Good day, everyone, and welcome to the Piedmont Office Realty Trust Incorporated Fourth Quarter 2023 Earnings Call. At this time, all participants have been pleased on a listen-only mode, and we will open the floor for your questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Chief Accounting Officer, Laura Moon. Ma'am, the floor is yours.

Thank you, operator, and good morning, everyone. We appreciate you joining us today for Piedmont's fourth quarter 2023 earnings conference call. Last night we filed an 8-K that includes our earnings release and our unaudited supplemental information for the fourth quarter ‘23 that is available for your review on our website at piedmontreit.com under the Investor Relations section. During this call, you will 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 financing, 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 are based upon the information and estimates we've reviewed as of the date the statements 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 regarding fourth quarter and overall 2023 operating results. Brent.

Thanks, Laura. Good morning, everyone and thank you for joining us today as we review our fourth quarter results and reflect a bit on 2023. In addition to Laura, 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. We also have the usual full complement of our management team available to answer your questions. You don't have to search hard to find an article recounting the demise of office. The topics longevity in the headlines rival Taylor Swift, and every form of media carries the story. Business websites, social media platforms, and most recently the godfather of television news, 60 Minutes, even reported on the impending financial calamity from a tsunami of vacant office space as a result of remote work. And it's exactly the fact that despite the overwhelming negative sentiment for office in the press, business leaders and executives continue to denounce fully remote work. And while it may be deeply buried in your news source, in the last four weeks, UPS, IBM, U.S. Bank, and hundreds more American businesses removed tens of thousands of employees from a remote office model. And it is in the face of these sector headwinds that makes the leasing success of the Piedmont team in 2023 all the more impressive. And what gives me the expectation that the continued migration towards a hybrid work model will further fuel the flight to quality and the flight to capital leading to more demand for Piedmont's assets. I'd like to take a moment and remind investors of several points I've made on prior earnings calls that bolsters the thesis in Piedmont. First, that market statistics can be very deceiving. And despite 30% vacancy, the top five to…

Thanks, Brent. Our attractive workplace offerings and strong sponsorship continue to bear fruit with solid operational results. We had another strong leasing performance in the fourth quarter with 42 lease transactions completed for approximately 816,000 square feet of total volume, the most quarterly volume executed since 2019. Renewing our largest tenant, U.S. Bank's entire 447,000 square foot world headquarters in our downtown Minneapolis tower for 10 years was the highlight. But, aside from the U.S. Bank, the totals included 155,000 square feet of new tenant leasing across 20 transactions, approximating our pre-COVID quarterly average and representing 7% of our overall direct vacancy. Furthermore, our weighted average lease term achieved on new lease activity for the quarter was well over nine years. Excluding the sizable U.S. Bank lease, the average lease size executed during the fourth quarter was approximately 12,000 square feet. Again, continuing the theme we saw throughout 2023, increased market demand for small to medium-sized enterprises requiring 15,000 square feet or less. Smaller users across a broad range of industries are driving our leasing success. This quarter, outside of the 77,000 square foot GE Venova deal in Atlanta, all of our new deals were under 10,000 square feet. That said, we are continuing to see increased activity from larger requirements of over 50,000 square feet, looking at our bigger blocks of space in both the Sunbelt and our more recent availabilities in our Northern markets. As we've discussed in the past, how we market space to those smaller users has evolved over the past several years. Today, we operate a strategic pre-built office suite program that has been very successful in meeting this demand segment. In fact, over the last 36 months, we've leased a total 41 spec suites, and that's just in the Southeast. Furthermore, with the disruption…

Thank you, George. As has been the case throughout 2023, activity remains virtually non-existent in our target markets. However, we are starting to see the ice thaw just a bit. We continued disposition discussions around a select number of non-core assets, but it is still too early to comment on any specifics. The buyers we are talking to are mostly local operators or owner-occupiers who are targeting our smaller assets, generally those less than 250,000 square feet. As always, we will keep you informed of any material activity on this front, and we will continue to earmark any resulting sale proceeds towards the reduction of debt. While acquisitions are not under consideration at this time, we remain highly engaged across our operating markets, with a strong bias towards our Sunbelt cities. With our significant scale, operational platform, and deep local relationships, we believe opportunities may surface in the second half of this year and into 2025. With that mindset, we will continue to position the balance sheet and consider creative alternatives which might allow us to take advantage of the conditions if and when these opportunities do present themselves. With that, I will turn the call over to Bobby to review our financial results. Bobby?

