Piedmont Office Realty Trust Inc

Please stand by, we are about to begin. Ladies and gentlemen, thank you for joining today's Piedmont Office Realty Trust Inc second quarter 2020 earnings call. All phone lines are in a listen-only mode, but after today's prepared remarks, you will be given the opportunity to ask questions. To get us started, I am pleased to turn the floor over to Eddie Gilbert. Mr. Gilbert, good morning.

Thank you, operator. Good morning, everyone. We thank you for joining us today for Piedmont's second quarter 2020 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. All this information is available on our website at piedmontREIT.com under the investor relations section. During this call, we'll refer to certain non-GAAP financial measures such as FFO, core FFO, AFFO, same store NOI. The definitions and reconciliations of these non-GAAP measures are contained in the earnings release and in the supplemental financial information. 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 detail 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, operating income, dividends and financial guidance, future leasing and investment activity, and an important factor for today's call is the potential adverse effects associated with the COVID-19 pandemic on the company's financial and operational results. The extent to which COVID-19 pandemic impacts us and our customers will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the depth, duration and severity of the pandemic and the related economic disruption. You should not place any undue reliance on any of the forward-looking statements and these statements speak only 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 second quarter results and accomplishments. Brent?

Thank you, Eddie, and good morning, everyone. We appreciate all of you taking the time to join us today for Piedmont's second quarter earnings call. In summary, our financial results for the quarter were strong, and we made significant progress on a number of our strategic objectives. Of note, we completed a strategic asset recycling transaction at the end of the quarter, and we executed some important leasing, all despite the unprecedented disruption from the coronavirus pandemic on both the national and global economies, which had operational and financial consequences for our tenants and Piedmont. In light of the challenging economic environment, we are very fortunate that most of our tenants are investment grade quality and subject to long term leases. with an approximately six year weighted average lease term remaining and with very low expirations over the next two years. The strength of our tenant base is demonstrated in the fact that we collected approximately 99% of the cash rents due for the second quarter of 2020 based on current contractual lease terms. However, I would point out that this collection data is net of approximately 3.6 million of second quarter cash rents that have been deferred. We have entered into lease modification agreements with approximately 50 of our tenants as a result of the pandemic. These agreements typically deferred an average of three months of rent to be paid later in 2020 or in some cases in 2021 with interest. Most of these workout agreements are with our retail tenants that represent approximately 1% of our annual revenues. More importantly, During the second quarter, we continue to partner with our tenants to refine our operational procedures, cleaning standards and health protocols in all of our buildings to protect the safety and well-being of all those working at or visiting Piedmont properties. This partnership, including our publishing a return to work tenant guide, outlining building specific information on operational changes such as elevator spacing, common area queuing and etiquette, janitorial schedules, Enhanced Maintenance and Engineering Programs, and Improved Security Protocols. We have also installed a comprehensive signage program and hand sanitizing dispensers throughout all our buildings, garages, and amenity areas, and we have installed touchless equipment and automated doors in most common areas and pathways. With all our buildings remaining open and fully operational these past few months, I could not be more proud of the hard work put forth by my Piedmont colleagues to ensure essential businesses and government agencies could continue to operate during these challenging times. I want to particularly recognize our property management personnel who have worked compassionately with our more than 1,000 tenants while at the same time exercising vigilant financial stewardship for our stockholders. Turning now to other key events in the second quarter. Obviously one of the highlights was the sale of 1901 Market Street, our only asset in Philadelphia. The gross sales price was approximately $360 million or $450 per square foot at a 5-4 cash cap rate, resulting in an approximately $182 million net book gain. In addition to the very attractive economic terms, this transaction was also strategic and that it allowed us to exit the market and continue our creative asset recycling program by successfully structuring the disposition transaction as part of a 1031 exchange with the Dallas Galleria Office Towers, which we acquired during the first quarter of this year at an approximately 250 basis points greater cap rate. Consequently, no special distribution of the significant gain from this disposition will be required. I would note that the sale of the 100% lease 