Good morning, ladies and gentlemen, and welcome to the Piedmont Office Realty Trust's Fourth Quarter 2021 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 fourth quarter 2021 earnings conference call. Last night, we filed an 8-K that includes our earnings release and our unaudited supplemental information for the fourth quarter that's available on our website at piedmontreit.com under the Investor Relations section. During this call, you'll hear from senior officers at Piedmont, and they may refer to certain non-GAAP financial measures such as FFO, core FFO, AFFO and same-store NOI. The definitions and reconciliations of these non-GAAP measures are contained in the earnings release and in the supplemental financial information. Also, on today's call, the company's prepared remarks and 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 in our SEC filings. We encourage everyone to review the more detailed discussions related to risks associated with forward-looking statements in 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. At this time, our President and Chief Executive Officer, Brent Smith, will provide some opening comments and discuss our fourth quarter and annual results and accomplishments. Brent?

Good morning, everyone, and thank you again for joining us on today's call as we review our financial and operating results for the fourth quarter of 2021 and for the year. On the line with me is Eddie Guilbert, our Executive Vice President of Finance and Treasurer; George Wells, our Chief Operating Officer; and Bobby Bowers, our Chief Financial Officer; as well as other members of the senior management team. Before we begin today's call, I want to take a moment and thank my talented, hard-working team members, who deliver first-class service to Piedmont's customers, 24/7, 365 days a year. Their tireless dedication continues to garner industry honors for operational excellence and sustainability, including our recognition as the 2021 Energy Star Partner of the Year and achieving LEED status now on roughly half of the portfolio. Today, I'm going to cover Piedmont's operational success and leasing momentum along with an update on capital allocation activities across our markets. Focusing on the fourth quarter of 2021, our FFO per share was $0.51, in line with market consensus. Portfolio operating metrics were solid with same-store NOI on a cash basis increasing 5.8%. We leased approximately 400,000 square feet, generated a 3% increase in second-generation cash rents and executed an average lease term of 6.5 years, illustrating the longer-term view taken by most of our customers. Most notably, about half of the fourth quarter's leasing was related to new tenants, making this the second consecutive quarter Piedmont has achieved pre-pandemic levels of new leasing. Overall, leasing activity remained robust and well dispersed across the portfolio with over 40 leases and amendments executed during the fourth quarter. And while the Omicron variant had a modestly negative impact on building utilization during December and January, the leasing pipeline has not dissipated and we expect the…

Thanks, Brent. 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. Looking back on 2021, core FFO for the year was $1.97 per diluted share, a 4% increase over 2020 and in excess of the upper end of our original guidance range for the year. This growth in core FFO overcame an approximately 1% reduction in our overall lease percentage on a year-over-year basis. The decrease in occupancy was driven by several factors: reduced leasing activity during 2020 in the first half of 2021 as a result of the pandemic; a number of sizable lease expirations at recently acquired properties in Atlanta and Dallas that were underwritten as part of their respective acquisitions; and the purchase of the 77% leased 999 Peachtree Street property. After incorporating the just completed disposition activity in January of 2022, our pro forma lease percentage as of December 31 would have been 87%. We reported $0.51 per diluted share of core FFO for the quarter. That's an 11% increase over the fourth quarter of 2020. This increase is primarily due to accretive recycling activity and rising rental rates. Our core FFO achievement during the fourth quarter also reflects the repurchase of approximately 1 million shares of our common stock at an average price of $17.76 per share during the quarter, leaving approximately $150 million in Board authorized capacity under our share repurchase program. Now core FFO, as you know, excludes gains, losses, impairments on real estate as well as excluding depreciation and amortization. And I do want to discuss this real estate activity during the fourth quarter of 2021. While we had originally intended to lease up Two Pierce Place…

[Operator Instructions] Your first question for today is coming from Anthony Paolone, JPMorgan. Please post your affiliation then post your question.

Thanks, JPMorgan. Bobby, I think I may have just missed this because drawing some things down. The loan investments. Did you say those were getting repaid or over the details on those?

Hi Tony, I hope you're doing okay. Yes, the note receivable, we're expecting to be paid off based on discussions with them. You might remember that originated back last year with the sale of some properties in New Jersey, but we do expect it to be paid off in the first quarter.

Okay. Got it. And then with regards to the capital recycling this year, you mentioned the neutral acquisitions and dispositions. It sounded like that was from like a dollar volume point of view. Can you talk to spreads and what you think happens on that front?

