chief Executive Officer, Brent Smith, will provide some opening comments. Brent?

Good morning and thank you again for joining us on today's call, as we review our financial and operating results for the second quarter of 2022. In addition to Eddie, on the line with me this morning are George Wells, our Chief Operating Officer; Chris Kollme, our EVP of Investments; and Bobby Bowers, our Chief Financial Officer; as well as other members of the senior management team. During the second quarter we continue to experience the strong leasing momentum that we've witnessed the last several quarters, marking our fourth quarter in a row of new tenant leasing that is more than 200,000 square feet. As a reminder, this level of new tenant leasing is above our pre-pandemic levels and I believe it validates our strategy over the last few years of investing in premier assets within targeted Sunbelt growth markets. Assets with great amenities and walkable infill environments and with sustainability and wellness placed top of mind. To that end, during the quarter, we laid the groundwork for our second Midtown Atlanta acquisition in less than 12 months. We anticipate closing on 1180 Peachtree Street during the third quarter, which will make Piedmont the largest single owner of Midtown office space on this iconic street. Chris will discuss more about this strategic transaction in a minute. And to round out the quarter, we continue to deliver consistent financial results, with core FFO of $0.50 per share and cash same-store NOI growth on trend with guidance. At this time, I'm going to turn the call over to George Wells, our COO, to review this quarter's leasing activity with you in greater detail. George?

Thanks, Brent, and good morning, everyone. Our operational teams delivered strong second quarter results on many fronts and leasing momentum continues to be very encouraging. Piedmont's well-located modernized assets continue to track and resonate with today's discerning office users seeking a highly amenitized environment and an owner that embraces wellness and sustainability best practices. This quarter, we completed over 50 lease transactions totaling approximately 724,000 square feet, surpassing last quarter's volume. Of this amount 233,000 square feet was related to new leasing activity. Our lease economics were favorable with approximately 3% and 12% roll-up or increase in second-generation rents on a cash and accrual basis respectively, with an average lease term of 6.5 years, if you exclude one large short-term renewal. Our lease percentage at the end of the second quarter was 87%, up approximately 150 basis points from the end of 2021. While I will note, that the majority of our new lease activity continues to emanate from our Sunbelt portfolio where most of our vacancy resides we are experiencing improved leasing activity in all of our select markets including our non-Sunbelt markets. If you allow me, I'd like to take a few minutes to discuss a few key events that occurred during the second quarter in our operating markets. First in Orlando, we completed four deals for 71,000 square feet including the largest new tenant transaction for Piedmont this quarter which was with Kimley-Horn for 61,000 square feet, at our Trophy LEED Gold South Orange Avenue project. It is worth noting a few things about this lease relocation transaction, that it was a 20,000 square foot expansion from Kimley-Horn's current location. Their new lease space is on the fifth and sixth floors of our 30-story tower and the lease partially addresses a substantial portion of a four-floor contagious…

Thank you, George. As disclosed last night in our earnings release, we are extremely excited to have entered a binding contract to purchase 1180 Peachtree Street in the heart of Midtown Atlanta. For those of you familiar with Atlanta, this asset needs no introduction. For those less familiar, 1180 is the most iconic differentiated office building in Atlanta and is certainly among the most recognized properties across the entire Sunbelt. I'd encourage you to review the acquisition materials which we posted on our website earlier this morning for more complete details including its unique location, amenity set, tenant roster, submarket fundamentals, and our acquisition rationale. But here's a quick snapshot of what we consider to be an exceptionally rare and strategic acquisition opportunity. 1180 Peachtree is an almost 700,000 square foot LEED Platinum 41-story office tower located at the epicenter of Midtown, Atlanta, the corner of 14th in Peachtree Streets. It is 95% leased with a weighted average lease term of over seven years. Its sterling tenant roster includes King & Spalding, Roark Capital, Bain & Company, and Cushman & Wakefield among others. The global headquarters of King & Spalding, an Am Law top 25 law firm comprises about 38% of the building and the lease runs through early 2031. We believe in-place rents are approximately 20% below current market rents and this asset certainly goes toe-to-toe with any new construction due to its unmistakable physical profile, floor-to-ceiling full glass façade, rich amenity base including a 10,000 square foot fitness facility, a 12,000 square foot tenant SkyPark, all at an irreplaceable location. 1180 is located directly across the street from Colony Square, affectionately called Midtown Atlanta's Living Room, offering almost 200,000 square feet of experiential retail including restaurants, Polson Road, which has been called one of the best food holes…

