Piedmont Office Realty Trust Inc

Good morning, ladies and gentlemen, and welcome to the Piedmont Office Realty Trust Fourth Quarter 2020 Earnings Call. At this time, all participants have been placed in a listen-only mode, and the floor will be open for your questions and comments following the presentation. It is now my pleasure to turn the floor over to your host, Eddie Gilbert. Sir, the floor is yours.

Thank you, Operator. Good morning, everyone. Thank you for joining us today for Piedmont's Fourth Quarter 2020 Earnings Conference Call. Last night, we filed an 8K that includes our earnings release and our unaudited supplemental information for the fourth quarter that is available on our website at piedmontreat.com under the investor relations section. During this call, you'll hear from senior executives at Piedmont, and they will 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 detail in our press release as well as 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 the COVID-19 pandemic 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 only 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 for joining us to review our fourth quarter and annual results along with our outlook for the coming year. On the call with me are George Wells, our Executive Vice President of Operations, Eddie Gilbert, our Executive Vice President of Finance and Treasurer, and Bobby Bowers, our Chief Financial Officer, as well as other members of the senior management team. Let me start by saying that all of us at Piedmont sincerely hope all our tenants, vendors, and investors continue to be safe and healthy. And while we remain optimistic about the accelerating vaccine deployment and the path forward, as we begin 2021, the pandemic continues to disrupt American business. Today, our portfolio utilization remains at approximately 25 to 40% on average, but can vary greatly depending on city and tenant profile. Notwithstanding the disruption to the office sector in 2020, Piedmont continued its track record of delivering solid FFO growth for eight out of the last nine years, generating 10 cents more of core FFO per share, or approximately a 6% increase over the prior year for 2020. And we expect to continue this positive growth trajectory into 2021, as Bobby will discuss in our guidance later. Despite the challenges of the pandemic, my colleagues have kept the entire portfolio open and operational 24 hours a day, seven days a week, 365 days a year, while remaining laser-focused on the health and well-being of our tenants, assisting in their efforts to return to the workplace safely. Furthermore, we've taken this period of reduced building population to improve the tenant experience and enhance on-site amenities, focusing on outdoor space and wellness factors at all of our buildings. For example, Our 2.2 million square feet Gallery Atlanta project has achieved well health and safety rating by the Well Building Institute, one of the few projects of this scale in the country and the first in the Atlanta market with this designation, with additional buildings in the process to also achieve future ratings by the Well Building Institute. And we're excited that these ESG programs are already helping to generate incremental leasing. From an operational perspective, shelter-in-place orders during the second quarter of 2020 brought new tenant leasing activity to a virtual standstill. But despite this challenging environment, we executed over 1.1 million square feet of leasing for the year, the majority of which was renewals for existing tenants. These leases had a weighted average lease term between four and five years and achieved a cash roll-up of 3.5% on second-generation leases. And our weighted average lease term overall for the entire portfolio is now over six years. Of the total leasing for the year, approximately 190,000 square feet were completed during the fourth quarter, with our most notable leasing taking place in Atlanta, Washington, D.C., Minneapolis, and Dallas. For a list of our fourth quarter leasing highlights, please see our earnings release or our supplemental financial information, which were both filed last night. During the latter half of 2020, we continued to be encouraged by the improved leasing activity and the increasing size of the leasing pipeline. Providing real-time color on our leasing activity, generally we're witnessing similar dynamics across all our seven markets, with smaller size tenants, those less than 10,000 square feet, continuing to make leasing decisions with little change in space design. On the other end of the spectrum, We're also seeing tenants with large space requirements who are certain in their business model and require generally more than 50,000 square feet continue to execute leases to take advantage of favorable rates and concessions. In fact, we're seeing a number of these larger requirements in Boston, Dallas, Atlanta, and Orlando. And we're beginning to see tenants planning space with lower densities and greater focus on collaboration and team space. I would also add that we've noticed that tenants are greater focused on the ESG platforms of their landlord more than ever before, something that is differentiating Piedmont from less sophisticated operators in our markets. Finally, I would note that the segment of the market which seems to be the most timid in making longer term lease decisions are small and medium enterprises needing roughly 10,000 to 25,000 square feet of office space. These tenants continue to exhibit a pattern of shorter duration renewals typically ranging from one to three years. As I noted earlier, we continue to see meaningful large tenant activity, particularly in our Sunbelt markets, along with Boston, driven by an uptick in corporate relocations and expanding technology companies. In fact, in 2021, year to date, we've executed more than 500,000 square feet of leasing. And so with this real-time dialogue with tenants, and the improved pipeline activity that buoys our confidence that office space usage will continue to improve and return to a more normalized state over the course of 2021. Furthermore, we believe Piedmont is positioned to meet tenants' needs in the post-COVID marketplace, with a