Good day ladies and gentlemen, and welcome to the Piedmont Office Realty Trust Third Quarter 2022 Earnings Conference Call. At this time all participants have been placed on a listen-only mode then we will open up the floor for your 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 third quarter 2022 earnings conference call. Last night we filed our 10-Q and an 8-K that includes our earnings release and our unaudited supplemental information for the third quarter that's 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. 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 and operating income, dividends and financial guidance, future leasing and investment activity and the impacts 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 third 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 third quarter Piedmont executed over 440,000 square feet of leasing at meaningfully higher rental rates with almost a third related to new tenant leasing. In addition, the company delivered solid financial results in line with the quarter's consensus estimates. Also, we completed a very strategic acquisition and laid the groundwork for two important dispositions. Notwithstanding these accomplishments, the broader economic environment continues to pose numerous challenges to the commercial real estate sector. This results from a number of factors including the impact of remote work, rapidly rising interest rates and inflation, as well as concerns regarding a recession. Despite these headwinds, we remain optimistic and realistic about our leasing prospects. Our prudent investment strategy in targeted growth markets and our overall operating performance. Our current leasing pipeline remains stable with over 300,000 square feet currently in documentation and over 150,000 square feet of leasing already executed in the fourth quarter, positioning us to close 2022 with over 2 million square feet of complete leasing, and the portfolio approximately 87% leased. In short, we believe Piedmont's focus on high quality assets in amenity-rich working environments will allow us to continue to attract and retain tenants. And our well capitalized balance sheet provides us with an operating flexibility to successfully navigate these challenging times. With that, I'll turn it over to George, Chris, and Bobby to provide further details on the quarter. George?

Thanks, Brent, and good morning everyone. Despite the usual summer travel impact along with the growing macro-economic uncertainty that Brent alluded to. Our operational teams delivered solid third quarter results on many fronts and leasing momentum remained solid. We're still seeing demand from a broad range of industries, particularly the financial, legal, healthcare and business services sectors. Workspace utilization and our portfolio continues to increase incrementally and it's up to 50% in September, and nationally there is a growing chorus of companies setting the stage for greater in office participation by removing vaccine mandates. Increasing the number of required in-person days, or enhancing the office experience with additional incentives or amenities. We believe our operating strategy to providing a highly amenitize. Modern working environment is a critical component in meeting today's corporate flight to quality objectives, which is not only appealing to leasing prospects with new space needs, but also to attracting and retaining employees for existing tenants and for drawing employees back into the office. And we believe the merits of this strategy is showing up on our leasing results. Workforce priorities have shifted post-COVID. There's a much higher concern for quality of life, homeownership, work life balance and shorter commute times. Our premier assets complement these needs and are located in growth areas, most of which are easily accessible suburban, and infield sub markets. This quarter, we completed over 50 transactions for approximately 444,000 square feet of total overall volume. Of this exactly half or 25 of these leases totaling a 124,000 square feet were related to new tenant lease activity and expansion. While the volume of new deal activity was good, the total square foot lease did not reach the level on the past few quarters. We largely attributed the first part of the summer when historically…

Thank you, George. As we disclosed on last quarter's call, we entered into a binding contract to purchase 1180 Peachtree Street in the heart of Midtown Atlanta, for a purchase price of approximately $465 million, including the assumption of an approximately $200 million, 4.1% Fixed Rate secured mortgage, which matures in 2028. I'm pleased to report that we have closed on the acquisition of what we believe is the highest quality, most differentiated office setting in Atlanta and almost 700,000 square feet 1180 Peachtree is a LEED Platinum Skyline defining asset with a weighted average lease term of over seven years and in place rents at approximately 20% below market rates. The initial accrual basis in yield for the transaction is 6.3%. Piedmont is now one of the largest owners in Midtown, accumulating a position of over 1.3 million square feet within just the last 12 months. If you haven't already done so, I'd encourage you to review the materials on our website, which offer more complete details about this acquisition. We anticipate ultimately funding the 1180 acquisition using sale proceeds generated from non-core asset dispositions. And after quarter-end, we have agreed to terms for the disposition of our two assets in Cambridge, Massachusetts to two separate buyers. Both groups are nearing completion of their diligence periods. These transactions are on an all cash basis with no financing contingencies. We anticipate recognizing an approximate nine-digit gain on a consolidated basis. As for the balance of 2022 given current market conditions and our temporary leverage levels, our capital markets initiatives will be principally concentrated on evaluating additional dispositions of non-core assets. That said, we will be patient and we will be disciplined, as today's market environment is certainly challenging for both buyers and sellers. With that, I'll turn it over to Bobby to walk you through the financial highlights of the quarter and address guidance for the remainder of 2022, Bobby?

