Greetings, and welcome to the Piedmont Office Realty Trust Incorporated Third Quarter 2023 Earnings Call. At this time, all participants are on a listen-only mode, and the floor will be open for questions and comments following the presentation. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to your host, Laura Moon. Ma'am, you may begin.

Thank you, operator, and good morning, everyone. We appreciate you joining us today for Piedmont's third quarter 2023 earnings conference call. Last night we filed our Form 10-Q and 8-K that includes our earnings release and our unaudited supplemental information for the third quarter that is available for 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 third quarter operating results. Brent?

Thanks, Laura, and good morning, everyone. Before we get into the call, I would be remiss if I did not acknowledge that you all heard a different voice reading the introduction this morning. As most of you know, Eddie Guilbert, our EVP of Finance and Treasurer; and someone we all proudly call a friend and esteem colleague has voluntarily resigned from his position at Piedmont. Eddie has been one of our most trusted, dependable and dedicated teammates for over 16 years, and he made immeasurable contributions towards the advancement of Piedmont. He will be sorely missed by all of us. Eddie will stay on as a consultant for a period of time to ensure a seamless transition. And Laura Moon, our Chief Accounting Officer; and Jennifer Heneisen, our VP of Financial Planning and Analysis will be taking on most of Eddie's responsibility. Okay. So now on with the quarterly call. I want to thank everyone for joining us today to review our third 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 of our management team available to answer your questions. I'd like to start with our leasing results, both what was completed during the quarter, as well as some significant activity that was completed during October. Total leasing for the third quarter was approximately 302,000 square feet and included roughly 170,000 square feet of new tenant leasing, our 11th consecutive quarter of new tenant leasing at/or above pre-COVID levels, resulting in net absorption during the third quarter. The average sized lease executed was approximately 13,000 square feet with a weighted average lease term of approximately seven years and…

Thanks, Brent. Good morning, everyone. Demand for Piedmont's high-quality assets has produced another quarter of solid operational results. As we've seen for the past two years, small users from a broad range of industries are fueling our leasing success outside of one full floor new deal in Minneapolis that I'll highlight in just a moment, The average size of new deal activity was around 6,500 square feet. These tenants are attracted to our competitively priced offerings, setting their ease of accessibility, vast amenity-base, unique tenant engagement programming and best-in-class conference facilities. Overall, this quarter, we had another strong leasing performance with 45 lease transactions completed for just over 302,000 square feet of total overall volume. As Brent noted earlier, 170,000 square foot or more than half of that total was related to new tenant lease activity and in line with our pre-COVID quarterly average and represent 7% of our overall direct vacancy. Continuing with operational metrics, our lease economics were also quite favorable with 11.7% and 10.3% roll-up or increase in rents for the quarter on a cash and an accrual basis, respectively. Our weighted average lease term achieved on new lease activity for the quarter was over nine years. Due to our leasing success and low-level expirations, our lease percentage increased by 50 basis points to end the quarter at 86.7%, and nearly 80% of new tenant lease activity occurred in our Sunbelt portfolio, where almost 70% of our vacancies reside. Retention rates remain consistent coming in at 70% and no doubt a reflection of both our customer-centric service approach and high-quality commute worthy portfolio. Leasing capital spend for the quarter was approximately $6 per square foot per lease year in line with our average for the past several quarters. Sublease availability has stayed steady for the past three…

Thank you, George. I'll be brief, as generally speaking, market activity remains muted, given the extraordinarily challenging financing environment. However, I did want to provide a quick update on our two assets in Houston, which have been under contract. Both sides made every effort to execute, but at the end of the day, the buyers were unable to secure a suitable capital structure and we recently agreed to terminate the transaction. We'll continue to explore other alternatives for the potential disposition of these assets at a later date. As for the balance of our activity, we continue discussions on select non-core assets, including some of our non-strategic land parcels, but it's far too early to speculate, given the current market backdrop. As always, we'll keep you informed of any material activity on this front. As we have said now for several quarters, any resulting sale proceeds will be earmarked for the reduction of debt. With that, I'll turn the call over to Bobby to review our financial results. Bobby?