Hi Tony, it's Brent. Thanks for joining us this morning. In regards to spreads, I think it obviously depends on the opportunity that we're looking at. And while there does seem to be either some good off-market dialogues that we're currently having or as I alluded to in my prepared remarks, an opportunity for some brokered assets that we've been looking at for some time in our markets primarily again Boston, Atlanta, Orlando and Dallas. And so we continue to remain very enthusiastic about continuing to recycle. Historically, as you've mentioned or kind of alluded to we've been able to do that accretively probably to the tune of 150 basis points to 200 basis points some of the immediate, some of it through value creation over, call it, a few years. An example of that being 999 where we're going to do some pretty heavy lifting at the base of the building but drivers meaningfully. So it's tough to give you a specific answer in terms of spreads because we don't know what we'll buy. But I can say that what we kind of have in the hopper to sell is either being noncore, some of the more mature assets. And of course, you've heard me allude to Cambridge being a great opportunity or a piggy bank. I think we can continue to maintain accretion to what degree it's hard to specifically say, but I think that trend is going to maintain itself given the quality of those assets that we have and/or the long-term lease nature of those assets that I mentioned that are in the disposition offer.

Okay. Got it. And then you had mentioned kind of where the sweet spot is in terms of looking for high-quality assets. I think you mentioned like a seven-year lease term, that sort of thing. Like how do you think about where your sweet spot is in terms of competing for these assets and just outcompeting the competition, it seems like everybody is looking for fairly comparable staff.

I think 999 speaks to volumes of kind of the opportunity set. Our recent acquisitions, both the Galleria assets, right at the pandemic onset are good examples of historically what we've been able to find and create value with great bones, older assets, but a need a little TLC on the front house, particularly, but the back of house has been well maintained, so we're not focused too much on mechanicals, et cetera. So we're obviously continuing to look for that. We recognize that some of our peers are purchasing just newly developed assets with long-term vault that is a, frankly, very eye-popping pricing in terms of per pound valuation. We understand the, I guess, the perspective that those individuals or groups have, but we've utilized our recycling and redevelopment D&A to drive earnings growth more than the risk of ground-up development. That's not to say we wouldn't consider – sorry, acquiring buildings that are recently ground up development. Not to say that we wouldn't undertake that to enter into a new market or specifically gain stronghold in a submarket, but I think we're more leaning towards finding those diamonds in the rough, buying them at, call it, a 6% cap or 6.5% cap depending on the and driving them to 7.5% plus. And I think all of those that I mentioned in the beginning of this answer, kind of qualify as that type, but we're not – I want to stress that we're not compromising on quality. When you talk about our sweet spot, there are a lot of companies who are willing to come into a market but can't afford to pay $45, $50 net rent for new construction, but they want an amenitized high-quality, sustainability-focused landlord, and that's the sweet spot that we provide at a more, I guess, affordable rate for that user group that isn't a tech big five, frankly.

Got it. Appreciate all the color, thank you.

Thank you. Your next question for today is coming from Dave Rodgers [Baird]. Please announce your affiliation then post your question.

Hey, good morning everybody. Dave Rodgers at Baird. I wanted to follow up on the asset sale discussion. Obviously, you don't want to identify what you're looking at acquiring. But can you talk about what's in the market today? You talked about selling more during the first half of the year. So I presume that there's a number of assets in the market. Can you identify kind of what the targets are when you say noncore that just Houston? Is that – we're going back to D.C. It sounds like Cambridge is on the chopping block as well. But can you give us more of a sense of what to expect on the sell side?

Sure. I think Dave, again, thank you for joining today. We look at dispositions, as you know, historically, we've paired our dispositions very well. with our acquisitions. I think 999 is a perfect example. We went under contract actually on the Raytheon asset in the middle of 2021 and devise the structure so that we can opportunistically pair that with the buy. I think what's promising in this market is we're seeing more opportunities start to come to fruition. And so we get a bigger opportunity set gives us the ability to wait a little bit longer to dispose of the assets. So I don't have anything specifically in the market at the moment that we're looking to dispose of. But we do have dialogue every day with participants who we know we can move quickly, and we pay fair value if we needed to. Now in terms of the buys, I think we're looking at – well, you wanted to focus on disposition. So I think I'll leave it at that. So I think we have a good opportunity set. Again, that is Houston in that noncore bucket. It includes Cambridge. I used the term chopping block. I don't know if I would phrase it as that, but it is certainly fully matured under our ownership. It's got about a little over 10 years of term remaining with a major tenant there being harbored in both of those assets. And frankly, given where pricing is at, call it, a 4.5 kind of $1,600 a foot for some assets in that market, we feel like it's a great opportunity to monetize that and rotate into something accretively. Hopefully – and looking towards the 2023 event, I would say 60 Broad would be a potential monetization opportunity set there as well.

Maybe one for Bobby. Just in terms of the guidance, since you're not including acquisitions and dispositions in the guidance this year, it's a fairly wide range from an operational perspective. What really kind of pushes you up and down in that range? Do you have any more – it looked like you kind of grabbed another $1 million or so from the GAAP deferrals previously and added that back in the quarter. Do you have more of those that get you to the top end? And is the bottom end just kind of move outs, expirations, terminations? Maybe some guidance on that would be helpful.

