Piedmont Office Realty Trust Inc

Good day, ladies and gentlemen, and welcome to the Piedmont Office Realty Trust, Inc. First Quarter 2021 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 a live operator. At this time, it is my pleasure to turn the floor over to your host, Eddie Gilbert. Sir, the floor is yours.

Thank you, operator, and good morning, everyone. Thank you for joining us today for Piedmont's first quarter 2021 earnings 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 of 2021. This information is available on our website at piedmontrete.com under the investor relations section. During this call, you'll hear from senior executives at Piedmont, and they may make 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 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 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 a date they are made. At this time, our President and Chief Executive Officer, Brent Smith, We'll provide some opening comments and discuss our first quarter results and accomplishments. Brent?

Good morning, everyone, and thank you for joining us on today's call as we review our first quarter financial and operating results. On the call with me this morning 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 our senior management team. First and foremost, I hope that everyone is and continues to be healthy and safe. This quarter, we reached a dubious milestone, having been in the midst of the pandemic for over a year now. While it has been highly disruptive to the office sector in general, and Piedmont's leasing pipeline specifically, we are fortunate that the vast majority of our customers are current on rent and building utilization continues to improve. now approaching an average of 25% across the entire portfolio, primarily led by a return to the workplace by our small to medium-sized tenants. While overall daily utilization for the portfolio remains far below pre-COVID-19 levels, that percentage is improving and is expected to continue to ramp up in the second half of the year. But I will note the daily utilization still varies greatly based on tenant characteristics and geography. With vaccines becoming widely available for all, we continue to see incremental gains in local economic activity week by week, particularly in our Sunbelt markets, as I noted on our last earnings call. However, this quarter, we track an increase in activity for our northern markets as well, a first since the pandemic began. In addition, we're beginning to see medium-sized space requests in the 15,000 to 25,000 square foot range and starting to conduct tours with these tenants. we're encouraged that our leasing pipeline is strengthened and we feel positive about our ability to generate some leasing momentum headed into the rest of the year. While we saw consistent upticks in tour activity across the portfolio as the first quarter progressed, a 30% increase actually from January to March, we still anticipate it will take two to three more quarters for Piedmont's leasing volumes to approach pre-pandemic levels. With the USD GDP expected to grow 6.2% in 2021, Per Bloomberg's April Economist survey, the U.S. feels like it's getting back to a new normal. And with this backdrop, we are encouraged for our tenants, our employees, and our stockholders as corporations and large businesses begin to plan their return to the office, with most targeting the early fall for their workforce to reenter en masse. Even more tangible evidence of this improving outlook is the fact that we experienced a sizable uptake in the number of executed leases for the first quarter of 2021. The company completed approximately 678,000 square feet of leasing, with new tenant leasing accounting for approximately one quarter of that activity. Had it not been for one large tenant, new leasing would have actually outpaced renewals. I would also note that the weighted average term of leases entered to during the quarter was approximately seven years. Comparing the first quarter of this year to the first quarter of last year, both the number of leases and the overall square footage related to new tenants exceeded the first quarter of 2020's pre-pandemic levels. Through this leasing activity and customer dialogue, we continue to better understand tenant space needs and design requirements. I would characterize the majority of new leases as having a space plan matching pre-pandemic levels of square feet per employee but with a greater focus on creating collaboration space and integration of technology to facilitate work from home and in-office employee communication. That said, we believe a vast number of firms are still trying to understand what work from home truly means for their organization. We are finding that medium-sized enterprises are having the greatest difficulty in reaching a conclusion, and as such, these customers, typically requiring 15,000 to 25,000 square feet, are those most often requesting shorter-term renewals of two to three years. One positive note is that these customers are requiring very little tenant incentive or capital to transact on these shorter renewals. As I noted in our last call, we continue to see the smaller user market, defined as those needing less than 10,000 square feet, remain rather resilient, almost approaching pre-pandemic levels of activity. And in the large user segment, defined as those needing more than 50,000 square feet, We continue to see the companies who know their business well use this market disruption as an opportunity to negotiate more favorable terms from their landlords. While the large user segment has not recovered to the extent of small users, we are still experiencing elevated levels of activity from large tenants in Dallas, Atlanta, Orlando, and Boston. I am pleased to share that one example of this phenomenon has resulted in an early seven-year renewal of Raytheon's approximately 440,000 square foot lease, comprising the entirety of our 225 and 235 presidential way assets in Boston. The lease required only a modest level of tenant incentives and leasing commissions, equating to approximately $2.60 per square foot per year of term, with a modest adjustment to the current rental rate, which we noted in our earnings release, had a disproportionate effect on our lease mark-to-market for the quarter. A more complete listing of the larger leases executed during the first quarter of 2021 is included in the supplemental information that we published last night and is available on our website. Looking ahead, our only expiration of any significance over the next 18 months is the City of New York's lease of approximately 313,000 square feet that remains in holdover at 60 Broad Street. We are pleased to welcome approximately 20% of the various agencies' workers back to the building next week. I'm also excited to share that Piedmont has executed a five-year interim lease extension, and the Department of Citywide Administrative Services has informed us that the public hearing and final approvals are in process. As a reminder, on