Thank you, Chris. I'll discuss some of our financial highlights for the quarter. But I encourage you to please review the entire earnings release and supplemental financial information which were filed last night. More complete details, including additional interest expense incurred during the current quarter driven by rising interest rates, as well as interest expense from additional debt associated with the 1180 Peachtree acquisition, Piedmont still achieved operational and financial goals for the quarter. With successful leasing year-to-date, rising rental rates and asset recycling, the company was able to maintain core FFO of $0.50 per diluted share, consistent with the third quarter of 2021. FFO generated during the third quarter was approximately $43 million, which is well above our current $26 million orderly dividend level. We continue to experience improving lease economics and rental rate roll ups during the quarter. Similar to the last several quarters, our same-store cash NOI however, decreased marginally as expected during the third quarter due to successful prior leasing activity and the commencement of these leases, resulting in a 60% increase in lease square footage under abatement as of September 30 2022 compared to September 30 2021. Our guidance for same-store NOI on a cash accrual basis remains the same for the year and is still anticipated to increase approximately 2% to 3% as several abatements burn off during the fourth quarter. Turning to the balance sheet, our debt-to-gross asset ratio was 39.8%. This temporarily elevated ratio is due to the debt related to the acquisition of 1180 Peachtree that Chris mentioned, I say temporarily elevated because as with all of our acquisitions, we intend the recycling of assets to be leveraged neutral. And we anticipate reducing our current floating debt outstanding with the proceeds from property sales over the next few quarters, including our…

Thank you George, Chris, and Bobby. As George mentioned, Piedmont operates a portfolio Class A assets predominantly in the Sunbelt where continued population migration and job formation trends provide a mitigate to the remote work headwinds the office sector faces. We have refined our portfolio over the last several years to create differentiated buildings that offer premier amenities and hospitality driven collaboration spaces in conjunction with local food and beverage operators. But at Piedmont, we go beyond the building to provide unique services and offerings, including our tenant engagement platform, published sustainability initiatives, and concierge experiences. It's a dynamic workplace environment that our competitors and frankly, the employees house can't easily replicate. The flight to quality is helping our customers to attract, retain, and increase their employees overall productivity. In fact, over the last two years, 70% of our executed leases have taken place at properties that we have redeveloped within the last five years. These asset level investments are what's garnering more than our fair share of leasing activity. Our balance sheet is slightly elevated in terms of leverage due to a key strategic acquisition. But we will address a majority of the floating rate debt related to this acquisition with our anticipated Cambridge dispositions. We will focus on a few other dispositions into 2023. Patiently managing our balance sheet, but committed to get our leverage ratio down a few percent. Finally, I would note that we recently published our annual ESG report, and it is available on our website. I would encourage you to please take a look when you have a moment as there is a lot of good information. And we're proud of the work we're doing in these areas. Reducing GHG emissions, energy and water consumption, and curtailing waste production. We are getting an Energy Star Partner of the Year, 2022 Greenleaf leader with 50% of the portfolio now LEED certified, 100% of our portfolio well health rated, and 88% BOMA certified. At Piedmont, I'm fortunate to work alongside colleagues who are good caretakers of the planet and good citizens within our communities. Along those lines as I conclude, I want to thank each of my Piedmont colleagues with whom I've had the privilege to work alongside each day for their impeccable work ethic, creative tenant offerings, and the drive to provide best-in-class service to our customers. With that, I will now ask our conference call operator to provide our listeners with instructions on how they can submit their questions. We will attempt to answer all of your questions now. We will make appropriate later public disclosure if necessary. Operator?

Ladies and gentlemen, the floor is now open for questions. [Operator Instructions]. Your first question for today is coming from Dave Rogers. Please announce your affiliation. Then pose your question.