Well, obviously, when we release Dave, our guidance, the midpoint is typically the target we try to focus upon. I think over the last several years, absent of COVID, we've come in a little ahead on those. So hopefully, we're conservative with our estimates. But I don't know how to respond to you. There are a number of factors that influence our actual earnings. It depends on our leasing activity that takes place – we try to make good long-term decisions there. It may result in downtimes as we try to bring in investment-grade tenants, things like that, that are not predictable as such. So leasing always is the key driver for us that influences what we achieve in a given year.

And I would add, Bobby, operationally, we are still in the midst of a pandemic. There are components of parking and the return to office variable expenses that create some of that fluctuation, and we've done our best to predict that. But frankly, nobody could have predicted, well, Delta, once you saw Delta, maybe you could have predicted Omicron. But I think we're trying to be cognizant that there could be a Beta or something else to that effect, that could continue to delay. But realistically, we feel like 2022 is moving in the right direction, and that's where the midpoint of the range would suggest.

Last one for me, if I could. I guess I wanted to get your thoughts on two things. You obviously continue to do the stock buyback in the quarter. I think your average buyback price going back to 2011 is above where the stock is today. You talked about increasing the dividend on the call in the middle still of a pandemic you have an above-average financial position relative, meaning more financial leverage than your peers, higher rollover schedule of massive tenants coming due. So I guess why the hurry to deploy all this capital, especially after a quarter when concessions on leases were pretty tough, and you got a lot coming at you.

Did a lot in there, Dave. I guess, first, let me take the quarter. Admittedly, the renewals were a little high. Each one of those kind of three deals that we alluded to in our supplement that were unusually high TI have a reason behind that. Not to give the specifics, but when involved mainly moving around smaller tenants to get a large investment-grade hit into the space. And so we continue to do what drive by the real estate. And sometimes that does mean spending a little bit more for a tenant. And in that instance, a few of those happen hit in the same quarter. That's why we always ask that our investors look at more of a rolling 12 months and look at those trends. And I think you'll find on a rolling 12 months, we still are trending kind of right in line with prior years and during COVID. So I think on the capital front, we don't feel like there's a wall of capital from our perspective, there's the regular way leasing and certainly, we'll admit that concessions have gone up on the TI side in the pandemic while free rent has dropped more dramatically, but we recognize that overall, I think our portfolio from a capital standpoint will stand against anybody else's, and we don't have an unusual amount of draining needs in that regard. In terms of our debt profile, we've always stated we operate between 30% and 40% and call it a sub-6% debt to EBITDA, and I'm very focused on maintaining our credit rating. And there is no concern with our rating agencies. We're both stable from both groups. And we feel like the balance sheet is well protected. Our line is currently – has some drawn, but as Bobby has…

Well, Brent. Thanks for all the color. And I appreciate your indulgent from the time. Thanks.

Yes, thank you.

Your next question is coming from Michael Lewis. [Truist] Please announce your affiliation then pose your question.

Great. This is Mike Lewis at Truist. This quarter, it looked like you had more CapEx classified as incremental as opposed to nonincremental and therefore, not back out of the AFFO calculation. Maybe that's related to some of the activity you already talked about. Can you just clarify what that $25 million of incremental cost was related to? And is there still a lot to spend and allocate to that bucket?

That was primarily related to some base building work at 60 Broad and the redevelopment of that asset for the lower floors. There is a new race frankly, HVAC mechanical system and some additional components as well as just some of the regular way redevelopment of some of our properties. I would not anticipate that, that would continue. Bobby maybe.

Yes. I was just going to comment. We do track with each of our leases, the incremental versus non-incremental, what we're doing in buildings. We have outstanding projects less than $15 million now on the incremental side – now if we do buy something, sit to do a lobby, enhance the building that will add to that number.

Okay. Perfect. Thanks. And then just one more for me. I know you get asked frequently about the CVS lease expiring at the end of the year and the next year, Ryan, Cargill, U.S. Bancorp. I think a previous question kind of alluded to these coming up. I don't know if you talk about it frequently, I think, is there anything incremental to be aware of, either changes in how you think about market rents or market rents versus in place or anything else to report on any of those upcoming expirations?