801,000 square foot Philadelphia property did marginally impact our reported occupancy during the quarter, lowering our overall lease percentage by 1% to approximately 89%. As a result of this transaction, 96% of our annualized lease revenue is now generated by properties located in our seven core operating markets. Currently, no other significant developments, acquisitions, or dispositions are underway. We continue to examine Piedmont's business strategy in the context of both the near-term health crisis, as well as implications on the office sector beyond the vaccine. We believe the pandemic has accelerated two main themes, which we have been incorporating into our portfolio strategy for several years. Specifically, millennial family formation, generating population migration to the suburbs, and corporations relocating to lower cost, pro-business cities that offer world-class education centers and highly integrated multimodal transportation infrastructure. Today, we have a uniquely positioned portfolio of 57 Class A office properties comprising 17.2 million square feet, primarily concentrated around urban infill and suburban dense mixed-use environments, or what we call hub-urban. Offering our customers the real estate required to attract and retain a high caliber professional workforce, including a strong amenity base, walkability, convenient access to transportation, and closer proximity to workforce and executive housing. We were already starting to witness the impact of these population migration trends and data collected before the pandemic. Specifically, for 2019, Cushman and Wakefield reported that nearly 70% of the Class A office absorption occurred in the suburbs. With shorter commute times and walkable amenities that allow employees to accomplish more in their day than just work, employers are more and more acknowledging these locations offer as compelling a live-work-play environment as many urban cores. We think the target millennial workforce will drive office space absorption in suburban nodes as well as in lower cost, higher quality of life markets. And with approximately half of the Piedmont portfolio located in the Sunbelt and an additional approximately 20% located in the concentrated knowledge centers of Boston and Northern Virginia, we are uniquely positioned to capture incremental office space demand spurred on by this burgeoning demographic shift in America. Furthermore, our concentrated sub-market position garnering significant market share in areas like Orlando's Lake Mary, Burlington and Boston, Atlanta's Northwest Submarket, Dallas's Lower North Tollway, and Washington's RV Corridor give us the ability to leverage our scale and market depth to meet the flexibility today's office users demand. Transitioning to leasing activity, the pandemic did have an impact on this area of the business. with a new tenant leasing pipeline virtually coming to a halt during the second quarter due to travel and shelter in place restrictions. However, we did execute 271,000 square feet of leasing transactions during the quarter, almost entirely renewal activity with its most significant lease executed being Brother International's renewal of their approximately 102,000 square foot lease at 200 Bridgewater Crossing in Bridgewater, New Jersey. A listing of all leases greater than 10,000 square feet completed during the quarter is included in the supplemental financial information that was filed last night for your further review. On a year-to-date basis, executed leases will have a starting cash roll-up of 4.5% and accrual-based roll-up of almost 12%. Looking ahead, we are encouraged by the amount of leasing interest that has begun to reemerge, and we're particularly heartened by the activity we're seeing in Dallas, Atlanta, Washington D.C. and the Boston Submarkets. We continue to make progress on the one large upcoming renewal representing 1% or more of our annualized lease revenue, the City of New York's 313,000 square feet at 660 Broad Street that is currently in holdover. While the governmental leases are typically slow to complete, understandably the city's contracting personnel have been preoccupied with more pressing issues during the pandemic. That said, communications have been ongoing and productive, and we expect to complete a long-term renewal with the city by the end of the calendar year 2021. Other than this one renewal, we have no other significant expirations until 2022. In conclusion, in light of the pandemic, we feel that we are well positioned to withstand the effects of the economic slowdown associated with COVID-19 and in good financial position to take advantage of growth opportunities should they present themselves. I want to also add, considering the public discussion around surrounding equality in our country, I want to take this opportunity to reiterate that all of us at Piedmont will continue to support the nonviolent efforts to eliminate prejudice and discrimination wherever it exists. We proudly joined other Georgia employers this past quarter in urging our legislature's passage of a new hate crimes bill in our state. Piedmont is committed to demonstrating to each other and our communities the compassion, kindness, and strength required to bring about positive and lasting change. With that, I, along with the rest of the senior management team, will be available to address any questions you have after Bobby walks us through the financial highlights of the quarter and outlook for the rest of 2020. Bobby?