Thank you, Chris. While we will be discussing some of this quarter's financial highlights today, I encourage you to please review the entire earnings release and the accompanying supplemental financial information which were filed yesterday for more complete details. Core FFO per diluted share for the fourth quarter of 2023 was $0.41 versus $0.50 per diluted share for the fourth quarter of 2022, with the current quarter reflecting approximately $0.065 per share of increased interest expense as compared to the fourth quarter of 2022, as well as the impact on property net operating income from the sale of our Cambridge Massachusetts portfolio in December a year ago. Examining our annual results, we experienced an almost $5 million increase or $0.04 per share increase in property net operating income during 2023. However, that increase was more than offset by an approximately $35 million increase in interest expense during the year. AFFO generated during the fourth quarter of 2023 was approximately $32 million or $128 million on an annualized basis, providing over 2x coverage of the current dividend and providing strong funding for our foreseeable capital needs. Turning to the balance sheet, we do have some updates to share regarding recent refinancing activity. As you may have seen in our December Form 8-K filings, late in the fourth quarter we were able to capitalize on the first downward trend in interest rates that we've seen in a while and an improving appetite for office paper among fixed income investors. We issued an additional $200 million of our 2028 notes at a premium, resulting in effective yield at 8.75%. We used the proceeds from this offering to pay down our revolver and $100 million of a $200 million unsecured term loan that was scheduled to mature in 2024. This information is included in…

Thank you, George, Chris and Bobby. As we've talked about here today, our core business, that is leasing, was extremely robust throughout 2023. We addressed our largest tenants lease renewal and are pleased to see increasing tour activity in all of our markets. Other than the few known move-outs, the remaining lease expirations in 2024 are very limited, equating to around 5% of ALR remaining to expire this year. I would also note the majority of our vacancies reside in our Sunbelt markets, where we see a healthy pipeline of prospects. Our balance sheet is also well positioned, with the bulk of our near-term debt maturities addressed and limited outstanding maturities remaining over the next three years. As you can tell, it's been a busy year at Piedmont, and I'm thrilled with the strategic goals we were able to accomplish, and despite the challenging economic backdrop in 2023. Thanks to the Piedmont team for their hard work, which made our success possible. It definitely has taken a talented and collaborating group of employees, so congratulations to all my colleagues on an outstanding year. I would also be remiss if I didn't also thank each of you, our analysts, equity and fixed income investors for your support of Piedmont this past year. As we look ahead to 2024, we expect the full impact of the increased interest expense and known tenant vacates to result in an earnings and vacancy trough in the middle of this year. With the optimism, the company will return to quarterly FFO growth before year-end through consistent same-story NOI growth, aided by the declining interest rate environment. As we've discussed here today, there are a lot of reasons to be optimistic about Piedmont's 2024 runway. With that, I will now ask the operator to provide your listeners with instructions on how they can submit their questions. We will attempt to answer all your questions now or we will make appropriate later public disclosure if necessary. Operator.

Certainly. [Operator Instructions]. Please hold while we poll for questions. Your first question is coming from Anthony Paolone from JP Morgan. Your line is live.

Great, thanks. Good morning. My first question, I just want to understand the occupancy and the guidance there a little bit better. So the 87% to 88% lease rate you gave, is that comparable to the 87.1% that you closed out the year? Because it sounds like you are taking a couple of those Minneapolis assets out of service, just trying to get that straight.

Hey Tony, good morning. It's Brent. Thanks for joining us. As you point out, we have discussed in our prepared remarks, we will be putting in this quarter the Excelsior Crossings asset into the redevelopment pool. And then in the second quarter, latter part of second quarter, the Meridian asset will also likely go into the redevelopment pool, and that's what we've anticipated in our guidance for the year. So the 87.1% that we have today would include those two assets, and they will be pooled out here throughout the year.

Okay. And then, maybe just thinking about occupancy in general then. If we take out those two assets going into redevelopment, do you think you absorb vacancy in 2024 or are there other sort of either no move-outs or pressure points in the portfolio to think about over the course of the year? Just trying to understand what's in the guide and the thinking there.