Baird. Hey guys, this is Nick on for Dave. I just wanted to touch on the leasing pipeline. I think George went over in great detail kind of some of the key factors we're looking at. But as we're looking at the 150,000 square feet signed in fourth quarter and the 300,000 square feet and documentation. I guess I want a little more color on what's that new versus renewal. And then what's like the average deal size you're seeing?

Sure, Nick. Good morning. Great question. I'm delighted to talk about our pipelines and continues to be pretty, pretty repos. I would say that in terms of how much we have in new activity bucket, but I would say about a third of that. That's already been signed is new. I would say looking-forward to what's in the documentation stage. I would say again, it's about a third or so. It's in the new bucket list. And I think we have a couple of other transactions that we're chasing that we hope to convert into the legal stage pretty soon as well. In terms of average size, it's been a small kind of market for the most part, I would say the last quarter I think 24 of our 25 deals were under 10,000 square feet. I would say looking at what we're doing so far for November, October and November. We have a couple of full floor transactions that were completed, which is pretty typical for us. I think we see between one and three deals that are about a full floor or larger. But after that, I'd say ranges a little under 12,000 square feet across the board.

I'd add there to George, and this is Brent. Nick, thanks for joining this morning. As we kind of, as George alluded to, we really have seen that smaller tenant call and a half of floor 12,000 to 15,000 square feet or less, really be the strongest part of the market. And frankly, we're probably in terms of number of deals and volume for that segment above where we were pre-pandemic. I think that's what gives us some positive just I guess vibes. As we think about the expiration, the remainder of this year and into next year, given the fact that we have X the Cargill expiration, the average tenant size that will be expiring is about 8,000 square feet. And so we're really and most of that call about 60%, 65% of that's in the Sunbelt markets. So we really feel like the portfolio is positioned to continue to get good leasing traction and good pipeline volume.

Yes, all very helpful. And then maybe touching on you guys resolved Ryan, kind of -- for the intermediate term. Looking at your larger tenant roster, what are the chances we kind of see similar activity for say, like an Amazon looking forward at Galleria Towers. Just looking at like for potential holdovers, or you've even begun discussions on something as far away as 2024?

I think this is Brent again. I think we were really pleased to renew Ryan. And we noted about kind of a phased period over time with a weighted average term of a little bit about 3.5 years now. And really, I think an example of the success we've had at that LEED certified building, as we look to Amazon, I think it's pretty early given that in 25 expiration. I will say that, they are active in the space that can do our other Dallas tenants. But at this point, I think it's a little early to think and know whether or not their longer term plans are. I think as we look towards other larger tenant role, we do have Cargill towards the end of '23, as I've noted on the last earnings call, we continue to be engaged with them, that LEED Gold building is a phenomenal asset. It's a 2010 Vintage. And if you'll recall, we bought it for about $185 a foot at a 10 cap. So what's really interesting there is and I think what continues to attract Cargill and other tenants that we do have looking at the building -- there are potential tenants as it is in the market now. You've got a 300 seat auditorium, a 13,000 square foot fitness center with lockers, cafe, coffee shops, it's really got everything we think about in terms of amenities that OD as a complex, and it is a building part of a larger complex. Green parking ratio 5x1000 and it is right down the street from the New Light Rail Stop that's being built as we speak, operational sometime we think in 24s what the city saying. So great positioned asset. We're hopeful they will stay, but again, we are marking that space. And so we'll provide continued updates as we think about Cargill, as it gets closer to their expiration, which again is at the end of '23. I would say as well U.S. Bank, we continue to stay very engaged with them also in Minneapolis and both their location Downtown, as well as the extension we in the space that we did last quarter for their suburban locations. As you may recall, they -- as we noted, are working through a sizable merger with the West Coast Bank that has federal approval now and hopefully should close by the end of the year. And as we continue to work through with them that has come into the picture as well as their final approach to hybrid and work strategy. I think the good news there is we see most financial services doing it predominantly in office hybrid model. So I think overall that bodes well, but obviously still very close to the U.S. Bank. Given our relationship both on the banking side and on the customer relationship side to the tenant.

