Good day, and welcome to the Piedmont Office Realty Trust Incorporated Second Quarter 2024 Earnings Call. At this time, all participants are in a listen-only mode. After management's prepared remarks, there will be a question-and-answer session. I would now like to turn the call over to your host, Laura Moon. The floor is yours.

Thank you, operator and good morning, everyone. We appreciate you joining us today for Piedmont’s second quarter 2024 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 of 2024 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 discussed 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 and 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 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 are based upon the information and estimates we have reviewed as 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 second quarter operating results. Brent?

Thanks, Laura. Good morning, everyone and thank you for joining us today as we review our second quarter results. 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 have our management team available to answer your questions. Piedmont had an exceptional quarter and we're very pleased with the results thus far this year. As we released last night, Piedmont completed over one million square feet of leasing, the largest quarterly volume the company's reported in over a decade when at that time the portfolio was approximately 35% bigger than it is today and we operate in 18 markets. As you all know we are a very different and far more focused company in 2024. Out of the headline one million square feet of total leasing over 400,000 square feet of the quarter's volume was related to new tenant leasing, and importantly the balance included several sizable renewals, which gives us the confidence that we can increase portfolio occupancy through the remainder of 2024. George will provide market specifics and details on the leasing pipeline in a moment. We believe that this quarter's leasing success is a testament to the high quality of our portfolio and the unwavering commitment of our teams at the property to provide truly differentiated environments and not just office space. We also continue to be the beneficiaries of tenants demanding not only superior professional space, but also that they delivered by well-capitalized sustainability minded landlords. In addition, our customer service and leasing strategy targeting small and medium size tenancy is driving portfolio leasing volumes and rental rates to new highs. We believe these trends will be long-lasting…

Thanks Brent and good morning everyone. Exceptional leasing momentum for new space and multiple existing tenant renewals during the second quarter led to strong operational results on several of our key metrics. All of our core markets experienced solid leasing demand, dominated by small and medium-sized businesses that are attracted to our modern well amenitized projects. Having the right blend of amenities is crucial for today's office customers, and our portfolio is well equipped with a wide range of food and beverage options, hospitality infused collaborative workspaces, training rooms, fitness centers, outdoor meeting spaces and health program design and some bring people together. This quarter we added two more food and beverage operators one at our Clarendon asset in Northern Virginia and the other in our downtown Minneapolis tower, further enhancing the range of our offerings and vibrancy in our common areas. Overall, this quarter we completed a record 65 lease transactions for over 1 million square feet of total overall volume twice our quarterly average with nearly 40% of that volume was related to new tenant lease activity accounting for 38 transactions for 400,000 square feet, which is more than twice our pre-COVID quarterly leasing average of 165,000 square feet. The average size of new leasing activity was approximately 11,000 square feet consistent with previous quarters, with a weighted average term achieved of nearly 11 years. Once again, our focus on small and medium-sized enterprises continues to yield excellent results, with a record 31 new tenant leases each less than 10,000 square feet totaling almost 130,000 square feet with many I mean lease commencement dates later in 2024. As Brent mentioned earlier, this quarter's rent roll-up metrics were quite impressive and is a continuation of strong roll-up trend the company has achieved over the past 10 quarters, including double…

Thank you, George. As Brent mentioned earlier, subsequent to quarter end, we closed on the sale of 750 West John Carpenter in the Las Colinas sub-market of Dallas. The asset is a 12 story, approximately 315,000 square foot office building, which was 46% leased as of June 30, 2024. While we remain highly committed to the Dallas market and our team there, we were approached by a local investor who expressed an interest in the asset. We firmly believe in maintaining total objectivity around each of our assets, and as we evaluated the competitive positioning, the lack of walkable retail offerings, the persistent vacancy, and importantly, the significant amount of time and capital required to elevate the asset to today's standards, we simply felt our resources are better spent elsewhere, so we sold the asset in July in an all-cash transaction. We continue to have preliminary dialogue around potential dispositions of non-core assets throughout our portfolio, but it's premature to speculate on any of those at this time. As for new investments, we continue to be highly engaged across our operating markets with an eye towards refining and enhancing our existing portfolio. We are tracking several opportunities across the Sun Belt, but we will be disciplined and patient on the acquisition front. As always, we will keep you informed of any material acquisition or disposition activity as appropriate. With that, I'll turn the call over to Bobby to review our financial results.

