Piedmont Office Realty Trust Inc

Good morning, ladies and gentlemen, and welcome to the Piedmont Office Realty Trust's fourth quarter 2021 earnings call. At this time, all participants have been placed on a listen-only mode, and we will open up the floor for questions and comments after 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, and good morning, everyone. We appreciate you joining us today for Piedmont's fourth quarter 2021 earnings conference call. Last night, we filed an 8K that includes our earnings release and our unaudited supplemental information for the fourth quarter that's available on our website at piedmontreit.com under the investor relations section. During this call, you'll hear from senior officers at Piedmont, 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 our press release as well as in our SEC filings. We encourage everyone to review the more detailed discussions 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 this activity on the company's financial and operational results. You should not place any undue reliance on any of these forelooking statements, and these statements speak 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 again for joining us on today's call. as we review our financial and operating results for the fourth quarter of 2021 and for the year. On the line with me is Eddie Gilbert, our Executive Vice President of Finance and Treasurer, George Wells, our Chief Operating Officer, and Bobby Bowers, our Chief Financial Officer, as well as other members of the Senior Management Team. Before we begin today's call, I want to take a moment and thank my talented, hardworking team members who deliver first-class service to Piedmont's customers 24-7, 365 days a year. Their tireless dedication continues to garner industry honors for operational excellence and sustainability, including our recognition as the 2021 Energy Star Partner of the Year and achieving lead status now on roughly half the portfolio. Today, I'm going to cover Piedmont's operational success and leasing momentum, along with an update on capital allocation activities across our markets. Focusing on the fourth quarter of 2021, Our FFO per share was 51 cents, in line with market consensus. Portfolio operating metrics were solid, with same-store NOI on a cash basis increasing 5.8%. We leased approximately 400,000 square feet, generated a 3% increase in second-generation cash rents, and executed an average lease term of six and a half years, illustrating the longer-term view taken by most of our customers. Most notably, about half of the fourth quarter's leasing was related to new tenants, making this the second consecutive quarter Piedmont has achieved pre-pandemic levels of new leasing. Overall, leasing activity remained robust and well dispersed across the portfolio, with over 40 leases and amendments executed during the fourth quarter. And while the Omicron variant had a modestly negative impact on building utilization during December and January, the leasing pipeline has not dissipated and we expect the momentum from the second half of 2021 to continue. Today, our leasing pipeline stands at over 500,000 square feet in negotiations, and we're trading LOIs on an additional 1 million square feet, which positions Piedmont for space absorption in 2022. And with only about a million square feet of existing leases expiring, we're about 6% of the portfolio. Boston, Dallas, and Atlanta remain our most active leasing markets, albeit for different reasons. The Boston market continues to exhibit strong fundamentals, led by business migration to the suburbs and reduced competitive Class A office stock, as the insatiable demand from life science users continues to drive office-to-lab conversions. For example, during the past year in our Burlington submarket, three competitive Class A buildings comprising over 400,000 square feet have been repurposed to labs, hoping to push net effective rents for office space to pre-pandemic levels. And in Dallas and Atlanta, our two largest markets, we continue to see an increasing number of corporate relocations resulting in meaningful job growth. As an example, during the fourth quarter, we signed a 55,000 square foot lease at our Connection Drive property in Dallas to serve as the new corporate headquarters of an undisclosed Fortune 500 company. And in that same market during the second quarter, we signed a 44,000 square foot lease to serve as the corporate headquarters for a large national beverage distributor. In both these markets, rents at our properties are now above pre-pandemic levels. However, net effective rents are approximately 2% to 5% lower. I would note a customer flight quality is well underway, which is driving wider rent disparities between placemaking versus commodity office product. For example, JLL research noted that 84% of Atlanta leasing activity in the fourth quarter was in Class A or Trophy product. Orlando also continues to perform well with leasing and tour activity across all five of our downtown properties at pre-pandemic levels. The downtown sub-market continues to experience population inflows, particularly for the Millennial and Gen Z cohorts, driven by a highly walkable environment with expanding retail, food and beverage options, along with entertainment amenities surrounding the University of Central Florida's Creative Village Campus, Amway Center Arena, and Camping World Stadium. along with a uniquely urban Lake Eola. In Orlando, net effective rents are still trailing pre-pandemic levels by about 5% as a result of increased concessions. Finally, Minneapolis, the district in Washington, D.C., and New York City are all experiencing increasing tour activity. However, leasing velocity and tenant demand still lag our Sunbelt markets. I would add, we are fortunate to have limited vacancy and near-term lease expirations at our 60 Broad Street property in Lower Manhattan and virtually no expirations at our Washington, D.C. properties for more than two years. Leasing across all our core markets contributed to the fourth quarter's totals. And our customer, CEO, and HR dialogue continues to show our portfolio's position to gain market share. Users of OfficeSpace are undertaking a flight to quality that focuses on new or newly renovated office buildings with unique environments and a vast set of amenities. owned and operated by responsive, sustainability-minded, service-oriented landlords. And because of these demand drivers, Piedmont's portfolio is well-positioned, supported by a concentration of newly renovated, well-amortized buildings located near housing communities and highly regarded education systems, with easy accessibility to major highway thoroughfares and airports. 