Great point, Tony. I think overall we feel very optimistic and excited about the 2024 leasing prospects given the pipeline that George alluded to. While we will be getting back some larger space there, I think the overall trend in the portfolio, as I alluded to in the prepared remarks, has been modest absorption. And I think we'll continue that trend. Obviously, we'll put those assets we discussed into the redevelopment pool. So the in-service portfolio will continue to operate in that kind of high 80% lease, 87% to 88% that we've targeted for the end of the year.

Okay. And then just on the capital side, just two items, just thinking about capital sources and uses for the year. On the sources, I know you didn't want to identify too much on what you might sell, but just can you give us some sense as to maybe order of magnitude or proceeds you're thinking about at this point for the year?

Great question, Tony. I think on my last call, I kind of stated, and I think it's still fair to say, we anticipate selling somewhere in the neighborhood of about $100 million to $200 million over the next 18 to 24 months. I think as we look specifically at 2024, it would be towards the lower end of that range and that's probably the best guidance we can give you. We do continue to canvass the market or be canvassed in the marketplace by as I mentioned, the smaller operators and/or a number of user-owner occupiers who like the high-quality assets that we have, particularly those that are smaller in scale, both from a purchase price standpoint, availability of debt standpoint, and frankly for their own operations, fits better than obviously some of our larger assets. So, we continue to have those discussions with the expectation that some of that will come to fruition through the year.

Okay. Great. That's all I got. Thank you.

Thank you. Your next question is coming from Dylan Burzinski from Green Street. Your line is live.

Hi, guys. Thanks for taking the question. I guess just sort of thinking about your comments on potential future acquisitions, how should we think about sort of sources and uses there? Should we only expect you guys to look at assets should you sell any existing assets or I guess just how should we be thinking about that?

Hey, Dylan, thanks for joining us this morning. I think in our prepared remarks and even Chris noted this, any right now dispositions we have would go first to pay down debt. And as we continue to have disposition success, that would be our anticipated “use of proceeds.” That said, we continue to be very much in the flow of our target markets, particularly those in the Sunbelt where we would consider growth. And that's really just staying in the flow and continuing to follow what many in the press read is the dislocation and in some instances distress in the marketplace. I would say that assets that we want to target are more experiencing the dislocation than the distress, just given their more high quality in nature. And so we continue to build relationships with those owners that might be potentially either looking to sell or need creative capital infusions, whether they be preferred or mezz, however you may want to classify or structure it. But that was what we continue to look at as means of continuing to tie up assets maybe without a direct purchase or a credit play in that nature. But, I think at this point in time, again, focus on dispositions to pay down debt and staying in the flow with a mindset towards the opportunities to really start to present themselves towards the latter part of the end of this year into the beginning of next year. And so our goal would be to get the balance sheet in an optimal position to take advantage of those situations should they arise, again, probably more towards 2025.

That's helpful. And then obviously a good year on the new leasing front for you guys, so congrats on that. But I guess as we think about the lease percentage guidance, it kind of came in below sort of our expectations. And so just curious if there's any other larger move outs other than Cargill and U.S. Bank that may be sort of driving that lower. I know Amazon, you guys have called out I think 70,000 square feet in D.C. this year. But I guess just as they look at their Dallas footprint, can we expect that space or at least some of it to be given back or?

Thanks, Dylan. Yeah. So, you know, I'm not quite sure where your lease guidance percentage number might have been for ‘24. But overall our -- I think that's what we find exciting about the Piedmont story, is that there are no move outs, the larger move outs. Once you take those out of our ‘24 expiries, you've only got 5% remaining to expire during the year and we consistently hit 70% retention ratios. So we feel pretty good about our runway from a leasing perspective. You noted Amazon in D.C. And in fact, as we've discussed, they are a known vacate closer to about 65,000 square feet or so, almost 60,000, Bobby noted to me. So a little bit less than what you had anticipated. And other than that, there are no significant move outs that we don't have backfills behind in terms of leasing in the portfolio. So it's really those two larger ones in suburban Minneapolis. And as I get, I alluded to my earnings call, we're seeing good success. It's a market that frankly there's not a lot of well-equipped, full, vertically integrated platforms that have access to capital and that can conduct leasing for regional headquarters locations or larger deals, which those buildings are suited for, as well as that smaller tenant market, which we're seeing good traction with. So overall, again, we feel very good about leasing. In terms of looking to 2025, you noted Amazon in Dallas. It's still early stages. And again, we are very closely tight-lipped under an NDA related to that tenant. But overall, I think we feel very optimistic given a few factors. One, they have a very high utilization at that location now at pre-pandemic levels. Two, they are not in need of expanding space. And three, they continue to utilize all their existing space. So I think it's unlikely they'll be canvassing the market, particularly given the short duration between now and when that lease expires. And we feel pretty good about significant renewal in the majority of the space. That's probably our best indication we can give you at this point in time. Other than that, in 2025, I think there's very limited large expirations for the remainder of that year. So again, we feel like all the “bad news” is on the table. The trough is identified this year for investors, and it's just a matter of how fast we come out of that trough towards the end of this year.

