Piedmont Office Realty Trust Inc

Good day ladies and gentlemen and welcome to the Piedmont Office Realty Trust Inc first quarter 2020 earnings call. All lines have been placed on a listen only mode and the floor will be open for questions and comments following the presentation. If you should require assistance throughout the conference, please press star zero on your telephone keypad to reach the operator. At this time, it is my pleasure to turn the floor over to your host, Robert Bowers. Robert, the floor is yours.

Thank you, operator. Good morning and thank you for joining us for Piedmont's first quarter 2020 conference call. Last night, we filed our form 10Q and an 8K that includes our earnings release and our unaudited supplemental information for the first quarter. All of this information is available on our website under the investor relations section. 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. Forward-looking statements address matters which are subject to risk and uncertainties that may cause actual results to differ from those we anticipate and discuss today. Examples of forward-looking statements include those related to Piedmont Office Realty Trust's future revenues, operating income, dividends, and financial guidance, as well as future leasing and investment activity. You should not place any undue reliance on any of these forward-looking statements and these statements speak only as of the date they are made. We encourage all of our listeners to review the more detailed discussion related to risk associated with forward-looking statements contained in the company's filings with the SEC, including our first quarter 10-Q. In addition, during this call, we'll 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 supplemental financial information available on the company's website. After our prepared comments are made, our senior management team will be available to address any questions that you may have. At this time, our Chief Executive Officer, Brent Smith, will provide some opening comments and discuss our first quarter's results and accomplishments. Brett.