Thanks, Chris. While we'll be discussing some of this period's financial highlights today, I encourage you to 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 third quarter of 2023 was $0.43 per share versus $0.50 per diluted share for the third quarter of 2022, with the current quarter reflecting approximately $0.08 per share of increased interest expense as compared to the third quarter of last year. The dilution related to the higher interest cost was partially offset by the operational growth that Brent alluded to, resulting from successful leasing efforts, rising rental rates and asset recycling over the past year. As previously announced, given the significant increase in interest costs that we're all currently experiencing, we reduced our annual dividend from $0.84 per share to $0.50 per share beginning with the third quarter of 2023, which approximates our forecasted taxable income over the next year or two. This reduction in dividend will lower the usage of AFFO and increase available cash by approximately $42 million on an annual basis. AFFO generated during the third quarter of 2023 was $40 million or $160 million on an annualized basis, adequately providing for dividend coverage and foreseeable capital needs. Turning to the balance sheet. As we've mentioned many times, a key component of our leasing formula is that our balance sheet and liquidity remains strong. A differentiating factor as prospective tenants scrutinize the capital structure of a potential future office building and the landlord. We believe this differentiation among office product is driving increased market share for the highest quality, placemaking assets and well-capitalized landlords. We covered the five-year $400 million financing activity that occurred early in the third quarter in detail…

Thank you, George, Chris and Bobby. At Piedmont, we continue to be encouraged by the resiliency of our leasing pipeline. As we've talked about today, the success we've had year-to-date is tremendous. Having now eclipsed 2022 new leasing volumes and with two months still remaining in the year and given our strong start to the final quarter, we feel confident in achieving the annual lease percentage and same-store goals that we've outlined previously. Same-store NOI is expected to be between 0% and 4% up with cash NOI at the higher end of the range and accrual basis NOI near the lower end. Certainly, the elevated interest rate environment will weigh on earnings and FFO and the financing environment continues to mute transactional activity. Despite these headwinds, we believe that the flight-to-quality occurring in the market, combined with Piedmont's strategy of providing premier workspaces at meaningfully lower rental rates versus new construction, will continue to resonate with the market and lead to leasing success. With that, I will 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 or we'll make appropriate later public disclosure if necessary. Operator?

Thank you. At this time, we will be conducting a question-and-answer session. [Operator Instructions] Thank you. Our first question is coming from Ray Zhang with JPMorgan. Your line is live.

Good morning guys. Thanks for taking my question and congrats for the downtown lease with U.S. Bancorp. On that, that's my first question. Any color you guys can give on the CapEx on the renewal at that space? I think you guys gave a range historically, but I just want to get a little bit more color on this specific one, if you guys can?

Ray, this is George Wells, and good morning. That transaction, which as you've been following, has been going up for multiple years, and that user has also been going through a fair amount of space planning and trying to reimagine what the workspace is going to look like. So that being said, we ended up having, I would say, more of a new type of tenant improvements, so they can redesign their space and encourage their employees to come back to the office. But it certainly was well within the range of market that you would expect on a year-over-year basis and not too far from what we've reported in ourselves.