Thank you, Chris. While we will be discussing some of this quarter's financial highlights today, please review the entire earnings release, the 10-Q, and the accompanying supplemental financial information, which were filed yesterday, for more complete details. Core FFO per diluted share for the second quarter of 2024 was $0.37 per share versus $0.45 per diluted share for the second quarter of 2023. I do want to note that same-store property NOI, increased on both a cash and accrual basis during the second quarter of 2024 as compared to the same period a year ago. Core FFO for the second quarter of 2024, reflects this property level income, but is offset by approximately $0.06 per share of increased net interest expense as well as decreased operating income as a result of the sale of one Lincoln Park during the first quarter of 2024 and as we've discussed on this call over the last several quarters, the expiration of two large leases during the first six months of this year. AFFO generated during the second quarter of 2024 was approximately $28 million, providing ample coverage of the current $15 million quarterly dividend and funding our foreseeable capital needs. CapEx, for the quarter, however remained elevated, as we work to complete this year four major building redevelopment projects which today have a total of only approximately $10 million of remaining capital expenditures to complete. Turning to the balance sheet, as Brent has already mentioned we issued in June $400 million in senior unsecured notes at a 6.875% coupon, a marked improvement compared to our 2023 issuance which we believe demonstrates an increased appetite for office paper and particularly Piedmont's high-quality portfolio. The bulk of the proceeds from the issuance of the notes were used immediately to pay off the $230 million balance…

Thank you, George, Chris, and Bobby. We continue to focus on our core business, designing, managing, and leasing great workplace environments. The investments we've made in our portfolios, combined with our leasing strategy, continues to resonate with existing and prospective tenants alike. Piedmont's balance sheet is well positioned, having effectively addressed all of our final debt maturities until 2027 and having the full availability of our $600 million line of credit. Our dividend is right-sized and our lease expiration schedule very manageable. We continue to be selective with capital deployment and anticipate being a net seller of assets to continue to leverage the balance sheet and enhance already ample liquidity resources. As indicated when we originally introduced our 2024 guidance back in February, we expected the impact of increased interest expense and recent tenant vacates to result in an earnings and occupancy drop during this third quarter of 2024, and we anticipate a return to growth in subsequent quarters. With that, I'll now ask the operator to provide our listeners with instructions on how they can submit their questions. We will attempt to answer all your questions now, but we will make appropriate later public disclosure if necessary.

Certainly. The floor is now open for questions. [Operator Instructions] Your first question is coming from Nick Thillman with Baird. Please pose your question. Your line is live.

Hey, guys. Appreciate the update on the leasing front. Good momentum there. I guess Amazon lease is done. The next big one, I guess, is City of New York. So, any sort of update on the discussions there and then maybe plans for that asset longer term?

Morning, Nick. This is Brent. Thanks for joining us today. I think as you did point out, with the renewal of Amazon, as we discussed last quarter, and Ryan as well, that's really put our large lease expirations to bed now or at least known in the market all the way up until 2026. So, a great runway we feel like in terms of being able to continue to get lease absorption of portfolio. Looking ahead to 2026, as you point out, New York City is the largest of those expirations. As we noted previously on calls, that dialogue continues to be very favorable and trending towards a renewal. We would expect that we'd like to dispose the asset. When we feel like the capital market is stabilized in New York and that lease is consummated, again, likely to be sometime in 2025. It just depends on the receptivity in the overall marketplace at that time. But as we noted, it is our intention to dispose the asset more near term.

And then maybe touching on dispositions, the John Carpenter sale under leased asset, what's the earnings effect of that sale? Is there plans for some of these other assets that have a little bit more vacancy to recycle those or is this more of a one-off?

Great question. I think as a platform, we're very adept at evaluating older, we call it 80s, 90s, 2000s vintage assets and their viability in the modern office environment. We take a close lens to our own portfolio. Frankly, West John Carpenter Freeway had a number of attributes that just didn't fit what we would deem an asset worthy of the Piedmont portfolio. I think if we look at elsewhere in the portfolio where there might be elevated vacancy levels, really resides in, call it, five assets. One of them we just disposed of, West John Carpenter Freeway. The other being 25 Burlington Mall road. We feel very good about that asset's position in the market as one of the top five assets in that sub-market. Admittedly, it is a little bit slower just given the tech lack of focus on leasing right now. The other one would be our Lost Cleanest asset where we did have a tenant vacate during the quarter, but we still feel like that is very well positioned at Las Colinas Corporate Center, amenitized, and we have good leasing momentum there. Then the other ones would be in the district, which we've talked about being very challenged overall in the sub-market. I feel like overall, the portfolio, this is probably one of the last ones, if not the last one that we would say needs to be pruned. We feel very good about what we have moving forward. Now, specifically to the West John Carpenter Freeway in terms of impact on earnings, that would be extremely limited. Again, maybe one cent or so impact.