Bobby, thank you very much. Good morning, everyone, and thank you for participating in our first quarter 2020 earnings call. On today's call, along with Bobby and myself, are Laura Moon, our Chief Accounting Officer, George Wells, our Executive Vice President of Operations, Eddie Gilbert, our Executive Vice President of Finance and Treasurer, Chris Kollme, our Executive Vice President of Finance and Strategy, Bob Weiberg, our Executive Vice President of the Northeast and Head of Development, as well as Kevin Fossum, SVP and Head of Property Management. Before I address our quarterly results, I thought I'd begin with a topic that is at the forefront of all our minds, the COVID-19 pandemic and its impact on the economy, our tenants, and specifically on Piedmont. First, let me say to Piedmont's customers Our tenants and our investors, thank you. Thank you for entrusting us with your business and more importantly, your professional friends and colleagues at our buildings. The COVID-19 pandemic has had a profound impact on our daily lives and communities. Even more difficult to fully comprehend is the suffering that many have endured and our heartfelt sympathies go out to the families whose lives have been forever changed. With the outbreak of the pandemic, the Piedmont Board and management team set three specific priorities. First, make sure we're taking all the necessary steps to protect our tenants and our people. Second, preserve our other precious resource, which is our capital. and third, that we prepare with an eye to the future to adapt the business to do our very best to anticipate the needs of our customers, be creative and engineer new solutions and ways of doing business and not rely on simply what worked in the past. As with most other businesses, our top priority is to protect our customers, contractors and employees. and I want to reassure you that all of us at Piedmont are focusing our efforts to confront this new global issue. I could not be prouder of how our team has responded to the challenges that were unimaginable just a few months ago. During the crisis, our buildings have remained open to essential workers. As of today, all of our seven core markets are operating under governor's orders for shelter in place. In Atlanta, our second largest market and where our headquarters is located, the governor has begun reopening select businesses to start to rebuild the economy. That said, I think it's going to be challenging and slower than we would like it to be. Ultimately, the recovery is largely dependent on the duration of the pandemic, an unknown factor. At Piedmont, I believe we are taking proper and conservative precautions. We've doubled down, in fact, tripled down on sanitation, hygiene, and housekeeping, striving to make our buildings safe and helping our tenants communicate to their employees to ensure they are doing everything they can to social distance, to remain six feet apart throughout the building's lobbies, elevators, and other common areas, as well as their offices, to prevent the spread of infection. Today, our essential employees and contractors continue to report to work on site in shifts utilizing appropriate PPE while the remaining employees continue to work from home without disruption. Across the portfolio of Piedmont, the entire team is working tirelessly to implement new policies and procedures, extensive signage, expansive cleaning protocols, while evaluating new products and measures to ensure our buildings promote a healthy environment. Finally, we're providing all the support we can to the local communities and businesses we operate with to help those who need it to get back on their feet. And as part of those efforts, Piedmont and its related foundation have donated over $40,000 to local charities across all our seven markets, including Seniors First in Orlando, NYU Langone Hospital in New York City, Meals on Wheels in Northern Virginia, and the Emory Hospital COVID-19 Impact Fund here in Atlanta, among others. Turning our attention to Piedmont's tenants in the performance of the first quarter of 2020. Overall, the consequences of the COVID-19 virus outbreak had minimal impact on our operations and financial results for the first three months of the year. The high quality nature of our tenancy has never been a more powerful, differentiated component of our strategy than it is today. with a majority of our tenants investment grade quality and an approximately seven-year weighted average lease term remaining in the portfolio, we are well positioned to weather this storm. That said, we are closely monitoring a couple areas of our tenant base. To date, we've had a limited number of tenants whose businesses and financials have been significantly impacted by the pandemic. We feel fortunate to have a limited exposure to some of the industries most disrupted. About 1% of our forecasted 2020 revenues are related to retail tenants. and likewise about 2% of our 2020 budgeted revenues are associated with the co-working sector. Digging into rent collection specifics. In the first quarter, rental receipts came in as anticipated, but as April progressed, we had a number of select tenants unable to pay their rent. So far, Piedmont has had 96% of its tenants submit full rent payment with many of the remaining seeking some form of rent deferral for the month of April. Most of these deferral requests are coming from our smaller tenants, largely food, traveling, consulting, retail, co-working related, or providing amenity services at our properties. Most of them have subsequently begun to avail themselves of the various federal and state relief funds, such as the CARES Act loans and the Payment Protection Program, which can be utilized partially to meet rental obligations. All the requests made to us were carefully reviewed and we have accommodated a limited number of the tenants that have requested deferrals of rent for typically up to three months and repayments scheduled for later this year without penalty or with payback in 2021 with interest. Regarding PMOT's second most precious resource, its capital and liquidity. We firmly believe we have ample financial capacity to confront the effects of the economic slowdown associated with COVID-19. The company commuted financial obligations, including the servicing of its debt, as well as beat all its debt covenants with significant positive margins. Piedmont also has a favorable liquidity position with access to our largely unused $500 million line of credit. Further bolstering our liquidity, we have entered into a binding contract to sell our only asset in Philadelphia, 1901 Market Street, for $360 million. I would also note that a significant deposit for the transaction went non-refundable on March 31st. We intend to use the proceeds from the sale to repay the property's $160 million mortgage as well as eliminate the balance on our line of credit which will result in only one small mortgage remaining in our portfolio with the other 56 properties being unencumbered. While we are seeing signs of the virus outbreak slowing and the infection curve flattening we know that this disruption is not over. The short-term financial impacts caused by the pandemic on 2020 results are still to be fully realized and the longer-term impacts will depend on a great extent upon the duration of the pandemic, its impact on our tenants, and the speed of the recovery. Certainly, leasing activity has slowed. Although we continue to execute some leasing, primarily renewals, we believe the pandemic will likely push out new leasing activity on the whole about a quarter and delay some expected growth in the portfolio. Likewise, the few tenant improvements and redevelopment projects we have scheduled will also be delayed. While we currently believe the impact on Piedmont earnings will be contained, and a majority of those impacts will occur primarily in the second quarter of 2020, the extent of the pandemic's impact on our economy, on our tenants, and on Piedmont will be dependent upon the duration of the pandemic and the depth of financial disruption to our tenants. Bobby will go into more detail in a moment on some of the factors that could impact the second quarter and the back half of the year. Focusing back to the first quarter, we are pleased with the operational results from a lease transaction perspective. During the quarter, we completed approximately 417,000 square feet of leasing, which is well dispersed across all our operating markets, and included approximately 120,000 square feet of new tenant leasing. The first quarter's executed leases for recently occupied space reflected a 5% growth in cash rents and a 15.4% increase in accrual rents. The larger leases for the quarter include the following. In Boston, Advanced Micro Devices renewed to 2,028, approximately 107,000 square feet at 90 Central Street. In Orlando, the law firm of Greenberg Frog renewed approximately 37,000 square feet to the year 2031 at C&L Center 1. And at 200 South Orange Avenue, Jones Langley South, signed a renewal and expansion through 2025, totaling approximately 20,000 square feet. Finally, in Washington, the Association for Unmanned Vehicle Systems signed a new lease through the end of 2030 for approximately 15,000 square feet at 3100 Clarendon Boulevard. A listing of all leases executed during the quarter for 10,000 square feet or more is included in the quarterly supplemental and an earnings release for your review. As of quarter end, the portfolio was approximately 90% leased. The lease percentage at the end of the quarter includes the transfer into service of our previously out-of-service asset, the recently redeveloped, now 41% leased, two-place tower in Chicago. Regarding upcoming lease expirations, we have low lease expiration over the next 18 months, with the only sizable lease being the City of New York at 60 Broad Street. We remain in discussions for a long-term renewal of substantially all the city's existing 313,000 square foot lease that expired this month. As common with government tenants, the lease entered holdover status on April 15th, with the lease specified post-expiration increase in cash rents approximating the current market rental rate. I would note the benefit of increased straight line rents would not be recognized until a long-term renewal could be executed, which, given the tenant, the decision is likely to be further delayed due to the pandemic. Therefore, for forecasting purposes, we have delayed the potential full roll-up in straight line rents associated with a long-term lease by approximately six months or until the middle to latter part of next year. Transactional Activity Thank you for watching this video. The gallery office towers were acquired through reverse exchange and will be matched with the disposition of 1901 Market Street in Philadelphia that is expected to close in the middle of the summer. Therefore, there is not a need to make a special dividend distribution related to the substantial nine-figure gain we anticipate on the sale of our only Philadelphia property. I've shared with you today how Piedmont is committed to protecting our people and preserving our capital and liquidity. As one last point, we remain optimistic about the future of commercial office real estate, but trying to predict the outcome of this event leads to many more questions than answers. One thing is certain, the industry will change and Piedmont will be positioning itself to succeed. At this point, I will turn it over to Bobby to walk you through the financial highlights.