I would add, Ray, thanks for joining this morning. Again, as we've talked about previously on a cash basis, it was basically flat, which was positive, but there was no free rent in the transaction. So, as George alluded to, kind of, I would consider market level TIs, approaching that triple-digit figure. However, there was no free rent in the transaction. And so I think that was ultimately a positive. Also taking a step back as we think about kind of what we had guided to the Street on that, we had thought initially it would probably be 50-50 in each location. Turns out that it was 100% Downtown and unfortunately, a give back in the suburbs. But I think as we think strategically about the market, there is much greater depth from a tenant need, if you will, in the suburbs than Downtown right now and demand is much stronger. As we witnessed just this quarter, getting a 32,000 square foot lease in that suburban market and seeing continued good demand. So, if we were going to get back space, I think that's overall the positive spin to the ultimate outcome there. And we feel pretty great about keeping U.S. Bank deep relationship, strategic financing partner of ours as well, and they're going to be really supporting downtown Minneapolis, which is important right now as the city recuperates from that. But great news is we're also going to have the best building in that submarket, certainly from existing build top three with a phenomenal amenity at the top, which you will think to loves and a light refresh on the lobby just to continue to improve and enhance the retail experience which we think is going to continue to be able for us to garner the best asset and good demand downtown as well. So what may be musical chairs, they'll be coming to our building, which is often what we're seeing now across the country and in our markets. I'll pause there any other follow-up question.

Yeah. Just to follow-up on that, on the suburb space. So it sounds like you wouldn't be out of service and kind of just in the market and getting new tenants, that's the plan for the suburb space for now? Or is it -- or maybe I missed it, it will be out of service out there?

That's a great question and follow-up, Ray, and thanks for letting me tag team on that. The Cargill building or as we call it Excelsior Crossings, as you know, they're going to be vacating first day of next year. That space will likely be put into redevelopment in 2024. It's a, I'd call it, a little bit larger floor plate in Meridian Crossings building, which is smaller, which suits is -- The Meridian building a little bit better. We think it may have a little bit more lease-up velocity. So the Excelsior building, we're going to put into redevelopment. It needs a light refresh call it, maybe $5 to $10 a foot. And then we'll start to market the building more fruitfully into the market. And we've already seen actually good traction at our Meridian Crossings building. Obviously, we're planning for a little bit more of amenity set garden for one user. We're pivoting on that. So we're not really sure exactly if we will or will not put it in the redevelopment pool, but we're in the mindset of making more of a multi-tenanted amenity set. The good news is we've actually already seen good traction at that property, and we've signed a 10,000 square foot backfill lease already with the user as part of our October total that you've seen. So overall, again, we think that building is really well positioned at the corner of 494/35 West for signs, very, I'd say, accessible right off the highway, walkable to number of restaurants more importantly, probably in the Minneapolis market. It's a five and 10-minute drive to France Avenue and pretty much any restaurant you can imagine. So, ultimately we think that gets great traction in the marketplace, along with our Excelsior building. But at least for now, we know the Excelsior building will be going into the 2024 redevelopment pool.

Got it. And if I may, just one follow-up, since we touch on US Bank and Cargill any update on the Amazon lease? Any incremental color you can provide? I know they have a couple of different leases and different spots and just any early conversation or color you can provide will be helpful.

Absolutely. Just like our Meridian buildings, which is LEED Gold, our Amazon building, in Northern Virginia is also LEED Gold. That's where Amazon takes about 60,000 square feet. And as we've noted, they will be vacating at the end of the first quarter. That said, we do have actually good velocity, if you will, on Tour Activity and traction to backfill that, including a number of large users for all of the space. So I think that's something we continue to feel. We see decent activity in Nova, and that building is really well positioned on top of Metro, walkable to Ballston Quarter, the Hockey Rink and a lot of the retail that sits around there and lunch options located within the building as well, so really well positioned there. On the LEED Gold building in Dallas that they occupy the Galleria, Amazon's larger position there, about 270,000 square feet. I'd say they're very active in this space. It's a little early to tell. There's no new development in the submarket for them to go to, and they really prefer to keep their workforce in that submarket. So we feel pretty good about our renewal in place. But exactly how much unclear, and we'll probably expect to get more engaged here over probably towards the end of the first quarter of next year.

Got it. That will be it.

Thank you. Our next question is coming from Nicholas Thillman with Baird. Your line is live.