How much capital do you think you would have had to put in that space to actually basically lease that one up?

Great question. That would have been approaching probably $100 a foot and base building capital as well as tenant-related lease-up capital. We unique to that asset, it was built actually to have two towers adjoined for most of the common areas. So if you think about a refresh, there's a lot of extra ground to cover for a 300,000 square foot building. And then once you add in carrying costs that number probably would approach or exceed $100 additional capital per square foot on the building.

And then maybe last one for George. Just on the leasing pipeline overall, can you basically break down renewals versus new leasing within that? And then kind of the average size of the tenants you're kind of seeing and if anything between the markets that commentary appreciate as well?

Certainly. Nick, good morning. Look our pipe as we mentioned in our recent release we just spoke about 250,000 square feet and late stage activity being legal or executed. About half of that is for new activity and in that new activity around that's really happening at every one of our markets. Digging deeper into the proposal stage I've mentioned again two million square feet just recent lease, 70% of that is for new activity. I would say that the bulk of that of that activity is happening in Minneapolis, Dallas and Atlanta. I mean Minneapolis is a new market that we're starting to see a lot more demand. I mean it's pretty obvious as a result of US Bank vacating a large percentage of their assets in that marketplace. And then looking a little further out in terms of tour velocity, we've been seeing in the third quarter what we've been seeing for the past several quarters. And then if you look at what's happening in July we're really happy about that's at the high end of our tour velocity range. So when you combine that early stage and late stage recovery -- early stage or late stage activity we feel pretty good about why we but again above the lease percentage guidance by the end of the year between 87.5% to 88.5%.

That's it for me. Very helpful. Thank you, guys.

Your next question is coming from Dylan Burzinski with Green Street. Please pose your question. Your line is live.

Hi, guys. Thanks for taking the question. Most of mine have been answered by now, but just so trying to think through obviously a great quarter on the leasing front. Great to hear you guys increasing leasing guidance for the year. Can you maybe just talk about some of the drivers of that pickup in leasing activity? Is it sort of a return to a more normalized leasing environment? Is that more certainty on the macro -- or less uncertainty on the macro front? Can you guys just give us some further details as to what you guys think is sort of driving that pickup?

Good morning, Dylan and thank you for joining us. You know, I think into a couple of different factors. One you need to our own portfolio. I think our focus on amenities and having a right level of service has continued to benefit us in the retention ratio on average at or exceeding 70%. But I'd also say from a new tenant leasing activity as we've noted on prior calls our focus and our leasing strategy around small, medium enterprises and those that take generally call it a half a floor or less in terms of space. It has been incremental in strength both in depth, but also in overall leasing velocity to backfill what has been historically these larger tenants that are giving back a larger being 50,000 square feet or greater on average about 30% of their space. Now if we want to delve into specific industries that would vary by market in terms of some of what we're seeing. But historically now over the last year we've seen really professional services come back in a meaningful way, a buyer --so financial as well as I'd say including consumer goods as well as retail and industrials. So I think it has been a continued robust from US economy and frankly non-tech and non-large tech – sorry, non-large corporate have been continuing to be those drivers and depending on which market you're in.

That’s helpful details. Thank you.

[Operator Instructions] Your next question is coming from Michael Lewis with Truist Securities. Please pose your question. Your line is live.

Thank you. So this signed, but not commenced sometimes ties my head up enough, so you talked about the $50 million of rent associated with those leases, $30 million of NOI is about $0.24 per share. But you're obviously over the next several quarters and ongoing we'll be signing new leases that have new free rent periods. I guess you know that spread between signed and not commenced versus rent-paying occupancy has widened, should we think about what a normalized level would be and what that $0.24 of upside ultimately evens out to? I'm just trying to think about what the real earnings power that's built up in that leasing you've done over the last of our quarters. What that really is?

Hi Michael. It's Bobby. I'm going to address part of that. If you look back over the last 10 years, that gap between economic lease percentage and the reported lease percentage is about 4% to 5%. So we picked up about 3% gap here which should close over time. It is what makes us optimistic about earnings. Yes, you do have some dispositions that will -- I mean not dispositions some expirations that will take place but we have low expirations here over the next few quarters. So we think it will be accretive to us as that gap closes back towards 4%.