Thanks Brent. Very helpful. Maybe last one for me. Maybe for Chris kind of touching on the asset sales. Sounds like the Cambridge assets that are going to trade relatively soon. Just kind of wondering on pricing, how it's changed relative to your underwriting when you were looking at selling those assets, and then maybe touch on kind of the bigger pool out there. It sounds like all cash deal maybe debt financing is a little tough out there. So how does that bode for like other assets so he just did that you have in the market right now? You guys get that.

It looks like we lost the main speaker line. Just one moment please. Ladies and gentlemen, please remain on the line while we connect the speaker line. Thank you for your patience. Ladies and gentlemen, please remain on the line, the conference call will begin shortly. We have the speakers lined connected. Dave, if you can please repeat your question.

Hey guys. Just last question was kind of for Chris on the asset sales and kind of Cambridge sounds like that one's going to close relatively soon. Just wanted to touch on where that's coming in relative to your underwriting for a potential sale. And then as we're looking at potential sales such as Houston is one of the pressure points here financing and that's part of the reason we see Cambridge trade is just as all cash buyers are a little more color on that would be helpful.

Yes, good morning, Nick. Good question. Sorry again, for the technological challenges. Got to be a little guarded with our commentary on Cambridge. We'd like where we sit. But in this market, we're not done until the wire hits. We did run a fully marketed process, demand there was not surprisingly very robust. These are generational assets. I think we had over 80 confidentiality agreement signed in the first couple of weeks. We launched it back in July, shortly after we went non-fundable on 1180. We threw a very wide net, we wanted as many eyeballs as we could get on these two assets. We certainly approached domestic investors, international investors, as well as a couple of dozen ultrahigh net worth individuals who have ties to Harvard and or had been investors in Cambridge, for years. The debt markets, as you mentioned, and the economic uncertainties, certainly did have some impact on some potential buyers. But the uniqueness of Harvard Square and the uniqueness of Cambridge, as well as remember, these are two long-term leased assets to Harvard and Bank of America, there certainly was ample demand that was engaged on the assets we have two highly qualified all cash buyers, two others with certainly others that are waiting in the wings. And we expect to close later in the quarter. So on Cambridge, we like where we set again, we're not done yet. But we've been pleased with the execution so far. On Houston, we mentioned back in the summer that we had talked to some potential buyers on those two assets. But we'd like to remind everybody that it's only two assets and 600,000 square feet. Those conversations are still ongoing. But it's really difficult to predict when or if those assets are going to trade but we'll certainly keep you informed as and if we make progress there.

Yes, I would add, I think overall, clearly the market is repricing risks of lower the risks, the less the price impact. And obviously, our Cambridge assets. Chris mentioned generational. So I think we've been fortunate to probably see less of an impact there. Because with regards to Houston, I think, as you noted in your question, and I think that's pretty accurate, great assets. And frankly, as we've had discussion with potential buyers, valuations have been where we felt would be reasonable, but the financing markets have not been there. And that's been probably the bigger hang up, as we continue to talk to those groups that are interested. I think we're hopeful that the market will open back up. But we're also thinking creatively as ways to monetize and be out of Houston longer term.

Very helpful. Thanks guys.

Your next question for today is coming from Daniel Ismail. Please announce your affiliation, then pose your question.

Great, with Green Street, just curious on conversations with tenants renewing their space? Has there been any conversations around changing lease terms on a renewal or new lease with respect to early termination rights? Have you seen tenants taking less space when they renew or taking up more space? I'm just curious if you'd speak any of those trends.

Thank you, Dan. This is George wells here. We've taken a look back at renewal and retention rates that we've had over the past couple of years. And they've held pretty steady, I would say in that 70% plus range. And we also dug further into how many of those were looking for contractions versus expansions. And we were pleasantly surprised to note that 40 of our deals were had some expansion element to them versus 27 of those deals had contractions and that's still we're seeing today in terms of where the dynamics of our tenants are going, some want more space and some want less. In fact, this past quarter, I think we had six expansions versus three contractions for 15,000 square feet net positive. So yes, it still seems to be evolving. I don't think that all the macro noises you're hearing is fully being reflected in our pipeline. We don't want to be naive to think that it won't, but at this point, our properties continued to resonate with demand, it's in the marketplace. I will say that, flexibility is always a key for tenants that are looking at enter to any building in the marketplace today. I would say the biggest ask in that realm is basically termination, right? Somewhere that I would say two thirds of the way into a lease term. But that would not say that that's universal, I think on the cage. And that's something that's asked for, but we're not seeing a lot of contraction options, or contractions in our existing pipeline today. I think I did well, usually those termination rights come with pretty heavy penalties. So that I think that's a positive. Overall, I'd say, we continue to see that small tenant market. And I mentioned before having…

Great, appreciate the color there. And then last one for me. Can you give us an update on to the current market on the portfolio, just in place rents versus market rents?