Hey, good morning, guys. Maybe starting with George just talking about overall demand to the market, it seems as though Minneapolis is picking up a little bit of velocity that might just be a little bit more of just vacancy in the market that you guys have in the portfolio now. But just ranking across the market, it seems like Atlanta and Dallas are most active, but just maybe give some color on what activity on the ground on some of the other markets.

Sure. Good morning. Thank you for joining us. I would say, you mentioned Minneapolis first. I mean we've been -- that portfolio has been very stabilized for many years, it being 90% leased or better for several years. We've been pretty ecstatic about it. So we're finding it a chance to come back to the marketplace. I would say, the brokerage community and the tenant prospects are certainly taking a close look at our portfolio. We're excited about the large transaction that we land another the headquarters location down one of our properties on as CRESCENT Rich. But that being said, we don't have a lot of spaces available, it's hard to see a lot of deal flow. However, we've made announcements in terms of changes that are happening in our portfolio from a tenant mix perspective certainly, the board is not about where US Bank is heading from a rating crossing perspective. We're starting to see deal activity just as Brent has mentioned a minute ago. So it certainly is picking up. That being said, most of our rates that continues to be in Atlanta and Dallas, where we have the bulk of our activity. And it's been a story that we've seen from quarter-to-quarter I will tell you though, we do have some expirations happening in 2024 in Orlando, but we're really excited about some of the backfill opportunities that we're seeing there. Heading up to Boston, again, we're fairly stabilized up in that marketplace, the largest block of space that we have up there is our 25 mall road, which want more recently for a building in its size. It has been re-imagined and renovated. It's been well received in the marketplace. So while I would say the large users are not really active in that marketplace. We're seeing a fair amount of velocity from small users and we're excited and making some announcements there over the next few weeks

I could pick up from there and continue on to New York? Or are we seeing actually, the 60 broad or vacancy sits at the top of the building. It's a 12,000 square foot floor plate. Again, we've got a lobby that's going to be completely remodeled and completed in about two months or so. So we're already showing off the new finishes, the new stones in place looks fabulous. But as we've talked about that small, the inside tenant, that floor plate perfectly, and we're seeing good leasing traction. As I noted last quarter, we actually took a tenant out of 55 broad. It's going to convert to resi and put them in our building, and we continue to see good philosophy there. TC is probably the district are most challenged market by far, as George noted, and I would think that's going to continue just given the vast amount of space. I think that why we continue to be, I think, more optimistic on our philosophy in Minneapolis is because there's a large -- one of the largest landlords there. We're well equipped from a capital standpoint and we really can bring a fresh different appearance, hospitality focus, and you've heard us talk about tenant engagement, and we're really light years ahead of most other office operators in that market, so we really can compete effectively TC is a little bit more of a difficult market to compete in. There's a lot of product, tougher to differentiate. And so we do think it's probably our most challenged market. I'll pause there. Any other follow-ups?

Yes. Yes, that's helpful. Brent, maybe just like an overall strategy going forward or maybe longer term, because it seems like investment sales market is a little locked up here. But it seems like Houston is an exit. I mean, what percentage of the portfolio do you view as core on a longer-term basis? Maybe if you look five, seven years out, like would be a long-term hold there. Are you viewing like Minneapolis, New York or Boston is core to Piedmont strategy going forward? Or do you think those would be eventually ones that you would look like to exit over time?

Great question, Nick. I think we're always trying to improve the portfolio incrementally. That's what we've historically done, selling, call it, $300 million to $500 million a year on average. Obviously, the disruption in particularly the debt capital markets has made the transactional activity more challenging. But I think as we look further out, the strategy that we've continued to have to focus on the Sunbelt likely lend itself, as we've also talked about some sort of disposition at some point for our New York building, which would be great proceeds to redeploy. And as I've also talked about on prior calls, given some of the good leasing activity we've seen at the buildings that are more occupied in Minneapolis, if we were to get a little bit more leasing success there. I think that would be a market where we compare backfill of the exposure, as well as we have continued discussions on just mature assets, inbound, some of it in the Sunbelt, but most of it in the northern markets and we'll continue to look to redeploy that. If you wanted me to put a percentage on what portion of the portfolio is core today, I'd probably put it in the 80%, 85% range. We've got a little bit of work to do and we acknowledge that in the north. And when the markets come back, will be effective at continuing to redeploy into the Sunbelt.