I would say to add to that Michael, appreciate joining us today. You know, it's going to take some time for that 51 million to come into the portfolio as we've talked about, call it anywhere from 12 to 24 months. I'd say a fair portion of that is call it 60% of it is in that for our current abatement period with 40% still and yet to commence. But as that comes into the portfolio, as we talked about that will backfill what we know -- now vacate at Excelsior crossings and at Meridian crossings. And so that exact timing is always difficult to determine is it also somewhat impacted as you point out by the volume of leasing that we achieve going forward. And so frankly -- ironically that gap staying wide is a good thing because that will mean that we are continuing to have this excess of leasing velocity and increasing that backlog. As we approach 90% leased, I would imagine that as Bobby points out gets to the more normalized level which historically has been in that call it 4.5% ZIP code and so the gap -- 4.5% gap between the leased percentage and an economic. And so if I had to specifically tell you when that would be somewhat be correlated to when we reach 90% occupancy. And that's probably going to take us you know, call it another 18 to 24 months. But we do feel like with the momentum we see, it's possible to exceed that and do it even sooner. And that would again make that widening gap remain here in the near term. I hope that gives you a little bit more clarity.

Yes. No that's helpful. It's nice to have some revenue in the hopper on the way. You mentioned Excelsior and Meridian, one of the nice things about this is we could start talking about US Bancorp as a looming move out and now it becomes redevelopment upside. And so, the three redevelopment projects that you have, is there anything to say as far as cost timetables potential NOI, all that stuff related to the redevelopment?

Yes. I would say, there are three assets in the redevelopment pool. One of them will be coming out of the redevelopment pool sometime next year. It will go into service or in operation late this year. And as we know, usually, it will stay out of service for a year until they reach 80% occupancy. The other two we just added into the redevelopment pool. You noted two of Minneapolis, Meridian and Excelsior crossings. Both of those are under, what I would call, a more modest but meaningful renovation in terms of cost per square foot for those two buildings running about $15 to $20 a foot in base building and then we'll have lease up. The reason they're going out of service. There's -- those were single-tenant buildings designed as such. So there's a need to really reposition them not only in the market because they haven’t been marketed for almost a decade but also to make them multi-tenant corridors, bathrooms base building, new lobby, et cetera. But an overall capital spend think about the size of those two buildings you're talking about somewhere in the neighborhood together of around $12 million of base building costs and expense. So not in the grand scheme of our balance sheet meaningful, which is why we like redevelopment opportunities rather than ground-up. We can get to the cash flow faster and frankly we think mitigate some of that downtime. Receptivity in the market for both those assets has been very good. We've noted on prior earnings calls, particularly, Meridian, which is a little bit further along. We've actually already had a little bit leasing success now about 10% leased at that asset with a lot of traction with call it 40,000 to 50,000 square foot tenancy. And then the Excelsior building is underway as well but a little bit behind in terms of its progress. But both of those will really be able to take tenancy through and actually walk through towards the end of the year. They are in full construction mode at this point in time. In terms of their cost again, pretty modest across all three, but I would expect that that capital is completed. It's been, call it, by the middle of next year. If you think about most of our larger redevelopment projects, we do think that will be wrapped up by the middle of 2025 and really will be in a more steady state kind of a base building capital spend across the developed -- across the portfolio at that time.

Okay. Thank you.

There appear to be no further questions in queue. At this time, I would now like to turn the floor back over to Brent Smith for any closing remarks.

Thank you very much. Appreciate everybody joining us today. Hopefully, you've taken away that we're very excited about the track record that we've created from a leasing and operational growth perspective here over the last, call it, 12 months and looking ahead, and the repositioning of the balance sheet also really giving us an opportunity with no major debt maturities ahead of us that we can now kind of reposition and focus the platform for future growth. We'd love to continue to talk to investors about that will be at the Bank of America Conference on September 11th and 12th in New York City. But as I've said on a prior call, we encourage investors to really come down to Atlanta and meet with management and tour the assets and split it after doing here and really to be able to appreciate the story and what's really happening on the ground, if you will within the submarkets in which we operate and how we're extrapolating out this platform across our other markets. Again, if you have an opportunity, please contact Bob or Jennifer if you're interested in meeting and we appreciate everybody joining today. Thank you.

Thank you everyone. 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.