Thanks, Chris. While I'll discuss some of our financial highlights for the quarter, I encourage you to please review the entire earnings release and supplemental financial information, which were filed last night for more complete details. Core FFO for the second quarter, was $0.50 per diluted share. That's $0.02 or a 4% increase, over the second quarter of 2021. This increase is primarily due to accretive recycling activity since the second quarter of last year, rising rental rates and the continued space absorption throughout the portfolio. AFFO generated during the second quarter was approximately $49 million, well above our current $26 million quarterly dividend level. I do want to point out that we have previously discussed, during the last two earnings calls, that our Board would review our current dividend level this summer, given the disruption in the fixed income markets and the potential for near-term recession, the Board decided yesterday to maintain our current dividend rate at $0.21 per share per quarter for the time being. I would note, that the company still maintains ample AFFO coverage of the dividend and the Board will continue to reevaluate, its dividend policy including the potential for a dividend increase as further economic data becomes available. The quarterly dividend declaration was disclosed, in our press release last night. As George alluded to in his comments, with the improved lease, economics and rental rate roll-ups over the last few quarters, our quarterly same-store cash NOI and accrual basis NOI, for the second quarter of 2022 increased approximately 2% and 3% respectively, compared to the second quarter of 2021. Now turning to the balance sheet. Our annualized quarterly net debt to core EBITDA ratio, as of the end of the second quarter of 2022 was at 5.5 times and our debt to gross assets…

Thank you, George, Chris and Bobby. I appreciate your partnership along with the rest of our Piedmont colleagues as that we serve our investors, customers and other constituents in our communities. As you've heard in the leasing report, I believe we're capturing more than our fair share of new leasing activity. We're aggregating our investments in strong growth markets in submarkets primarily in the Sunbelt and have chosen high-quality assets to contain the necessary amenities that will aid our tenants in attracting or retaining their workforces. Making these capital allocation decisions we believe is more effective than ground up development with far less risk and has allowed us to compete effectively at a reasonable cost basis, while we be able to continue to grow rental rates. Certainly, we are in a period of headwinds from rising interest rates to slower-than-expected return to the office to inflationary development costs and the potential for an economic recession. However, we remain optimistic about our leasing prospects, our prudent investment strategy and targeted growth markets, and our overall operating performance. We will continue to seek transformative acquisition opportunities to elevate the quality of the portfolio and earnings trajectory of the company and that's exactly what we accomplished with the acquisition of 1180 Peachtree, a skylining defining project at the most active corner in Midtown Atlanta with an impressive tenant roster comprised of professional services and financial firms with in-place rents 20% below market and limited near-term lease expirations. The ability to purchase this iconic building and recycle expected 1031 exchange proceeds from our Cambridge properties along with other non-strategic assets is an outstanding execution for the Piedmont team. Finally, this quarter, we've made continued progress on our ESG initiatives. We're proud to be recognized as a 2022 ENERGY STAR Partner of the Year and…

Ladies and gentlemen, the floor is now open for questions. Your first question for today is coming from Michael Lewis. Please announce your affiliation, then pose your question.

Yes, thank you. This is Mike Lewis from Truist Securities. My first question about the 1180 acquisition, the 6.3% cap rate actually sounded a little bit high to me considering the quality of the assets the mortgage that you're able to assume. Could you maybe just talk a little bit about the bidding process or any other information related to the pricing of that asset and maybe if that cap rate, what that implies for other assets in the market?

Good morning, Michael. I appreciate you taking the time to join us this morning and happy to and excited to talk a lot more about the 1180 transaction. So thank you for the question. In terms of the 6.3% accrual cap rate, I would say that, as we've noted that asset has roughly 20% below market rent, so a lot of embedded growth which is great. I would say in-place rents right now are probably in the -- call it mid-40s on a gross basis. And so, that really has afforded us the opportunity to be able to obtain that growth and be able to drive it out over the next few years. It does have a long-term weighted average lease, but we do have about call it 75,000 square feet rolling in the next two years, which gives us a little bit of opportunity more near-term to continue to drive that cash cap rate closer to the accrual cap rate. As you probably know, most of our cash cap rates are generally about 100 basis points behind the accrual. And I think that's fair to say in this instance it was in that neighborhood and a fair assessment of where cash would be on a cap rate basis. In terms of the bidding process, I think it was a competitive process. Certainly, it's been choppy capital markets but an asset of this quality as we've continued to see in a number of comparable trades since call it the June time frame where we started to really see some of this disruption was while competitive, we still felt like we were the optimal group given the quality of the asset, our previous acquisition call it nine months ago with 999 and being able to really create a beachhead here with 1.3 million square feet. But it would have the usual names you would have expected in terms of other REIT competition and those looking for core core-plus type returns. I think what probably separated us apart from that is just a continued bird-dogging on this asset and we've continued to search a lot as you heard me talk about on an off-market basis assets. This is one we were looking at for now since last year and continue to really move ourselves forward in terms of that process and being able to have diligence completed in a very timely manner and be able to move quickly and assume -- be a group that could assume that perceived to be very efficiently in a choppy market. So I think those all kind of led us to get what we thought was very good pricing with embedded upside low risk, but a little bit of near-term expiries to get some uplift.