Very helpful. Thanks for the time.

Thank you. [Operator Instructions] Our next question is coming from Dylan Burzinski with Green Street. Your line is live.

Hey guys. Thanks for taking the question. I guess, just going on portfolio percentage leased today versus how you guys think about it moving into 2024, I think you guys alluded to only 10 percentage points of rent expiring over the next 18 months. And given the strong leasing activity thus far, I guess, do you think it's safe to say that leasing percentage has maybe bottomed here? Or I guess, given the US bank news in the suburban location that there should -- there may be some pressure here as we look out to 2024?

Great question, Dylan. I think that's always a difficult thing with office companies is the ins and outs, the tenants is complicated and of course, when they come in, they don't necessarily always start cash paying. I think if we focus on occupancy, as you pointed out, we do have Cargill vacate beginning of next year and then middle of next year, the US bank vacate. We've got a great backlog of leases that are about 0.5 million square feet of yet to come in, another 0.5 million square feet that's not cash paying, but has commenced, so that will flow in and kind of, if you will, backfill some of from an FFO perspective. And depending on what assets we put in the redevelopment pool, that would obviously impact lease percentage. But let's assume for now that everything stays in the current portfolio operation pool, I would expect you see occupancy reach its bottom middle of '24 and we'll continue to fight that with great leasing that we continue to have and the pipeline that George and the team have talked about. But I would anticipate that's probably where the trough lies for the portfolio.

That's helpful. I really appreciate that. And then I guess just going back to the comment on the Houston transactions and the buyers not really being able to get comfortable with the capital structure, but were there any discussions of possibly offering seller financing to them?

A good question as well. And I think in this market, we've continued to see the very limited transaction activity that can occur often requires that type of financing. To your point, we did provide seller financing up to about 50% LTV at a market rate. We were not in a position we felt to go higher than that, and frankly, didn't make economic sense in our mind. The buyer, obviously, is not able to come up with the equity given that amount of debt proceeds. So we parted ways, but we are going to continue to canvass the market and offer seller financing on the asset. This go around at roughly 50%, call it, 55% LTV again at market rates. And we'll evaluate the receptivity hopefully here is positive over the next few quarters.

And are you able to share sort of what that market rate was for that Houston asset?

Interest rates, typically, we've seen from, I'd say, more gateway markets for seller financing in the 5% to 6% ZIP code. We were more in the 7% to 8% SIPCO given the tenure of the asset and, frankly, the suburban nature in Houston on the quality of the asset. Great buildings, great tenancy and long-term wall, but we felt like that was a reasonable leverage profile, and that was not -- they were not able to close it at that level.

Great. Appreciate the detail here, guys. Thank you so much.

Thank you. We have reached the end of our question-and-answer session. So I will now turn the call back over to Mr. Brent Smith for his closing remarks.

Thank you and I appreciate everyone for joining us today. I hope everyone has a happy Halloween. You've heard and receive more treats than tricks from us today, but certainly happy to continue the discussion. We'll be at NAREIT at the conference in L.A., November 13 to 15. If you're interested in sitting down with management, please reach out to Bobby Bowers or Jennifer. And really again, we look forward to having those further discussions. I do believe the office sector has been oversold. We're a particular name in that, and we'd love to engage and help explain why we believe that is, and Piedmont is a great opportunity to come into the stock. Everyone have a good day. Thank you.

Thank you. This concludes today's conference, and you may disconnect your lines at this time, and we thank you for your participation.