Piedmont Office Realty Trust Inc

Piedmont Realty Trust Incorporated second quarter 2025 earnings call. At this time all participants are on a listen-only mode and a question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference please press star zero on your telephone keypad. And please note, this conference is being recorded. I will now turn the conference over to your host, Laura Moon, Chief Accounting Officer for Piedmont Realty Trust. Mom, the floor is yours.

Thank you, Operator, and good morning, everyone. We appreciate you joining us today for Piedmont's second quarter 2025 earnings conference call. Last night, we filed our 10-Q and an 8-K that includes our earnings release and unaudited supplemental information for the second quarter of 2025 that is available for your review on our website at piedmontreat.com under the investor relations section. During this call, you will hear from senior officers at Piedmont. Their prepared remarks, followed by 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 supplemental information as well as our SEC filings. We encourage everyone to review the more detailed discussion related to risk 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 financing, 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 forward-looking statements, And these statements are based upon the information and estimates we have reviewed as of the date the statements are made. Also on today's call, representatives of the company 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 supplemental financial information which were filed last night. At this time, our president and chief executive officer, Brent Smith, will provide some opening comments regarding second quarter 2025 operating results. Brent?

Thanks, Laura. Good morning, and thank you for joining us today as we review our second quarter 2025 results. In addition to Laura, on the line with me this morning are George Wells, our chief operating officer, Chris Colmey, our EVP of investments, and Sherry Rexrode, our chief financial officer. We also have the usual full compliment of our management team available to answer your questions. Before I delve into the quarter, I want to highlight three macro trends that bolsters growth for Piedmont in the near term. One, the flight to quality means that demand for the best office buildings is accelerating and Piedmont is well positioned having invested to create a modern work environment at every asset. Two, large tenants are making more leasing commitments, driving meaningful absorption at the top end of the market. Three, given the lack of new office construction for the foreseeable future, today's differentiated buildings have a long runway for meaningful rental rate growth. Now, getting back to the quarter, we were very pleased with our leasing success, totaling 712,000 square feet, and bringing total year-to-date leasing to over 1 million square feet. Importantly, approximately two-thirds of our Q2 activity related to new tenant leases, marking the most new tenant leasing we've executed in a single quarter since 2018. Further, the new activity included numerous full-floor or greater leases, which will meaningfully backfill several blocks of space in the portfolio, including at Three Galleria Tower in Dallas, and our currently out-of-service Minneapolis portfolio, as George will talk about more in a moment. Our leasing success during the second quarter pushed our in-service lease percentage as of the end of the quarter up 140 basis points year-over-year to 88.7%, tracking well to our year-end goal of 89% to 90% leased. While not reflected in our lease percentage, our out-of-service portfolio comprised of two projects in Minneapolis and one in Orlando, is also performing extremely well as differentiated, amenitized workplaces continue to garner the majority of leasing in the market. At the end of the second quarter, the out-of-service portfolio stood at over 30% leased, but is approaching 60% leased based on the activity in July. We anticipate these assets will reach stabilization by the end of next year. In addition to the overall volume, second quarter leasing also resulted in favorable economics, with rental rates for space vacant less than a year reflecting just over 7% and almost 14% roll-ups on a cash and accrual basis, respectively. As JLL research noted this quarter, rents for trophy offices and new construction are reaching new highs. Asking rents for developments have grown by 27% year over year, and stand at $92 a square foot, the highest on record by a substantial margin. We believe the underlying effects of high interest rates, cumulative inflation on labor and materials, and potential tariff impacts will continue to diminish new office supply and push construction costs higher, and by extension, the required rents for new buildings, providing Piedmont with more runway to materially increase our rental rates across the portfolio. leasing momentum remains strong including over 300 000 square feet of leases signed during july and the pipeline remains robust with another approximately 300 000 square feet currently in late stage documentation demand for our buildings from full floor and larger tenants is particularly evident in minneapolis and our sunbelt markets with 10 transactions for a full floor or greater increasing our backlog of annual revenue from leases yet to commence or in their free rent period to $71 million with the gap between lease percentage and economic lease percentage or cash paying tenants remaining at a historically wide 10%. We anticipate roughly 80 to 90% of this revenue to commence by the end of 2026. From a macro level, JLL research reports that although overall volume for the second quarter was essentially flat as compared to the first, active space requirements grew 5.8%, reflecting the highest level of demand since 2021, and national occupancy held relatively firm during the second quarter as a modest amount of negative absorption was recorded. However, in contrast, PBON observed positive absorption in four of our operating markets. To my point earlier on construction costs, overall inventory remained flat in the second quarter, with only 1 million square feet of new projects breaking ground across the country and projected conversions and demolitions expected to exceed new deliveries this year. Given all of this activity, we are bullish about our leasing prospects and, as I noted before, are increasing our annual leasing guidance for the second time this year to a range of 2.2 to 2.4 million square feet, which reflects an increase of more than 800,000 square feet compared to our original 2025 guidance that was established at the beginning of the year. It is important to note, however, that the majority of this new leasing is expected to benefit earnings in 2026 and beyond. Sherry will touch on our bond repurchases that occurred during the quarter and her prepared remarks, But before I hand over the call to George, I want to quickly call your attention to our recent rebranding, including a new website. There are a lot of exciting things happening at Piedmont, and I hope you take a moment to examine for yourself the unique placemaking environments we've cultivated at each of our assets. With that, I now hand the call over to George, who will go into more details on the leasing pipeline and second quarter operational results.