all government tenant transactions, the landlord is required to execute documentation prior to the tenant. Assuming things move forward as anticipated, we expect a conclusion to this interim renewal around the end of the quarter, very much in line with the economics and terms we've shared in the past. Finally, following our playbook on the State of New York's lease in 2019, we continue to work with DCAS on a potential 20-year extension at the building beyond this extension. Taking a step back, I would like to share three trends which are benefiting almost all our operating markets. First, an accelerating population migration to the Sun Belt, along with other secondary cities, which offer businesses and employees a lower-cost, higher-quality experience. We believe this great affordability migration will constitute a decade-long trend that, in conjunction with the second trend, which is millennial family formation and a movement to the suburbs, will place well-amortized offices in mixed-use environments located along a city's primary ring road in higher demand. And finally, as we have dialogue with our tenants and track leasing activity, we're witnessing a third trend, a flight to quality. Amortized buildings and environments owned and operated by responsive, service-oriented landlords. Piedmont's portfolio is well-positioned to be the beneficiary of all three of these themes. A concentration of well-amortized buildings located near strong housing communities and highly regarded education systems. with easy accessibility to major highway thoroughfares and airports, and with more than half the portfolio in the Sun Belt, where population growth is expected to surpass national averages. But today's tenants are not only focused solely on location and neighboring amenities. The physical attributes of a building have never been more important. The building's indoor air and light, HVAC, fresh air intake, elevator capacity, and outdoor collaboration space are all critical. In addition to a high-quality building and a vibrant environment, Customers are demanding a higher quality landlord as well, and by that we mean an attentive operator that focuses on ESG initiatives and which has the capital base and scale to provide tenant offerings and engagement. Office space is no longer just a real estate product. Our customers view our offering as a service, which excites us and gives us the opportunity to provide a differentiated product, one that we believe will allow us to achieve greater occupancy and real rates in the prevailing submarkets. Touching briefly on transactional activity, although we did not complete a capital transaction during the first quarter, the Raytheon lease extension will likely provide a catalyst. This is the first time that that tenant has executed a renewal that provides a total of 10 years of remaining lease term at the buildings. As the two assets represented by this renewal are now 100% leased to a single creditworthy tenant with significant term, we believe that value has been maximized on the properties and we have a unique opportunity to realize that value which has been created. Therefore, we began marketing our 225 and 235 presidential way properties for sale late in the first quarter, and we received a good deal of interest. We therefore anticipate recycling the proceeds from the sale into high-quality, amenitized assets which fit strategically into one of our core markets. Finally, I want to highlight the recent progress that we've made on several key ESG initiatives. ESG has gained more widespread investor and tenant attention here in the U.S. over the past few years, And PMOD's management team has made it a priority to establish a best-in-class ESG platform. Getting involved to help to make our communities and planet a better place to live while ensuring our employees, tenants, and vendors are treated with respect and given equal opportunities. I would like to take a moment and point out a few recent achievements. On the sustainability front, out of thousands of participants in the U.S. Energy Star program, Piedmont was recently named one of 70 companies designated as a 2021 Energy Star Partner of the Year, and Piedmont is the only office reed headquartered in the southeast U.S. to receive this designation. I'm also very pleased with Energy Star's recognition of our ongoing commitment to reducing our portfolio's carbon footprint, including lower energy consumption in addition to water conservation efforts and reduced landfill waste from our buildings. Approximately three-quarters of our portfolio is currently ENERGY STAR certified, and we continue to make significant progress towards our goal of reducing the overall energy consumption by 20% at our properties over a 10-year period ending in 2026. Additionally, during the first quarter, our five Atlanta Galleria properties were awarded the Well Health Safety Rating by the International Well Building Institute. The Well Health Safety Rating is a new evidence-based third-party verified rating for all new and existing buildings. It focuses on operational policies, maintenance protocols, stakeholder engagement, and emergency plans to address the post-COVID-19 environment now and into the future. Our Atlanta Galleria properties, representing over 2.1 million square feet of renewable space, were the first properties in our portfolio, as well as the first for all office buildings in Atlanta, to receive this new rating, and we're actively working to expand this program across our portfolio. Additionally, Piedmont recently partnered with Morehouse College's Division of Business and Economics in Atlanta and with Howard University's School of Business in Washington, D.C. to introduce the Piedmont Office Realty Trust Scholarship Program. The program provides scholastic support to rising sophomore students seeking degrees in economics, finance, accounting, engineering, or real estate with a renewable scholarship for the Piedmont scholars' sophomore, junior, and senior years. Along with access to an executive shadowing program, the scholarship offers each recipient the opportunity to intern with Piedmont and acquire a firsthand experience in commercial real estate and participate in a board-level mentoring program. It is our hope that this program will provide need-based aid to ambitious students and expose a more diverse applicant pool to a career in the commercial real estate industry. Our ESG efforts are overseen by our board-level ESG committee, which is chaired by Barbara Lang, the former president of Washington, D.C.' 's Chamber of Commerce. Ms. Lang joined our board six years ago and immediately began making a positive impact helping to lead the company's environmental objectives and social involvement in our communities. For additional information on our overall ESG program, I encourage you to review our annual ESG report that's available on our website. With that, I turn it over to Bobby to walk you through the financial highlights of the quarter and guidance for 2021. Bobby? Thanks, Brent.