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 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 sustainability initiatives and which has a capital base and scale to provide tenant offerings and engagement. Office space is no longer just a real estate product. Taking a look back at the operational highlights for the 2021 fiscal year, Piedmont leased almost 2.3 million square feet, which was in line with our average pre-COVID annual leasing levels. In addition, the increase in second-generation cash rents was 7.5%, which helped increase same-store cash NOI for the year by almost 7%. And finally, our tenant retention ratio was in line with prior years at approximately 70%. Recovery and leasing activity bolsters our optimism for the rebound of the office sector, and particularly for landlords such as ourselves, who offer high quality, modernized, sustainability focused, amenity rich environments. Looking ahead, approximately 750,000 square feet of tenant leasing has yet to commence as of this year end, or is in some form of abatement. This backlog creates organic growth opportunities going into 2022, associated with approximately 26 million in future annualized cash rents. In addition, approximately 60% of the portfolio's vacancy and 85% of 2022's lease expirations reside in our Sunbelt properties, where we are experiencing the greatest level of leasing velocity. A schedule of the larger upcoming lease commencements and abatements is included in our supplemental financial information, which was filed last night. Pivoting now to capital allocation activities, Despite the disruption from the pandemic and, more recently, the Omicron variant, the office investment sales market has continued to unthaw. We are currently in discussions on a pipeline of over $1 billion of high-quality assets, primarily for properties in our Sunbelt markets. Furthermore, we are encouraged to hear of several targeted buildings that will be coming to market in the first half of 2022. Our principal and broker dialogue suggests insurance companies, pension funds, and other private market participants are planning to reduce their office sector exposure in the near term. And currently, well-leased Sunbelt office with more than seven years of wait average lease term is among the most liquid type of property in the asset class. The increase in transactional activity is encouraging, given Piedmont's strategy to recycle capital strategically as an additional driver for our earnings growth. Finally, I would note that cap rates remain steady for high-quality assets with limited lease rollover and particularly those that are highly amenitized and that can compete with new construction. While the investment sales market has improved, construction starts have slowed dramatically due to the uncertainty created by the pandemic, a positive for the continued office market recovery. With supply chain constraints, the construction of new product will now take two and a half to three years to be delivered. In addition, New construction costs have escalated by 15 to 20% versus pre-pandemic pricing, driven by an increase in both raw materials and labor. In this capital environment, Piedmont continues to focus on our redevelopment opportunities, where costs and timelines can be more easily managed. In 2021, we completed over $50 million of incremental investment in our properties, upgrading assets to remain best in class within their respective sub-markets. That said, we continue to have dialogue with a number of clients regarding pre-leasing for ground-up development. Focusing on Piedmont's investment activities, during the quarter we expanded our Atlanta market footprint with the acquisition of 999 Peachtree Street, and subsequent to quarter end, I'm pleased that we closed on the disposition of a Raytheon asset, as well as accelerated our plan to exit from the Chicago market. As you all know, the 999 acquisition marks our entry into Midtown Atlanta's sub-market. The iconic Class A LEED Platinum 28-story building at 622,000 square feet with 77% lease at acquisition. We purchased it for $360 a square foot, which we estimate is over 40% below replacement cost. We're working with Gensler, a tenant at the building, to complete the redesign of 999's arrival experience in public spaces, including a modernized and expanded lobby, energized outdoor space, and other enhanced amenities, which we'll complete over the next 12 to 18 months, and will revitalize this asset in a fraction of the time and cost of new construction. With a 10-foot glass window line across 70% of the facade, this asset will effectively compete against new construction at a fraction of the cost with an expected all-in basis in the low $400 per square foot versus new product costing in excess of $650 per square foot, creating substantial pricing leverage for our building when compared to that new development. The $224 million acquisition of 999 is being funded through multiple dispositions. Immediately after quarter end, the disposition of 225 and 235 Presidential Way in Boston closed in a reverse 1031 exchange for $129 million, or a mid fives cap rate. Also, subsequent to quarter end, we negotiated an agreement to sell and have closed on to Pierce Place, our last remaining asset in the Chicago area, and we'd anticipate more non-core asset proceeds in the first half of 2022. The acquisition of 999 Peachtree Street during the fourth quarter, as well as the completion of two non-core dispositions just after the quarter end, now makes Atlanta our largest market based on annualized lease revenue. Adjusting our lease percentage for the disposition transactions, our pro forma lease percentage as of December 31st would have been 87%. Additionally, approximately 63% of our annualized lease revenue is now generated from our Sunbelt properties, and our goal is to have 70% to 75% of our ALR generated by our Sunbelt markets before the end of 2023. We believe a goal that's attainable given the investment sales market activity we see today. Finally, I want to thank those investors who attended the recent property tour in December at our Midtown Atlanta and Galleria properties. Myself and the team were extremely grateful to be able to share some of our most recent redevelopment projects. With that, I'll turn it over to Bobby to walk you through the financial highlights of the quarter and guidance for 2022. Bobby?