Okay. Thanks. And then on the disposition side, Cambridge we knew it was coming when you found an acquisition target. You talked about Houston that, kind of, pausing on that. I was wondering if you could give any more detail on what you look to next in that. What's behind Cambridge, which Bobby alluded to? My guess is maybe New York City isn't quite ready? You're looking to get a long-term lease there. The rest of these markets all look core to me. There's always a bottom, I always say there's always a bottom 5% or 10% of the portfolio. But where do you look for the rest of those disposition proceeds that you talked about?

Good question too Mike. On the flip side in terms of the additional dispositions beyond Cambridge and we continue to see a good depth in the market in terms of better pools for high-quality, well-leased, long-term assets. And we feel like we've got a bucket of those assets that certainly fit that profile that we could transact on. I would say in a matter of Houston, we felt like we had the pricing. But obviously just given the disruption in the debt capital markets when that volatility pulls in, we hope to be able to execute on those. But I would remind you, we probably sold about over $400 million of assets, four out of the last six years despite COVID and the unusual disruptions that our industry has faced more near-term. So we've been effective at continuing to recycle that capital and feel very confident on both Cambridge and then the additional $250 million, roughly $1 million behind that in disposed over the next 12 months. But it would have much more of I would say a core plus profile, but good tenancy, but long-term not part of our strategic operational plan.

Okay. And then lastly for me, I'm just wondering should we think of US Bancorp's short-term renewal, should that scare us or make us feel good right? Because you mentioned going through the merger and it sounds like you're still deep in negotiations for a longer term deal. And so from that respect it feels good. From the broader environment, we know about companies that want to do short-term deals because they don't know how much space they ultimately need in this kind of hybrid work world that we're in now. What's the feeling on US Bancorp? Is that short-term deal? Is that a good thing, or is there some hesitancy there because maybe they're figuring out, how much space they ultimately need?

Good question too there Mike. I would say, we have a long history of finding win-win situations and solutions with tenants that have difficulties or elongated processes. I'd point to the New York State in that unusual situation where we did an interim lease or a situation like where we talked about a project in Boston with Microsoft doing unusual wraparound lease and letting them get into a campus situation that evolved over time and continue to come back and forth or even like at our Galleria project where we've had a number of those situations here in Atlanta. And I would say that generally, I would see that as a positive, because you're continuing to find that win-win solution with the tenancy. I would note that as we did in the prepared remarks the US Bank is in the midst of that merger. But like many financial services firms, they're still trying to figure out what that work-from-home hybrid strategy ultimately looks like. But we feel very confident that new development is not an option that would be for them in terms of their locations downtown. And I want to remind everyone that that asset that they're located in is their headquarters. And on the 31st floor has by far the best amenity set, overlooking the city of any office building in that market. So we still feel very good about keeping them for a majority of the space downtown. And then out in the suburbs, that is well-located certainly, very accessible right off the highway great signage IT location. And they continue to utilize that space, and the fact that they wanted to extend for 18 months in that location I think bodes to the desire to do something there longer-term. And again, for what we think would be probably the majority of the space out there. But it is going to take some time as they continue to work through those areas. And we -- sorry, the merger, and we continue to work with them and figuring out their ultimate headcount in Minneapolis and the space plans that best suit that and how they should design their space. Eddie, correct me too here. I'd just note that was a 16 month extension, not 18, apologies.

Great. Thank you.

Your next question for today is coming from Ray Zhong. please announce your affiliation, then pose your question.

Hi. Good morning, everyone. This is Ray Zhong on for Tony Paolone here at JPMorgan. First congrats on the acquisition. Just wanted to get a little bit color on it, in terms of strategy-wise, I think you guys mentioned previously on the value-add acquisition strategy compared to 999 Peachtree Street, this one feels like, correct me if I'm wrong, it's likely -- it's more on the mark-to-market side and 999 Peachtree was more on potential lease-up opportunity. Just want to get a sense of is that indicative of the strategy kind of just focus on high-quality asset long-term lease but with mark-to-market opportunity, or you guys are still looking at assets that have lease opportunities as well?