Great. I appreciate all that detail, guys. Thanks so much.

Thank you. [Operator Instructions]. Your next question is coming from Nick Thillman from Baird. Your line is live.

Hey, good morning guys. Maybe just a little bit more color on some of the leasing year-to-date and the late-stage pipeline. So can you break out the 260,000 square feet between new and renewal? Same for the late-stage pipeline on new and renewal. Then maybe what markets you are seeing in most of that activity?

Good morning, Nick. This is George Welch here. Thank you for joining us. I’ll tell you, we're really excited about the transaction like that we're seeing today. I'd say overall to answer your question, in terms of the 260 that's already been executed, about 50-50 is new, and the other 50% is renewal. I would also say that I mentioned about a 0.5 million square feet at the late-stage, legal stage, and again, the characteristics there are predominantly 50-50 as well.

Anything specific on markets, or is it all kind of broad-based or still Sunbelt-focused?

I'll tell you, it's pretty broad-based. Looking at all of our markets, we've been really fortunate to see activity from the last quarter to this quarter being broadly in all of our seven markets. Really excited about the depth and breadth of our overall leasing capacity and accomplishments at this point. In fact, one of the interesting things about our pipeline as I mentioned is over 2 million square feet. The interesting characterization there is, though it's a pretty high percentage for new activity, a lot of that is for large transactions. We're seeing larger transactions above 50,000 square feet or larger. I'd say about a dozen of those across our, let's say, our four major markets.

That's helpful. Then maybe for Bobby on just the maturities for 2025. Last year you were pretty proactive of getting that bond offering done earlier in the year, even though it was like pricing wasn't as favorable as it is today. Do you expect to be a little bit more patient on that upcoming maturity and seeing, like testing the disposition market before deciding to do another deal? What are kind of your thoughts around that?

Your answer is, yes, be patient. We have $275 million bank term debt maturing in 2025 and none in 2026. And although it's not modeled in, as Brent alluded to, we hope to achieve around $100 million dispositions in 2024 that we hope that we can pay down or reduce our debt with. That would maintain our ratio between 30% and 40% leveraged. That said, the pay down and refi strategy is going to become more clear I think in the middle of the year. We do have available capacity with our key bank partnerships and we've demonstrated our ability to access the public debt markets to refinance debt, which is a very strong long-term preference for us.

That's helpful. And then the last one, on commenced occupancy or lease percentage, we're kind of assuming the bottom is going to be 2Q even, if we're just looking at the projection for 2024?

I would say it’s probably more likely 2Q to 3Q would be the trough. It's tough to pinpoint that. They just give move-outs and commencements. And as we continue to see construction taking a little bit longer than we have historically seen, I don't know exactly if that's just lack of availability of materials, increased demand on other asset classes, etcetera, but just taking a little bit longer than historically to build out some of the space. But overall I would say, yeah, your trend is correct, sometime in the middle to second half of this year.

Thanks, guys.

Thank you. That concludes our Q&A session. I will now hand the conference back to CEO, Brent Smith for closing remarks. Please go ahead.

I appreciate everybody taking the time to join us here today. I do want to reiterate one statistic that was misreported in the analyst report. It had our same-store NOI growth at negative 2.2 for fiscal year ‘23. I just want to reiterate the company achieved positive 2.2 same-store cash NOI growth for fiscal year ‘23. Overall, we're very excited and pleased with 2023's performance and what lays ahead for 2024. We'd love to have a chance to talk to investors further fixed income or equity at the Citi Conference that will be held on March 4th to 6th in South Florida. Please reach out to Bobby or Jennifer if you'd like to sit down with management. And again, thanks everyone for joining today. Have a good day.

Thank you, everyone. This concludes today's event. You may disconnect at this time and have a wonderful day. Thank you for your participation.