Hi, Michael, it's Brent. Thanks for joining. We do get asked about those expirations. I think as the prior question alluded to, the number of potential expirations that we have in the next, call it, 24 months and want to raise the dividend. I think the reason why we feel like we can raise the dividend is we feel generally pretty good about the leasing market and where that dialogue is with those tenants. So specifically with CVS, as we've noted before, we're well down a path and we feel like that it's likely that they'll renew on a majority of the space. As been noted in the press, Ryan has a site they've considered going and building a building on up in Frisco. Right now, their expiration is slated for the end of next year – sorry, February of next year. And likely, they're going to have to do at least a short-term renewal because it's going to take them probably 2.5, three years if they could put a shovel in the ground tomorrow and that is not currently underway. In terms of U.S. Bank and Cargill both of those are pretty far out still into 2023 and 2024. So it's a little early, but I will say we're close with both groups and engaged I feel pretty comfortable about where that stands, although again, it is really early. But U.S. Bank has been headquartered in Stalwart, corporation in Minneapolis and intends to continue to be there. In Cargill, again, we feel pretty good about where the early dialogue has been. So that's where it stands at the moment. But again, I think we feel pretty good about where all the leasing velocity is and our ability to then look forward and say the spread between AFFO and our current dividend and dividend is very meaningful, call it, $1.10 to $1.20 in terms of AFFO and a dividend of $0.84. So our ability to raise that to 5% or so is really modest relative to where the cash flow of the operating assets is.

Perfect. Thank you for the update.

[Operator Instructions] Your next question is coming from Daniel Ismail. [Green Street] Please announce your affiliation then pose your question.

Great. Thank you. Daniel Ismail from Green Street. Brent, you touched on this a few times during the call, but you mentioned the increased focus on amenities and type of place in the office as well as increased concessions in some markets and supply chain issues. Is it your sense that normalized CapEx has moved higher for the sector? Or is this more of a point-in-time type phenomenon?

You're – sorry, you kind of – you've treated off there a little bit of end. I think you said, do you – do we feel like we're – in this environment is a normalized CapEx environment for the sector?

No. I guess – sorry if I trail off. I was saying do you think that CapEx for the sector has just structurally moved higher over the last two years as a result of increased focus on amenities and perhaps a higher concessionary environment? Or are you anticipating that to reverse back to pre-COVID levels?

Yes. I think, Danny, I guess definitely would agree with you. Currently, it is definitely elevated. I think it is partly due to the pandemic and people trying to take advantage of a softening in the marketplace. And frankly, we've seen free rent still be very limited, but TI capital kind of rule the day because you have frankly, expand tenant market, and they've continued to not want to come out of pocket for build-outs. In terms of the opportunity set of the amenities, et cetera, I think every building has an evolution and you need to evaluate when we buy buildings, we do win that kind of opportunity is to need a refresh and then be able to drive rents and drive velocity. So for a building, it kind of depends on where it is in its life cycle. We see some buildings that are older in nature, but have been well maintained and amenitized and they do very well in the marketplace. But we want to recognize that there are commodity products that we wouldn't make sense to invest in anymore and probably better in different use. Fortunately, our product isn't of that nature. But I do think you're going to see just overall in this sector, which already was starting before the pandemic that commodity obsolescence will continue to take hold. And as I alluded to in my prepared remarks, a disparity between kind of a quality assets and then most everything else and reinvesting in the AEs are going to continue to help drive rent and just continue that disparity between unamenitized, commoditized product. And so I think from our strategy, we think that lends itself well. Definitely, that flight to quality bodes itself towards our product versus the latter. But I do think, overall, the sector, that CapEx profile has been elevated up. And in terms of being able to claw back from the tenant side, I think you're going to see likely more a drive in rate than a reduction in that capital. It's still, I think most of my peers would probably agree, you're looking at, call it, $650 to $8 per square foot per year of term in terms of capital depending on the market.

Great. Thank you. That's great, Brent. That’s helpful. Thanks. And I believe the last time you provided I think your portfolio rents were about 5% to 10% below market. Is that still the case?

Yes, that is absolutely the case. I think as we've continued to show, again, on a rolling 12 months, I think quarter-by-quarter can be choppy, but on a rolling 12 months, we're right in that sweet spot between five and 10, and I think that's very indicative of where the portfolio still stands. We've been pleased that we've held rate on a good bit of the portfolio, although net effectives are down in the single digits. And some of our markets and flat and others almost now versus pre-pandemic levels.

Great. Thanks, Brent.

There are no more questions in queue. I would now like to turn the floor back over to Brent Smith for any closing comments.

Thank you, everyone, for joining us today. Myself and the team are really excited about 2022 and really continuing the growth and particularly the new leasing that pre-pandemic levels at the end of last year into this year, 6% of our leases expire this year. And with 60% of our vacancy and 85% of our role in the Sunbelt, we really are enthused about the ability to continue to drive velocity and occupancy. We feel like we've got a best ESG platform and paired with our high-quality amenitized assets, we'll continue to drive earnings growth. Thank you, everyone, for joining today. Have a good day.

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.