Great question and I appreciate you joining today, Ray. I would say each asset or acquisition is a little bit unique in their own right. And we've -- as we mentioned I think in our NAREIT meetings, we're generally kind of 70% core, core plus and 30% value-add in terms of that pipeline. And I think that's fair to say how we think about acquisitions and being mindful of a couple of different components, not all of it given the balance sheet and being able to make sure you have ample cash flow we want to increase the dividend we've talked about watching the capital markets for that regard. But you can't take on too much value-add, too much redevelopment at any one-time and that 999 project is a pretty meaningful in terms of scale, call it, about $25 million redevelopment. And the 1180 profile, though, is very different much more stable. As we think about its 1031 partner, if you will, in Cambridge that was a long-term lease, high credit and really a high quality asset and we wanted to pair that trade with a similar profile asset. You continue to have that mix within the portfolio. But what's unique about this, I think there are other acquisitions that we've continued to see roll-off in our sector for these types of high-quality deals is that this one will compete with new construction full glass window line beautiful 10-foot plus finished ceilings, really unique building and location-wise could not be more at the corner of Main and Main in Midtown Atlanta. And we got that below replacement cost and the ability to continue to drive rents higher in the building is the way we'll continue to create value. You probably heard me mention, we've got about 75,000 square feet roll in the first few years, but a good wall sort of overall at seven-plus years. And given the potential for a recessionary environment, we also felt very pleased with pairing this with Cambridge keeping our occupancy up within the portfolio, because those buildings are also well-leased. And we're excited overall to continue to grow our presence in Midtown now having 1.3 million square feet. And it's a great combination with our 999 asset. Once we stabilize both buildings, we feel like we'll still to be around $550 a foot on a basis versus construction costs now for replacement would be $700 a foot plus. So that's a little bit around the strategy. I could talk more for hours on Midtown itself and the benefits there. But we'll kind of pause and hand it back to you. I think last point though on the strategic side is the fact that this will continue to move our percentage in the Sunbelt to 67% and we continue to stay the targeted goal of getting to 75% by the end of next year.

Got you. Thank you. Thank you for the color. And you guys mentioned if I got the number correctly 2 million square footage in the pipeline a little bit higher than previous quarters, any chance we can have a little bit color on the pipeline on Atlanta, or maybe Midtown Atlanta, I was trying to look at 999 Peachtree from quarter-to-quarter just trying to see if the lease rate has gone up or anything? Just any color on the leasing pipeline there will be great in that market?

I'll handle that and then hand it over to George Ray. In terms of 999, I think, we've been very pleased with the receptivity in the marketplace. We've been working on our repositioning. We've completed plans for that and been sharing that with the market. I think near term we're going to have some success to share both on the leasing side and the office tower, but also on the retail side as well as the base of the building continuing to create that environment. And I think the exciting thing there will be, we've continued to see rental rates achieved that are above our initial underwriting. I'll let George talk to a little bit about more around that and maybe some of the pipeline as well and what we're competing against. George?

Thank you Brent. Good morning, Brad. We did talk a lot about Atlanta in the script. But I will tell you there has been a fair amount of activity a dominant player for the past couple of quarters. The news was all about 1180 this time around. But look we're still enthusiastic about what's happening in Atlanta. I mean, overall, we've got about 25 deals in the pipeline today for over 350,000 square feet. So that really brings a lot of optimism about what we're doing in Midtown. At 999 itself, we've got over 40,000 square feet in the pipeline there too. So with all the relocations that are happening in migration of new companies coming into Atlanta that really makes us excited about what's happening there.

I would add to you to get more specific. I think what's unique about Atlanta overall versus say a Charlotte or a Dallas is that we don't have a competitive city in the sense of Raleigh and Austin that are taking the technology firms. So what we're seeing in Midtown as we've talked about is not only the technology companies that are coming into the market for the high-quality software and hardware engineers and diverse talent. But also the companies that we continue to see from a professional services standpoint move from Buckhead into the Midtown market particularly on the legal side and some of these other firms. So we've continued to see absorption in Midtown pulling from other submarkets as well as that out-of-market corporate and tech company. I think what continues to really separate Midtown from the rest of Atlanta is that just mixed use environment, and what we've continued to see success leasing-wise are those projects that are very accessible by transportation and very walkable to amenities restaurants retail, et cetera. And certainly that Midtown market is probably bar none. I think in our presentation, it's the second most dense city in the Southeast -- or sorry area of a city in the Southeast.

Got you. Thank you. That's all I have. Thank you.

There are no further questions in queue. I would now like to turn the call over to Brent Smith for any closing remarks.

Thank you. I would just remind everyone joining us on the call today. If you haven't had a chance to look at the presentation materials on our website around the 1180 acquisition, please do so. You'll find additional detail and pictures, et cetera about the asset. But I would just reiterate that while we still remain optimistic about our performance for the rest of the year, we are cautiously continuing to watch for -- given the uncertain economic environment. But I think overall very pleased with Piedmont's execution in the second quarter and look forward to talking again in October. Thank you everyone. And as we get closer to October a reminder to reach out to Eddie or Bobby to get on the NAREIT calendar for November's meeting. Thank you.

Thank you, ladies and gentlemen. This does conclude today's conference call. You may disconnect your phone lines at this time, and have a wonderful day. Thank you for your participation.