Absolutely, Danny, I think is we've continued to kind of reiterate for the past few quarters, that's generally are in the neighborhood of 5% to 10%. Obviously, we had a stellar quarter this year with a significant -- sorry this quarter with a significant roll-up on a number of tenants but even if you remove the largest tenant with a massive roll up, we were still above that, that kind of that range of 5% to 10%. I think as we also look forward to the role, I think that's representative of kind of the more near-term role that we have in the portfolio as well. So I think that's still a fair barometer.

Great, thanks.

Your next question for today is coming from Anthony Paolone. Please announce your affiliation then pose your question.

Thanks, JPMorgan. Just first question is, as it relates to like asset sales and thinking about earnings over the next year or so I think historically, you've tried to pair dispositions with acquisitions. And you've tried to match those in a way where it's actually been accretive, but in your commentary, it seemed like the focus has shifted a bit more towards the balance sheet and maybe reducing debt. So should we think about, maybe dispositions next year, like do you think that will be dilutive? Or do you still intend to kind of match that up and mitigate the earnings impact?

Yes, I appreciate you joining us this morning, Tony, this is Brent. As we continue to, really, as an operating business model, we continue to be big recyclers of capital. We've sold about 400 million, four out of the last six years, and despite COVID, we've still managed to continue to be able to recycle assets, with an anticipated Cambridge disposable achieve about $300 million this year in dispose. But overall, I think we feel like the asset sales market is going to give us the opportunity to sell Cambridge, which would be accretive relative to 1180, and then have the additional dispositions that will come in. So that net-net, when we sell everything, we will get back to the leverage neutral and roughly earnings neutral on 1180. Again, that was a trophy quality asset that we're trading trophy quality asset for in Cambridge. And so I think overall, the net-net, applauded the portfolio and certainly advances the strategy of continuing to bolster in high growth sub markets like Midtown Atlanta. So we feel very positive about the ultimate end game and maintaining the level of earnings and not diluting earnings. As we look forward and continuing the recycling strategy. It's always our objective to improve the quality of the portfolio and have the acquisition to be accretive to earnings. So I would not say anything's changed in that regard. But we'll be continuing focus on that in '23.

Okay, got it. And then just one other item, just thinking about the inflationary environment. And if the portfolio stays, kind of in this mid-80s, occupied level, does inflation on the cost structure for the other 15% that you're not getting reimbursed on? Is that something we should be thinking about as potentially notable we're going into next year? Or can you kind of control that?

I guess the first thing I'd say is, the majority of our leases do have clauses that insulate us from immediate price increases. Now, then as you point out, the portfolio is a little bit under leased. We took on some vacancy knowingly at the early end of '19, the number of acquisitions that we had, and I feel like we're at the trough related to the vacancy in those acquisitions with great traction at those assets. So I think we feel like we can continue to maintain the occupancy level that we have in the portfolio, it is a little under lease, but overall, I don't feel like the inflationary pressures that we're seeing are going to come to the bottom line materially to the landlord. We are kind of I would say above the occupancy level where most of the costs are being passed through to the tenant. And I don't think that's a meaningful exposure that to be shareholders to be focused on.

Okay, great. Thank you.

[Operator Instructions] There are no further questions in queue. I would like to turn the floor over to Brent Smith for any closing comments.

Thank you. And again, I want to thank everyone for joining the management team this morning. As a reminder, we are going to be at the NAREIT Conference in San Francisco in two weeks. So reach out to Justin or Eddie if you'd like to sit down with management. We certainly like an opportunity to tell the story and continue to share what we think is a very exciting transition that Piedmont is continue to have strong leasing activity and recycling transactions. Again, I hope everyone has a wonderful holiday season and we look forward to continuing the dialog on the fourth quarter call in January. 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.