focus on lower-cost, higher quality-of-life markets such as Dallas, Atlanta, Minneapolis, and Orlando, in addition to our suburban markets in Boston and Northern Virginia. a preference for environments that create vibrant, amenity-rich workplaces, along with robust tenant engagement and a best-in-class ESG platform. We believe the most successful operators in the post-COVID market will provide office users with a more balanced service offering, encompassing wellness, sustainability, and engage the broader communities in which these businesses operate. Turning to Piedmont's lease expirations in 2021, Excluding the city of New York lease, which is currently in holdover, we have only about 5.8% of our annualized lease revenue expiring during the year, and with virtually no expirations at our properties in New York and Washington, D.C., which rely on mass transit for building population. I would also note that with the disposition of the New Jersey portfolio, we have only one asset in New York City, which was 94% leased at year-end. Furthermore, I'm pleased to report that we continue to make progress on the lease renewal with the City of New York at 60 Broad Street. Despite it taking longer than anticipated, we are working with the Department of Citywide Administrative Services to culminate the approval process and expect to have more to share on our next earnings call regarding the shorter-term renewal that would take the New York City out of holdover and cover the time frame for a restack of their space under a longer-term lease. Digging into the strength and resilience of our tenancy base. Over half of our tenants are investment grade quality, and we collected 99% of our billed receivables during the fourth quarter of 2020 and for the year. Looking back at the height of the pandemic, we did have a number of tenants that experienced operational difficulties, but these tended to be more smaller retail, hospitality, and co-working operators that represented a limited amount of our total annual revenues. As the result of the pandemic, we have entered into approximately 70 tenant workout agreements that typically defer three to four months of rent. A total of approximately $7 million was primarily deferred under lease workouts, or a little over 1% of our total annual revenues. By year end, repayments of 1.3 million of that had already been made, and the remaining rent deferrals are expected to be repaid in 2021. As we've noted on previous calls, our credit concerns primarily focus on our six tenants in the co-working sector, which represent a little over 2% of our annualized lease revenue in 2020, and less than 2% in 2021. With one tenant, we work representing roughly half the exposure at three separate locations. During December, we reached an agreement with WeWork to terminate their Orlando lease effective at the end of the first quarter of 2021. I'll remind everyone that our WeWork leases were typical lease arrangements with standard credit enhancement terms. Due to contractual requirements, the Orlando location began paying rent on their lease in August of 2020. Although I will note that we have not made any tenant improvements there, due to issues between the tenant and local zoning officials. WeWork has prepaid their rent through the end of the first quarter and also paid a lease termination fee of $2.6 million. And in addition to agreeing to the termination fee, all rents for the other two WeWork locations in our portfolio, which are open and operating, have been prepaid for over a year into 2022. In connection with the other five small coworking tenants, we will continue to monitor this segment carefully. However, our exposure in 2021 to coworking at this point has dropped to a very minimal level, and we believe we have adequate reserves to cover potential future losses. Turning to transactional activity, 2020 was a successful year. We exited two non-core markets, Philadelphia and Northern New Jersey, and an average exit cap rate of around 7%, and recycled proceeds into two Sunbelt markets and an accretive roughly 9% stabilized cap rate. As we announced in conjunction with last quarter's call, we completed a portfolio sale consisting of our last three properties remaining in northern New Jersey. And as part of this transaction, we did provide secured seller financing at a weighted average interest rate of 7%. During the fourth quarter, we also acquired 222 South Orange Avenue for $20 million, a property which is connected to our 200 South Orange Avenue in downtown Orlando, and shares several building systems as well as the key entry points with that asset. The acquisition provides our existing office tower with direct frontage on Orange Avenue, the de facto main street in Orlando's central business district, and we have already begun a redevelopment of the property and expect to be completed in about 12 to 16 months. Upon completion, our downtown Orlando portfolio will represent a preeminent destination for the market and will reflect our environmentally sustainable priorities. As I have noted, we are seeing a more intense focus on a landlord's ESG platform by tenant base. And in that vein, I encourage all our listeners to review our most recent annual ESG report that is available on our website. You will see our board-level emphasis on measurable improvements to address climate change risks, and other environmental concerns, along with proactive steps to promote social justice, diversity, and community involvement, including the formation of the Piedmont Scholars Program at two historical black colleges and universities. Finally, I would like to point out that during the fourth quarter, we repurchased approximately 2.2 million shares of common stock at an average price of $14 per share, or approximately $30.6 million. We will continue to utilize the share buyback program in conjunction with acquisitions and development redevelopment to accretively recycle disposition capital. As of quarter end, board approved capacity remaining for additional discretionary repurchases was approximately $170 million. At this point, I will turn it over to Bobby to walk you through the financial highlights of the quarter and provide our initial guidance for 2021. Bobby?